“Hire an advisor because it is very hard to see the errors in your own behavior & it is easy to see the errors in someone else’s behavior. Very few people need to hire advisors because of the size of their calculators. They need an advisor to help them behave correctly.” – Carl Richards
Blackrock recently ran a survey that asked financial advisors about their client’s biggest financial concerns. These were the top five:
- Minimizing risk when investing.
- Developing their retirement plan.
- Market volatility.
- Protecting their investments from unforeseen global/domestic economic events.
- Securing a regular income stream from their investments.
It’s interesting to see what keeps people up at night with their finances. These would be my responses if they were my clients.
1. Minimizing risk when investing.
Risk is a broad term that encompasses many different aspects of the investing equation. At the end of the day, most investors worry about losing money. Loss aversion has a powerful hold on our psyches.
Yet the biggest risk for investors is simply that they don’t reach their stated goals. That means it’s extremely important to build an asset allocation plan that fits within an individual’s risk profile (willingness, ability and need to take risk) and time horizon until they need to start spending their investment dollars.
You can’t earn returns on your capital without taking some form of risk. That means a balance between short-term needs and long-term plans.
Risk and reward go hand in hand so there’s no easy way to earn consistent returns without taking some risk. This is especially true today in a low interest rate environment.
Your best bet for controlling risk will continue to be through diversification, rebalancing, learning from your mistakes and a big dose of humility.
An advisor’s job should be to explain to their clients what they do and don’t need to worry about to have the correct perspective on the bigger picture. Which means long-term thinking should trump short-term fears in the absence of the need for current cash flow.
2. Developing their retirement plan.
I’m assuming this means what the client plans on doing once they are retired because if they’re worried about their actual financial plan then the advisors aren’t doing a great job here.
Retirement plans should be part of a holistic plan with your advisor. One of the first things a financial planner should ask you is, “What exactly do you hope to get out of your life from here on out?”
All other financial decisions branch off from this basic question. It sounds like an easy topic to consider, but it can be difficult to figure out what to do with yourself when you’re done with the working world.
Most people say they want more free time or they would like to travel more, but that doesn’t get you very far. It’s too vague.
Financial advisors should ask questions until they have a better handle on the client’s true desires. Only then can a reasonable financial plan be put into place (it’s worth noting that these desires can and will change with changing circumstances, so stay flexible).
3. Market volatility.
This goes along with the first concern, but financial advisors need to be able to explain to their clients when volatility actually matters.
If you don’t need to use your money for another 10 or 15 years, short-term volatility in stocks shouldn’t concern you. It will but it shouldn’t.
Since most investors don’t pay attention to the market until there are large losses or huge gains, a good financial advisor needs to be there to give them the correct perspective on the markets and what’s important.
Basically, focus on what’s in your control (your behavior, how much you save, how much you spend, how much debt you have, investment costs, etc.) and don’t worry about forces that are out of your control (political events, the economy, daily moves in the market, the latest jobs report, etc.).
Volatility shouldn’t be an issue if it’s framed correctly by the advisor.
4. Protecting their investments from unforeseen global/domestic economic events.
The ability to predict the future should be pretty far down the list of characteristics to look for in a financial advisor. Since no one can predict the future, it makes no sense to have this as an input in your retirement plan.
There’s no way to know ahead of time with any precision how things will work out in complex economic systems.
The best thing you can do is have a comprehensive plan and stick to that plan no matter what happens. How you react to unforeseen events is much more important than figuring them out in advance. Reactions matter more than actions.
As Howard Marks once said, “You can’t predict. You can prepare.”
Forecast your behavior before something bad happens instead of trying to predict black swan events.
5. Securing a regular income stream from their investments.
This seems to be the holy grail of investing these days, but you have to invest in the markets as they are, not as you wish them to be.
Savings accounts and CDs offer miniscule yields at the moment. The 10 Year Treasury is hovering around 2.8% and corporate bonds (ticker LQD) yield roughly 3.8%.
As with all investments, the higher the reward you’d like the further out on the risk spectrum you need to go.
A nice balance of cash, corporate bonds, TIPs and government bonds is probably the best you can hope for at this point to fulfill the income and stability portion of your portfolio.
Reaching for yield doesn’t end well. You should take your volatility in the higher returning investments (stocks), not in the more stable asset class (bonds).
Real Financial Advisors
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