One of the areas where financial planners exhibit a significant amount of leadership is in helping their clients determine risk tolerance and investment portfolio composition. As we deal with market volatility related to a potential downgrade of U.S. debt, many of us are reminded of the challenges we faced during the financial market collapse of 2008-2009. Now, as Europe attempts to handle the sovereign debt issues of the southern European countries, we are once again helping clients through a challenging investment climate.
How can we as financial planners exercise leadership during these interesting times? One of my learnings during 2008-2009 was that a few of my clients who thought they had a high “risk tolerance” were in fact extremely uncomfortable with the market volatility of that time. There were only a handful, but those four or five clients took up a disproportionate amount of our time and could not get comfortable with the wide swings of the markets.
I personally talked with each of them as they reached the breaking point and told them that we needed to rethink their investment allocations, but that now was NOT the time to make any changes. I counseled that we owned solid investments for them that will recover with an improving economic situation. Each of them was told that sometime, in the next 12 to 18 months, as the markets recovered, we would revisit their asset allocations and make changes to reduce the potential volatility going forward. I pointedly said that when that time came, they would probably not want to get more conservative with their investments because the markets would “feel” better at that time.
Fast forward to late 2010. During the fall GFI (Goals and Financial Independence) meeting for each of those clients, I brought up the asset allocation and risk tolerance issues as I had promised I would. By that time, each of them had recovered what they had lost during the previous downturn and were actually a few percentage points ahead. All of them remembered our previous conversations. To a person, they all questioned the logic of reducing the amount of equities in their portfolios and felt like they would be giving up too much potential appreciation.
After more discussion, all but one agreed they did not want to go through the pain and agony of 2008-2009 again and took our recommendations for a potentially less volatile portfolio allocation. The single holdout client is where the leadership opportunity arose. He was the most nervous during the previous downturn and was now the most adamant that he could handle it this time and that he wanted to stay invested in a higher percentage of equity assets. I told him that in my professional opinion it was a mistake and if he did not make the changes we recommended, we would no longer serve as his advisers. To say he was shocked would be an understatement.
Ultimately, he reluctantly agreed to our recommended changes and the portfolio was rebalanced to a more conservative mix late in 2010. When the market was up through April of 2010, I did receive some moderate grumbling. But, when the market hit the skids in late summer of this year, we had a long talk on the telephone. He felt rather humbled at that point and thanked me for sticking to my guns. Even though his portfolio was down some, it was not nearly as much as it would have been.
How many of you have been through this type of experience? What can you share with your fellow FPA members about what worked and what didn’t? Each of us takes a leadership role with clients and during these volatile times we have the opportunity to learn from each other.
Richard Salmen, CFP®, CFA, CTFA, EA
Senior Vice President & Senior Advisor
GTRUST Financial Partners
Overland Park, Kan.