In “Teachable Moment,” FA-IQ asks an advisor to tell a story about a challenging client interaction from which he or she learned something of lasting value. This week we spoke with Katherine Fonville, president of Fonville Wealth Management, a full-service financial-planning firm in Richmond, Va. She recalls an early lesson on how to frame discussions with her clients.
A few years ago, when I was a relatively new advisor, I had an initial client meeting with a couple who were nearing retirement. In trying to come up with a portfolio strategy that fit their wants and needs, I asked all sorts of questions, including what level of downside potential they were willing to risk.
I phrased this question the way I was taught: “What sort of temporary decline in your portfolio would you be comfortable with before you wanted to pull out of the market — 15%, 20%, 25%?” My clients responded right away with 25%.
We moved on from there, but something about their answer nagged at me. They replied so quickly I was worried that they hadn’t fully grasped what I’d been asking. So I decided to double-check. This time, though, I framed the question differently: “How much money would you be comfortable losing before you wanted to pull out of the market?”
This question hit the clients in a totally different way. They talked it over between themselves before arriving at a figure. The number they came up with was $500,000. I was immediately glad I’d asked the question in a different way. Their portfolio was worth $2.8 million, and $500,000 was closer to 17% than 25%. When I mentioned the difference from their original answer, they were a little shocked, too. Putting the question in terms of a dollar value had changed the conversation — and ended up changing the portfolio I put together for them.
Ever since then, I’ve made a point of talking about dollars, not just percentages, with my clients. And though the investment policy statement I draft for every client includes the downside risk as a percentage, I make sure to also calculate the dollar value and run it by the client before they commit to anything. I’ll even write down numbers on the whiteboard in my office, because looking at the dollar figure written down seems to help some people get what this means. I sympathize — I’m a visual learner, too.
Our clients live their lives in terms of dollars, not percentages, which means dollars resonate more with them in these types of discussions. This can be hard to remember, since as financial advisors we’re used to talking about money in terms of percentages. I know that’s the way I was trained. And it’s easy to let it become a habit. But if you get wrapped up in jargon, you risk losing your client along the way.
Talking percentages can also be a way to gloss over difficult — but important — conversations about risk. Advisors don’t like to talk about the downside potential; they just want to talk about upside return. After all, it’s so much more pleasant to talk about gains than losses. But it’s also important to set expectations with clients. Clients need to understand that they’re not going to have a solid, linear ride upward; there will actually be some ups and downs along the way. Having this conversation at the very start, when taking on new clients — and having it in such a way that you know the clients fully understand what they’re committing to — means that they’re less likely to get anxious about slight downturns in the market.