It's time to come out of the cave.
The horrendous market conditions of the last three years put many a client and financial advisor on the defensive. Financial plans over the last three years typically focused as much on avoiding disaster as they did on building wealth.
However, with this year looking like the first positive one for stocks since 1999, it's time to rethink the approach to the annual review process. For clients, this year's review is an opportunity to entertain ways of growing an account again. For advisors, it's a time to capitalize on opportunities to add assets in the accounts of existing clients and to gain referrals to new clients.
Begin with the End in Mind
Before starting on the year-end review, it's important to decide what you hope to accomplish with the client in the coming year. Before the meeting, it's a good idea to send the client an agenda, with a request for additions (not deletions!) to topics to be covered. This accomplishes two things: (1) It puts you firmly in control of the direction of the meeting and (2) It prepares the client for the types of things you hope to discuss.
Key agenda points should include:
Notes from your last meeting.
A review of “old business” in which you revisit the investment policy statement and your investment managers.
“New business” or areas of new focus.
An action plan of top priorities.
A schedule of future meetings.
Investment Review — Beware the Benchmark
Too many investment manager reviews deteriorate into squabbles about performance numbers and managers' benchmarks. Such discussions are almost inevitable — my colleague, Ed Blodgett, says proper diversification means always being upset about something — but it's important to keep returns discussions in perspective. The most important concern of any managed account advisor should be maintaining a specific investment policy that features complementary managers across a broad spectrum of investments.
That said, the client needs to create a benchmark for the type of performance he wants from his account. One might choose to measure returns on a portion of their assets relative to the Russell 2500 value index. Another might want the track the portfolio's overall return relative to their retirement income needs, net of inflation. Still, even those benchmarks are subject to certain whimsical forces, including the “garbage rally,” in which a group of low-quality companies drive results in a market capitalization segment.
As I write this in late October, the best-performing sectors of the market have been those of low-priced stocks with no earnings or dividends. For example, a Birinyi Associates study cited in the October 26 New York Times shows that stocks in the S&P 1500 that began the year below $10 (222 in all) had an average gain of over 64 percent as of October 23. Nearly half of these companies had no earnings. By comparison, 99.5 percent of the 204 companies whose stocks began the year above $40 per share had positive earnings but returned an average of only 15 percent since January 1. If the markets turn down, which companies would you want to own?
Work the Plan
Annual reviews are an excellent opportunity to showcase your talents as an advisor. Remember that few clients know exactly how you operate. They see you only a few times each year. As such, the most important issue in the “old business” section of your annual review is to go over the investment policy statement you created with your client and the evaluation process you use for monitoring the managers and the client's individual account. Consider this list of questions:
Is the asset allocation in line with your initial guidelines?
Are the current holdings consistent with the manager's strategy?
How does performance compare to market/industry benchmarks?
Are fees in line with your expectations?
Is the portfolio still following the investment policy statement?
Are there any liquidity requirements for the next quarter? Are any additional assets expected, and how will they be invested?
New Business — A Time to Challenge
In the 2003 Phoenix/Harris Interactive Wealth Survey of nearly 1,500 millionaire households, respondents most often cited “trust” as the reason they employ their current advisor. A key component of the annual review, therefore, is challenging clients about whether they are truly prepared for the future. Don't let the market rally give your clients too much confidence — the effects of the bear market have taken their toll and the road back to recovery is not guaranteed.
So probe for the risks: What are your clients' greatest concerns? What risks do their retirement plans face? Most clients should emulate institutional investors, most of whom are beefing up contributions to their accounts right now.
Plan Now to Ask for the Money Later
Few clients are sitting on hoards of cash to make additional contributions to their retirement plans. Note that even General Motors is borrowing most of the $19 billion shortfall in its defined benefit plan. Can your clients pony up? Consider the flagging economy, and ask how it affects your client's business. Will his earnings change this year? Remember that year-end is the time most business owners pay themselves after closing the books. It's also the time your executive clients get an idea of their annual bonuses. Double check with your clients about when those payments will be made — you want to get those dates in your calendar now.
Till We Meet Again
You probably meet with even your best clients in depth only about four times each year. Don't underestimate the value of meeting again soon after the annual review to finalize an action-step decided on at the review.
Reinforcing your work together is an important reminder to the client of your proactive service. Use this time also to congratulate your client for taking action — most people are in denial about their financial future. And don't part without asking your client if he knows anyone with the same courage to take steps in defense of their financial future, because those are the best referrals of all.
Steve Gresham is executive vice president and chief sales and marketing officer for the private client group of Phoenix Investment Partners, Ltd. He's the author of The Managed Account Handbook: How to Build Your Financial Advisory Practice Using Separately Managed Accounts and Attract and Retain the Affluent Investor: Winning Tactics for Today's Financial Advisor. [email protected]