Keeping Clients on the Straight and Narrow

In this exclusive WealthManagement.com series, Eric Clarke, CEO of Orion Advisor Services, hears firsthand how some advisors are reprioritizing performance reporting in unique ways that empower clients to take control of their investments. For our third foray, Clarke talks with J.D. Bruce of Abacus Wealth Partners:

Abacus Wealth Partners has around 30 advisors on its team and each one has a different style for talking about investment performance with their clients. What Abacus advisors don’t deviate from, however, is their view on guiding clients to making smart financial decisions.

“90 percent of my job is standing between people and their bad decisions,” says J.D. Bruce, president of Abacus Wealth Partners. “We provide value by being between them and their tendency to go off the rails and do crazy stuff.”

Bruce said his advisors focus on two areas in a client’s financial life: things they can control and things they can’t control.

While some advisors may spend time digging into the particulars of a specific asset and weighing its value fluctuation over a quarter, Bruce has a different view on what makes an effective conversation with a client.

“I’m at the extreme end of not talking about performance. I have one investment conversation at the beginning of the relationship; after that, I’ll let them know if anything changes in investment philosophy and they’ll let me know if anything changes in their life that affects their allocation. There are things we can control and things we can’t. We can control allocation, but not performance; we can talk about expected return, but not actual.”

Because of the emotional nature of investing and protecting wealth, Bruce has found it more advantageous to focus on a client’s behavior, and spend less time talking about how much their portfolio went up or down in the last 90 days.

“Nothing shorter than 10 years is worth talking about anyway,” he says. 

Regardless, Abacus does report portfolio performance to its clients, but it has made some interesting decisions along the way. One method change is that the firm no longer shows benchmarks on its reports, which some people might view as “crazy.”

The reasoning for the change, however, is sound. The only appropriate benchmark is whatever assumptions were made in the client’s financial plan, and everything else is extraneous to that goal.

“When we meet with our clients, we collaborate with our clients on what they want their future to look like, and then we, as advisors, can work with the client on what investment return is necessary to make that happen.” says Bruce.

However, all clients are different. And client expectations of what they need from their advisor vary widely — that includes how often they want to meet to discuss their portfolio.

“One client never wants to meet, they just want to call whenever, and others want to meet on a regular basis. Some clients just need an arm around them in a very [family-like] atmosphere,” says Bruce.

To help clients navigate the discussion around performance and investing, the Abacus team uses a custom-branded client portal through their portfolio accounting solution. Abacus is working towards creating a portal environment that serves more than just basic investment information for clients. Additionally, they’ve found that clients who use the portal are more likely to ask investment questions when those in-person meetings occur.

Performance, however, is always only half of the discussion. As much as a client wants to discuss performance, their expected return will always be directly impacted by their level of acceptable risk.

Risk, at its core, is not about a binary choice between success and failure; it is about managing the possibility of bad timing. It’s the idea that you need a certain amount of money in October, but in September there’s a market crash.

“The best way to talk about risk — when you have a deep relationship — is to use required rate of return to figure out what they need to invest in and talk about what that risk looks like to get there,” Bruce says.

Figuring out the correct rate of return requires creating as full a financial plan as you can, using projected cash flow and projected earnings over a lifetime. The amount of risk necessary to achieve a client’s desired goals naturally follows the required rate of return.

And though rate of return acts as a guide, there is still a behavioral aspect to investing that often has to be addressed, and that is no more prevalent than when managing risk expectations with a couple.

Though using risk analytics tools is not common for Abacus, they have found value in using technology like Riskalyze to help highlight the differences in risk appetite in a couple or family.

“If you have a Risk Number of 40 and an 80 investing together, neither will be happy — ever. They’ll both be uncomfortable all the time,” says Bruce. “They need to come to terms and consensus about who gets to go where. Required rate of return is very helpful there; if the rate of return is the 40 number, then the risk-taking spouse is fine, although will always feel like they are underperforming. But if it’s higher (more toward 80), I have to seriously talk to the conservative spouse. They need to invest more, or cut down on goals. It can go either way.”

Once again, the key to helping clients understand risk and be comfortable with their returns comes down to adjusting psychology.

“The only time there’s a problem is when a certain return is needed for goals, but they can’t stomach the level of volatility required to get there. Then it comes down to education. The more we can educate clients, the more their risk tolerance, or risk appetite, goes up.”