7 Steps to a Great Risk Management Discussion

By Erin Tamberella

Date: 4/13/09

“Risk management” has become the 2009 power phrase when talking to clients and prospects. Over the last several months, advisors have become acutely aware of clients’ “real” risk tolerance and in most cases it was not what was written on the questionnaires. Forget the questionnaires.  It’s time to have heart-to-heart discussions with clients and prospects on the “real” level of risk they’re willing to accept going forward to reach their goals.

 

While most clients and prospects don’t really expect to make money this year, they do expect to better manage risk now and in the future. Now is the perfect time to have a candid risk management discussion with all clients and prospects.  The insight you gain at this juncture should be a fairly good indicator of their “real” risk tolerance.  Clients and prospects have recovered somewhat from the fear and paralysis that was rampant over the last several months, yet the greed factor typical in a market turn has not yet emerged full force.

 

Advisors and clients alike are at a crossroads.  This is your opportunity to start fresh with clients and manage their assets, wiser from lessons learned since September 2008.  The risk management discussion sets you apart from advisors who are using the same old lines and those who are saying nothing at all.  It also offers opportunities for gaining more assets, referrals and generating more business.

 

Seven Steps to a Great Risk Management Discussion

1. For clients, and prospects with whom you have some relationship, begin by reviewing in detail their investment objectives, goals and the plan they had in place prior to September 2008.  Discuss any changes made since the financial crisis began and review why those changes were made.

2. Ask the following key risk management questions. These questions are designed to give you valuable insight into what clients and prospects are thinking and feeling.  Remember most decisions are based on emotion so this is your opportunity to uncover what really drives their investment decisions.  Encourage them to elaborate on their answers and ask as many follow-up questions as you can to determine what’s most important to them on an emotional basis.

• Most people tend to overestimate their risk tolerance in good markets and underestimate their risk tolerance in bad markets.  Prior to September 2008, do you think you overestimated, underestimated or were accurate in estimating the risk you were willing to incur in your investment portfolio?
• Having experienced recent market conditions, has the level of risk that you’re willing to take in order to achieve your goals changed?
• Have your investment objectives or goals changed?
• On a scale of 1-10, with 10 being a complete speculator and 1 you have money under the mattress, where would you rate the level of risk you’re willing to take in your current investment portfolio?  In many cases, this question is just as effective in gauging risk as the questions in the lengthy questionnaires clients and prospects are often asked to complete.
• Knowing what you know now and having experienced the last few months of market turmoil, do you now consider yourself an ultra-conservative, conservative, moderate, moderately aggressive or aggressive investor?
• Specifically, what does that mean to you?  It’s very important that they explain to you what this term means to them in their own words. This gives you far more insight than the multiple choice answers on most firm questionnaires.  In many cases, as they are communicating their answer to you, they are thinking this out in a way they may not have previously considered.  It can be as insightful for them as it is for you.
• Do you feel that this is an accurate rating of your acceptable risk level for a 3-5 year time period?  Explain that you will be developing and/or modifying a plan reflective of their “real” risk tolerance and you need a reasonable time frame from which to work.
• How comfortable will you feel with your stated risk level when you start to see the markets go up?
• What other assets do they currently hold that should be considered in this risk analysis?  Explain that you will evaluate their answers relative to their total investment portfolio and then make recommendations for navigating the markets now and in the future based on their “real” risk tolerance.  In order for the risk analysis to truly benefit them, it must be applied within in the context of their entire investment portfolio.

3. Set Appointment #2 at Appointment #1.

 

4. Send them a handwritten note thanking them for their candor.  Other points to include in your note are:  You hope that your meeting was as insightful to them as it was to you.  You look forward to discussing the results of your risk analysis with them on (Date and time of Appointment #2).

 

5. Evaluate their stated risk levels relative to their present portfolio.  It’s time to leave the past behind and determine the best way to position them now for a rebound in the market within the parameters of their stated risk tolerance and their present holdings.  Develop a proactive phase-in/phase-out plan should the market retreat or continue its rebound.  Quantify your plan with actual numbers on the S&P and build in some flexibility.  It is unlikely that you will hit the top or the bottom but actual numbers give your plan structure and demonstrate foresight on your part.   Outline your recommendations in a one page bullet-point format.

6. In Appointment #2 review their stated risk tolerance levels.  Discuss your recommendations point by point.

 

7. Ask if they have any friends or family members who have been dissatisfied with the service they’ve received from their current advisor and might be interested in a similar analysis.

This is a valuable and timely service to offer clients and prospects now.  Clients and prospects want tactical solutions. They desperately want to feel that they are doing something proactive to help their situation now and in the future.  In most cases, the tactical solutions you provide will not entail a complete overhaul of their portfolio.  Even if they are positioned exactly as they should be based on their stated risk tolerance, having the risk management discussion will likely give them a peace of mind they haven’t experienced in quite some time.

 

You and your clients are both much wiser than you were just a few short months ago.  Now is the time to reclaim your power and reemerge as the best advisor you can possibly be to your clients.  This is your mission.  This is why you got in the business.  Do at least one proactive thing every day that will bring you closer to achieving that mission. Begin with the risk management discussion.

 

These guidelines would not be complete without one final note on prospects.  This is a once-in-a-career opportunity to gain new clients and raise assets.  Just as clients always want to buy stocks at full price rather than when markets are down and everything is on sale, advisors exhibit these same tendencies when it comes to prospecting. They shy away from prospecting when markets are down and people are unhappy and instead, want to prospect when times are good and there is very little incentive for change. As the market improves, prospect complacency sets in.  The time to prospect is now and the risk management discussion can open doors.  Seize this prospecting moment.  The great advisors are doing just that.  The seeds of greatness are within you.