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Q4 hedge fund letters, conference, scoops etc
Every advisor I know (including me when I was in the business) has one “problem client” with whom you don’t see eye to eye over investment performance. This issue is widespread enough to be considered an epidemic in the advisor community.
Before one of my webinars, I asked participants: “What is the #1 frustration you have when talking to your clients about risk?” The #1 answer (by a landslide) from a pool of over 200 advisors:
Clients want high returns and low risk
They just don’t get it, do they? Or, is it the advisors themselves whose understanding of risk needs to be improved? Either way, it needs to be addressed.
How do you reach people on this issue? What words do you use?
Here are my suggestions for how to respond to a client who stubbornly refuses to conceptualize the relationship between risk and return.
The words to use
You may not use this exact method of measurement, but the following examples reflect how to communicate risk clearly. They are adapted from a webinar I held with Aaron Klein of Riskalyze (replay here). Riskalyze uses a 1 to 99 risk score and presents the client’s risk tolerance like a speed limit sign. In its system, every client has a risk number that establishes how much risk they can handle (“Risk 45”) as in the following examples:
Example one
Say to the client:
Your risk score is a Risk 45. I can give you a Risk 78 that has a lot more return. But you’re going to have to accept the risk, the downside potential that the Risk 78 had in a year like 2008.
That creates a really interesting situation that Aaron calls the “ACAT for a moment” opportunity. You can see it through this analogy:
- I want to drive 45 miles per hour. That is what I am comfortable with.
- It would be way faster to drive 78 miles an hour. That would make me uncomfortable.
Read the full article here by Sara Grillo, Advisor Perspectives
