Education equals clients taking responsibility

Recent market volatility highlights the need for consistent client advice.

The relevance of the client risk profile and objectives has never been more important.

Behind these issues hides the fact that many clients may have very little understanding of the fundamental aspects of the assets that make up their portfolios. Put it to the test — ask a client what they think a ‘share’ actually is?

What’s the answer? Is it remotely close to the definition of a share — that is, the evidence of part ownership of a company? Then ask, what do you think a blue-chip share is? The majority of the time you will get answers such as ‘a big company’, ‘a strong company’ or ‘the banks and BHP’.

Advisers educate themselves on the finer points of the investment universe and keep up-to-date with the issues of the day, sharing their opinions and those of their peers to try and keep clients from feeling like they are losing their life savings because of investments they don’t really understand.

Some advisers may adjust client portfolios in market downturns to become more defensive, to address client concerns and to appear to be active.

These changes may make the client feel better but don’t necessarily help the client’s portfolio recover in the longer term. Sometimes this contradicts the standards to which advisers subscribe.

Then why do this? The role of the adviser is to present options to each client to allow them to make an informed decision. If the client had better knowledge about their investments, and therefore a greater understanding of their position, would the client relationship be easier to manage?

The answer is yes, and the same client will have greater respect for adviser recommendations.

This point of view is supportive of the clients taking responsibility for their own actions.

When times are good, clients praise their adviser, when times are bad, they seek ‘value for money’.

By taking an educational approach, a client is constantly reminded of the risk their investment poses to their financial future. It is important to remind clients why investments perform in cycles and that these ‘business cycles’ can have a negative effect on their portfolios.

Counselling a client about the constant risk involved with all investments and management techniques helps to reduce fear and helps them develop a sense of ownership of their investment strategy. The client then feels comfortable and secure about the decisions being made about their money.

Why? They are making the decisions. Advisers give options, not directions, and as such help clients to make informed decisions.

Margin lending is an area that is very successful by way of educating clients in basic risk/reward principles. It makes sense to be active and communicate constantly with clients in geared portfolios.

Without regular contact, updates and education, these clients can easily lose their nerve and move away from an investment strategy that carries a strong possibility of achieving their longer-term goals. Emotional decisions can result in poor outcomes that clients only make when fear amplifies their emotional state.

An adviser can counter this emotional state with information and empower the client with knowledge. A strong educational understanding of the operation of margin lending, the risks involved with the associated investments, diversity and above all a management plan to cope with the downside of markets keeps the client aware of the options and the impact on the outcome.

They know that dollar-cost averaging in the low phase of a market increases the possibility of accelerating their portfolio value. They know the importance of keeping a cash reserve to cover a margin call, maybe two. The adviser has given them the knowledge to act with confidence, and the emotional state is changed from a state of fear to optimism and the assurance that their future needs can be catered for.

Real financial advice is all about relationship management. Relationship management is built on communication and communication from both parties enhances knowledge.

Furthermore, investment in client education is one of the most important protective measures a successful adviser can take for their business and licensee.

Advisers using education as a basic tool to assist in building relationships and managing those relationships by increasing the knowledge of their clients will add significant value to their business. Clients value financial advice based on knowledge and respect.

Fees cover the value of advice given and the advice is based on the strength of the relationship and the options available for a client to achieve their objectives. Advisers who have spent time educating their clients, helping them to understand their strategic options and assets within their portfolios, will stand out in the crowd in years to come.

Shane Pinkerton is a financial adviser and authorised representative at Fiducian Financial Services.