Correcting the adviser-client disconnect over the definition of risk

When we say the word "risk" to clients, we're most often thinking of technical things. Like volatility or standard deviation. But when clients hear the word "risk," they're thinking of the chances they'll run out of money or fail to meet an important goal. That's a big disconnect, and super frustrating for both you and your clients. Clients absolutely need to understand what we mean by risk because it can affect decisions and goals. So how do we fix the disconnect? First, we need to help clients understand what we're really talking about when we say risk. Don't be afraid to drop the technical terms. I've found clients get it when I define risk, a.k.a. volatility, as the amount something wiggles. Great term, right? Yes, "wiggles" sounds funny, but people get it. (More from Carl: Keep clients from making this classic behavioral investing mistake) Then, I draw out the different types of investments. Stocks wiggle more than bonds. Bonds (intermediate term) wiggle more than cash, and cash wiggles the least of all three. You get the idea. Feel free to use my sketch, but this sketch is a perfect one to create on your own white board. Seeing it can make all the difference. Plus, clients will appreciate your effort to cut through the complexity. Of course, there's a place for technical terms and multi-axis charts in your work. But important client conversations need something more. They need us to cut through the technical mumbo jumbo to help people understand why it matters to them. Otherwise, clients will tune us out, nod their heads, and leave our offices confused. I know you don't want that. So take a deep breath. Find a word you like (you're welcome to use wiggle), and talk to your clients about what risk really means. Carl Richards is a certified financial planner and director of investor education for the BAM Alliance. He's also the author of the weekly "Sketch Guy" column at the New York Times. He published his second book, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money (Portfolio) last year. You can email Carl here, and learn more about him and his work at BehaviorGap.com.