How do you keep client risk tolerance stable as markets gyrate?

As I’ve talked to thousands of financial advisers over the years, I’m convinced there must have been a class back in financial adviser school where they said, “There are two things you should never talk about with your clients — it’s not religion and politics — it’s risk and the short term.”

For many of us, the word risk is associated with a sense of danger, or perhaps more charitably, adventure. So that instinct to never talk about risk is reasonable. But the challenge is, your clients respond to risk in the short term.

Counterintuitively, we can instill a sense of calm in our clients, we can attract new clients to our firm, and we can drive the satisfaction and retention of our existing client base by inviting a risk-focused conversation into the room.

The reality is, clients intuitively understand there is risk in the markets. Refusing to talk about the perceived “monsters under the bed” never made the fear go away with our kids, and it doesn’t cause it to disappear with our clients either. We will have the greatest success keeping their stress low by shining the light on risk, not minimizing its impact.

And it turns out that having risk-focused conversations, based on real quantitative analysis of how wild markets might impact an investment portfolio, really drives better confidence and stability in how people tolerate risk.

Over the last several years, we’ve been asking our Check-in questions to measure market sentiment and plan confidence at the same time that we’ve been measuring the client’s risk tolerance. You would expect risk tolerance for a fixed group of clients to drop slightly each year as they get closer to retirement and needing to draw down their assets for living expenses. What we found was fascinating.

In 2022, market sentiment has plunged by 128%. (Methodology: we assign a 1 to every positive answer and a -1 to every negative answer. The mean answer was +0.601 last year and is -0.167 this year.) But during the very same time frame with the very same clients, the Risk Number of the average client dropped by an imperceptible 2% — and that’s without any adjustments for age, time horizon and getting closer to retirement.

Further, we’ve proven with the data that clients whose advisers are actively driving these risk conversations are far less anxious than the population of clients seeking out an adviser. We did that by comparing the anxious clients in an adviser’s existing book of business versus the average prospect coming in on that same adviser’s website as a prospective client. Prospective clients were three times as likely to be anxious as an adviser’s existing clients — perhaps no huge surprise as there is a reason those investors were looking for a new adviser, but proof that risk-first conversations work to reduce that anxiety and stabilize client behavior.

Bottom line: Helping clients truly understand risk is the key to driving real growth in a wealth management firm. It keeps clients invested and assets compounding; it attracts new clients who need the benefit of advice; and it helps existing clients stay satisfied and retained.

[More: Helping clients through black swan events]

Aaron Klein is CEO at Riskalyze, the industry’s risk-centric growth platform.