If you're an adviser, the greatest value you bring to clients is keeping them from making mistakes from which they won't recover.
This past week, I was reflecting on the different outcomes experienced by two couples who recently came into our office for a routine review. Both couples have been clients since the breadwinners retired in 2005. In fact, they worked for the same company for years and had similar financial situations.
As their adviser, we performed all the basics of
financial planning. Among other things, we built out retirement income scenarios, calculated tax projections, constructed portfolios and educated them about risks and probabilities.
Clearly, both clients were in good shape to retire in 2005 and had their financial lives organized in a way that would protect them regardless of what financial storms came their way.
Yet here we are, roughly 15 years since they retired, and the outcomes of these two couples are entirely different.
On the plus side, one of the couples is in better financial shape than the day the main breadwinner left the workforce. Conversely, the other couple has had to cut their monthly income three times and eventually took out a reverse mortgage.
What's the difference?
It wasn't the investments chosen for them. It wasn't even their spending. The difference between the two is how they reacted to the financial crisis.
If you were a practicing adviser in 2008-2009, you probably know what happened: One couple stuck to their asset allocation and financial plan, while the other couple panicked and sold out of their equities just a few weeks before the market bottomed out.
As the market recovered, the clients who sold missed the tremendous recovery and turned what was a temporary decline in asset prices into a permanent destruction of their retirement.
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Obviously, during the financial crisis we were able to convince most of our clients to
keep their eye on the long-term outcome and not bail out on their financial plans.
And, for the most part, our clients weathered that storm just fine.
But of course, it wasn't without a lot of
hand-holding.
Reflecting on the clients I've guided through the dot-com bust and the financial crisis, I know that the real value I provided to those individuals was keeping them invested in the proper asset allocation.
All of this leads me to wonder what value robo-advisers and 1-800-CALL-CFP will provide during the next
bear market. Where will investors turn for guidance? Will they blindly follow the algorithms? Will they
trust the advice of the newly minted CFP behind the screen? Will they use a disciplined approach to buy more stocks as prices fall, or will they succumb to their emotions and bail out at the worst time?
The longer I'm in this profession, the more I understand that the personal relationships we have with our clients is the best prescription for protecting them against making financial mistakes that could ruin their lives.
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Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with $4.5 billion in AUM.
