The learning curve for new clients

New clients sometimes ask how often we’ll be meeting.

“I’d like to see you at least once a year — and of course you’ll hear from me if something dramatic happens,” I say. “Beyond that, I’m happy to meet with you as often as you want.”

Being a bit of a wise guy myself, I secretly like it when they say, “Oh yeah, what if we want to meet with you every month?”

“Fine with me,” I tell them. “I’m available as often as you want. But our guiding principles won’t be changing. That’s why we have an investment philosophy and a portfolio strategy. So I think you’d get bored with these meeting pretty quickly, because I’d be telling you the same things every time.”

No one ever put this to the test, but John came closest. When we started together, he was my youngest client. He had come into some money unexpectedly and had no financial experience, so we had spent a lot of time on client education before I started making any investments.

“Hey, Michael,” John began, phoning me about a month after I started managing his portfolio. “I’m here at work and some of the guys are talking about the stock market probably going to be going down and I’m wondering whether we should do anything about that.”

“Well, you know, John, they may be right. Or they may be wrong. We don’t know … and really they don’t know either. But you and I have a long-term investment plan that doesn’t depend on us knowing short-term answers, and we certainly don’t want to risk your retirement on what some people might be predicting, so I think we should just stick with the plan.”

“OK,” he said. “I just thought I should check.”

About a month later, we had a similar conversation. “Some people are saying that interest rates are gonna …” “Could be, John, but let’s stick with our plan.” “OK.”

A couple months after that, John called again from work. “Hey, Michael, I think I know what you’re going to say about this, but I thought I’d ask you just to be sure.” He recounted some other financial prediction he had heard.

“John, before I answer, may I ask: What is it you think I’m going to say?”

“I think you’ll say we should just stick with our plan.”

Bingo. At this point, we both knew that John understood our investment approach, and recognized that he didn’t have to worry about everything he heard. And that was his last “people are saying” phone call.

CLIENT EXPLANATIONS AND EDUCATION

There’s a learning curve with new clients. It takes time for me to explain (and for them to understand) how I think about investing and what I’m proposing to do with their money.

I tell them I’m not trying to turn them into investment managers but I do want them to comprehend enough of what I’m doing so they’ll feel like they don’t have to worry about their money. I want them to see that I have a consistent approach to investing and to learn to trust that approach rather than just trusting me because they like me.

Often, though, my upfront client explanations and education don’t stick. Clients’ memories fade.

Right after the 2008 crash, Liliana phoned me in distress. “I know my stocks are way, way down,” she began. “Don’t tell me how much. But what about my bonds — how much have I lost there?” I could hear a little panic in her voice.

Liliana had first called me about a year earlier, after her parents died. She had no financial experience and needed someone to manage her inheritance. She was extremely worried about market risk. (“I’m afraid of losing all my money.”) At the time, she was in the middle of a master’s program in public health and had already taken (and passed!) a course in statistics, so she was receptive to a more quantitative presentation than many of my clients.

I spent a long time with her explaining how I would construct a portfolio with some built-in risk protection. I wasn’t suggesting anything complicated — no fancy derivatives — just that I would put a substantial portion of her money (I think I proposed 40%) into fixed income for safety and I would make the stock portion very diversified, since (as she knew) larger samples have lower standard deviations.

I also talked about the correlation between risk and return. We could buy low-risk, low-return bonds, or higher-risk, higher-return bonds, but we were unlikely to find low-risk high-return bonds. Buying riskier bonds would defeat our goal of adding stability to the portfolio, so I was going to use higher-quality, shorter-duration bonds that wouldn’t see a lot of price fluctuation. We wouldn’t see a lot of yield, either, but it’s like we were buying insurance, and the lower return was just the cost of the insurance.

By the time the market crashed, Liliana had forgotten all this. Hence her panic, thinking her stocks had been trounced and fearing her bonds had been too. She was right about the stocks, of course: the initial market drop in 2008 was severe.

Meanwhile, her shorter-duration, higher-quality bonds held their value. I had to tell her twice before she believed me. Naturally she was pleased and relieved. She was even happier a year later when her stocks had gone back up.

[MORE: Helping clients tune out ‘investment noise’]

Michael Broad is a financial planner and investment advisor in Newton, Massachusetts. Got a good client story or problem you’d like to see in a future column? Email Michael Broad.