The opportunities of a lifetime

(September 2005) It’s been a good summer for equity investors. Even so, your client is getting impatient. After watching the latest edition of his favourite investment show on the weekend, he wants to sell a good portion of his portfolio and move heavily into the latest “hot” sector. After all, it’s the opportunity of a lifetime…

As an advisor, you know the best decision for your client is to stick to the plan. But your client doesn’t see things that way. He wants you to do something. Now. And if you don’t, you’re worried he’ll take his business to a competitor.

Sound familiar? Advisors have been dealing with this scenario since the media began reporting on the investment industry. The best way to prevent it, of course, is to train clients to view staying the course as a perfectly valid investment decision. So you provide them with case studies, market data, and even anecdotal evidence that explains why jumping aboard “flavour of the month” investments is a bad idea. Such efforts will pay significant dividends down the road, and are a big part of turning an average client into a resilient client.

But it also makes sense to tackle the problem from another direction. How can you demonstrate your value to clients, and show them you’re doing something, without making any changes to their portfolios? Easy: by encouraging your clients to see education as a form of action.

Clients want action! Like it or not, if you don’t provide clients with new investment ideas or strategies from time to time, your client may come to see the portfolio-and your relationship-as stale and in need of change.

How do you reconcile this position with your recommendation to “stay the course”? By constantly educating clients about potential opportunities. By discussing such opportunities, what you’re communicating is that you’re “on the case”- that is, you’re busy doing work for them, even though that work may not result in a change to their portfolio. As a result, clients begin to see all of your “behind the scenes” work as action. And that makes them more confident when you suggest taking no action.

Now, I want to be clear about something: the purpose of educating clients is not always to make a sale. You may be a strong believer in some of the opportunities you introduce to clients. Or you may be strongly opposed to them. Or you may not have a strong opinion one way or another. It really doesn’t matter. Either way, that information should come from you. By taking the time to explain the opportunity to the client, to educate the client about what they might be hearing from other sources, you win.

Case study: Action on hedge funds Let’s take a look at a real-life example that I recently came across, and show you what I mean by framing client education as action.

I spoke to an advisor from Alberta — I’ll call him Brent for the purposes of this article — who had fielded a number of calls from clients asking him about hedge funds. While Brent believes hedge funds can make sense for the right client, he doesn’t believe they’re appropriate for every client. But in the course of some of his conversations with clients, Brent realized that some of his clients simply didn’t see it that way. They wanted to invest in hedge funds. And they wanted to know why Brent hadn’t suggested such action earlier.

I spoke to Nigel Stewart, a Managing Director at Arrow Hedge Partners about Brent’s problem. Stewart was immediately sympathetic. “I hear stories like this all the time,” he confirmed. “Hedge funds have seen some phenomenal growth over the past few years, but knowledge hasn’t always kept up with that growth.” As Stewart explained to me, advisors need to educate their clients and articulate why they should or should not be investing in hedge funds.

To solve this problem, I suggested that Brent start educating his clients about hedge funds, in order to better inform them of the pros and cons of the investment. He could do this in a number of ways: start a call rotation, write a short letter that mentioned hedge funds as part of a broader “state of the market” discussion, or perhaps publish a newsletter on the topic.

The purpose of this communication would be twofold:

a) To give clients the "full story" on hedge funds, so they’re better informed when they next read an article in the financial press, or see an analyst talk about hedge funds on T.V., and

b) To explain that hedge funds make sense for risk-tolerant investors with larger portfolios, but not for the "average" Canadian investor.

"Personal" is the key here: Brent should make it clear that he has spent considerable time investigating hedge funds, and has thought carefully about the issue before formulating his position. "There’s a lot to know about hedge funds," Stewart says. "They come in various forms, some risky, some not. Regardless of the advisor’s opinion on them, giving clients the tools to make an informed decision should add value to the relationship."

As I explained to Brent, this communication should go out to every client, regardless of whether hedge funds would be appropriate for that client or not. Remember, the purpose of this kind of communication is not to drum up sales: it’s to give clients a concrete example of how you are constantly investigating new opportunities to build client wealth, even if those opportunities ultimately turn out to be inappropriate for a given client’s portfolio.

Remember too that education can be a great way to "bulletproof" your clients from the competition. "If you simply ignore new products or strategies, or don’t offer them to clients, some other advisor is going to seize on that," Stewart says. By educating clients about hedge funds and other new products, what you’re doing is closing off one avenue of competitive challenge. "If you’re well-versed in hedge funds and other alternative assets, that will probably be a big advantage for you over other advisors," says Stewart.

Let’s review what this educational activity actually accomplishes for Brent:

• It shows clients that he’s busy working to further his clients’ best interests;
• It demonstrates Brent’s knowledge and expertise of a highly technical investment product;
• It illustrates how Brent is aware of recent news and innovations within the industry;
• It shows clients how Brent is aware of their concerns, issues, and questions;
• It strengthens the resistance of Brent’s clients to selling pressure from the competition;
• It invites clients to be more involved in building their wealth.

All of these are good things for Brent’s practice, regardless of whether hedge funds are appropriate for his clients.

Whenever you discuss opportunities with your clients, what you’re really discussing is your value. And no matter how big your book, no matter how well established you are in the industry, value is something you need to constantly communicate to clients. In the long run, it’s the only effective way to build a sustainable competitive advantage.

Jeff Thorsteinson is the creator of the YouFoundation, an organization that has helped advisors build world-class practices through innovative concepts, tools, and systems since 1993. Contact strategicadvisor@youfoundation.com or 1 800-223-9332, ext. 1, for more information to help you build your referral business. Or visit the website at www.youfoundation.com.

(09/26/06)