Would you ever build a structure without using a blueprint? Well, you might, if you were building a garden shed to protect yard tools from the weather, but not if you were building a house to protect your family. Yet even today, many investors do not take the time to develop a blueprint for their investment success i.e., a written financial plan or investment policy statement.
We believe underlying every sound wealth management strategy is a clearly defined plan that lays out the objectives of the portfolio as well as any other pertinent information, such as a client’s asset allocation, annual contribution to the portfolio, planned expenditures, and time horizon. Unfortunately, many people ignore this critical effort, in part because it can be very time-consuming, detail-oriented, and tedious. However, a written financial plan is also the blueprint for a person’s entire financial house and, done well, provides a firm foundation on which all else rests. For financial advisors, it can also be an invaluable foundation for behavioral coaching.
Starting your client relationships with a well-thought-out plan can not only help ensure that clients will be in the best position possible to meet their long-term financial goals but also form the basis for future behavioral coaching conversations. In a way, it’s the pinnacle in proactivity: helping prepare today for clients’ emotional ‘storms’ to come.
Whether the markets have been performing well or poorly, you can help your clients cut through the noise they hear on a regular basis, noise that often suggests that if they’re not making changes in their investments, they’re doing something wrong. The problem is, almost none of the noise that investors are hearing pertains to their specific objectives: Market performance and headlines change far more often than do clients’ objectives. Thus, by helping clients to tune out the ever-present noise and to stick to their plans, you can add tremendous value over the course of your relationship.
The process sounds simple, but adhering to an investment plan, given the wide cyclicality in the financial markets and their segments, is often difficult. Many of the disciplines of investing–asset allocation, diversification, and rebalancing, for example–can become extremely challenging to adhere to during periods when either fear or greed are setting the tone for the markets. That is why making what seem to be small decisions when the plan is developed, such as when rebalancing will occur, can be so beneficial.
Think back to the Global Financial Crisis. When the time came to rebalance their portfolios, how many clients were thrilled by the thought of selling their assets that had held up well (likely bonds) to buy more stocks? It was probably a challenging conversation. It’s probably not much of a stretch to assume that if the advisor didn’t suggest rebalancing, clients, caught up in the headlines of the times, probably wouldn’t have chosen to rebalance on their own. What about the clients who asked if you should be rebalancing their portfolios after the stock market dropped 15%, or 20%, then 30%, on its way to a loss of more than 50%? Establishing the rebalancing rules in the financial plan can really help avoid these conversations which feel a little more like fortune-telling than financial advice when in the moment. The financial plan is your best tool for contending with clients behavior in emotionally charged markets, helping them remain on a firm foundation. After all, when the weather is really unsettled, where would you prefer to seek shelter–the tool shed or the house?