EDITORIAL: SLIDE HELPS YOU KNOW CLIENTS’ REAL NEEDS

The Chinese character for crisis is made up of two other characters: one signifying danger, and one signifying opportunity.

The danger part of the economic crisis in Russia has become all too clear as the U.S. and world equity markets have plummeted. The opportunity part is not so obvious.

Yes, there may be investment opportunities now that the crisis has virtually wiped out all the year’s stock price gains. But there may be an even more important opportunity — the opportunity for financial planners and their clients to learn more about the clients’ true risk tolerance.

A better understanding of how the individual investor feels about the tradeoff between risk and return can help a financial planner do a better job of building portfolios suitable for the client.

The wise financial planner will use the client’s behavior in the recent market rout as a measure of whether the recommended investment strategy and the asset allocation was really right.

For example, which clients did planners hear from last week, especially on Monday, during the market’s 512 point drop? Which ones panicked? Those are the ones whose risk tolerance may not be what the planners, and the clients, thought it was. Or perhaps the clients’ financial situations have changed since the last review.

If these clients have high equity exposures, regardless of their age and income level, the financial planners might need to cut back. Or the financial planners might have to do more education, more hand-holding, to discourage those clients from abandoning asset allocations that best suit their needs but which feel too risky for them right now.

On the other hand, financial planners should not ignore clients they didn’t hear from. Like the dog that didn’t bark in the Sherlock Holmes mystery, that silence is an important clue. It suggests the asset allocations and portfolios of those clients ought to be reviewed also.

Maybe they were just comfortable with their long-term investment plan and asset allocation. Maybe they were happy with their planners’ advice. But perhaps also the risk tolerance of these clients is higher then either they or their planners expected. Or perhaps their financial situation has become more secure since the last review.

The market crisis provides an opportunity for financial planners to help their clients understand themselves better, to educate them better as to the long-term nature of investing, particularly stock investing, and to help them position themselves better for investment success in the future.