Many of the clients financial advisors deal with will probably ask several of the same questions over time, about what to do with their money, how to best plan for retirement and what type of insurance products they should consider. But every so often a client may offer up a question that will stump you. Here are a few of the tougher ones you may come across and some answers to have in your back pocket that may be helpful.
Why Am I Not Beating the S&P?
The S&P 500 has been performing spectacularly over the past few years, and quite frankly has been hard to beat, even for active equity managers. So many investors are starting to wonder why they are paying fees to portfolio managers, when a simple S&P index fund could do the trick. And they may be right. But investments in actively-managed portfolios and hard assets also have their place and worth in a portfolio, especially during times of a market downfall. (For more, see: Explaining Portfolio Rebalancing to Clients.)
Explain to your clients that equities can, indeed, be risky and what goes up always comes down. So having some of their portfolio invested in safer or more diversified investments such as gold, international equities, or bonds as well as other alternative investments can be a good way to balance out a portfolio and safe guard it from a huge decline in the U.S. equity markets. You can also point out to your clients that an active manager will be carefully watching the stocks in the S&P to figure out which will be the best bets over the long haul.
Are You Getting Paid to Sell Me Certain Products?
The answer to this question will clearly depend on the financial advisor. Some advisors are purely fee-based and others do get commissions from the products they sell. Either way, it’s important to be upfront with your clients and let them know exactly how you work and how you are paid. If you do get commissions on certain sales, be sure to explain to your clients exactly why you like these products and what are some other similar products out there that they can choose from. If you are, indeed, putting your clients best interest first, there is no need to shy away from an explanation about why you think the products you sell are superior and a good choice for their portfolios. If they are not, maybe you shouldn’t be selling them. Some clients may also want to know if you are a fiduciary and what is the difference between advisors who are and who are not. It’s a valid question and deserves a straightforward and easy to understand answer. (For more, see: How Advisors Can Fight Shrinking Management Fees.)
Should I Invest in Gold?
Many investors over the past few years have been hearing about the attributes of gold. There have even been a plethora of commercials on TV about the merits of the asset. With many investors jittery about whether we are in for a big stock market correction gold, to some, may seem like a safe place to put their money.
To respond to investors lure to join the gold rush, some money managers are suggesting that advisors tell their clients to reassess their long-term investing goals. It’s always a good idea to review your asset allocation, so now may be the right time, although gold may not be the right answer. Advisors should ask their clients if their investment goals have changed and if they are not feeling comfortable any more with the amount of assets they have in the equity markets. They should also think about things such as inflation and how it will affect their assets worth. Gold may, indeed, be a good investment for some, but jumping in just because it’s the latest fad is not always a smart move. (For more, see: How Advisors Can Help Clients Stomach Volatility.)
Why Are You Charging Me to Manage Cash?
Discussions about fees are always slightly uncomfortable, especially when your clients are keeping a substantial amount of their money in cash. It can often raise the question: Why am I paying you a fee to watch my bank account?
The answer is that having all of one’s assets invested in the markets is typically not a good idea. Figuring out how to balance a client’s portfolio with a percentage invested in cash takes time, reflection and continual management. Active money managers also typically keep a certain amount of the portfolios they manage invested in cash. If their fees didn’t include the cash portion of your portfolio they may be tempted to put all your hard-earned money into more active investments - which could eventually result in a huge losses. The management of cash, how much to keep in it, is just as valid and important as the management of investments in the various market products available to investors. (For more, see: Tips for Assessing a Client's Risk Tolerance.)
You should also remind your clients that your fees cover the work you do in providing information about tax laws that may affect their investments, performance reports on how their assets are doing, and a myriad of other financial planning advice. This is why your fees cover all of their assets, even those in cash.
The Bottom Line
Smart clients should be asking you questions about their assets, your fees and how well you are overseeing and planning for their futures. So don’t be afraid to take on the difficult questions a client may ask you, but do be prepared with the appropriate answers or tell them you will do more research and get back to them with timely responses. (For more, see: How to Be a Top Financial Advisor.)