Accounting Today - - Financialplanning - From page 28 From page 16

may be. Some of these so­lu­tions may be to spend less, down­size the home, earn more, or de­lay re­tire­ment. None of these so­lu­tions are good news, but it is bet­ter that your clients find out about their core is­sue sooner than later.

The other side of that equa­tion is your dream client. This client needs to earn very lit­tle be­cause of su­pe­rior savings or very low costs of liv­ing, and has the tol­er­ance and abil­ity to with­stand mar­ket cy­cles where losses dom­i­nate. In this case, your ad­vice could range from very con­ser­va­tive up to in­vest­ing ac­cord­ing to your client’s higher tol­er­ance for risk.

In each client re­view, I think it’s good prac­tice to bring the hu­mil­ity and re­al­ity that mar­kets may be­have ir­ra­tionally, and there isn’t much that any in­di­vid­ual can do about that ex­cept to turn off all risk and take cover. If you do that, good luck try­ing to de­cide when and how to get back in. We’ve all seen the data in terms of in­vestor re­turns if you miss the few biggest rally days in any given pe­riod. You’ll also no­tice that the best pe­ri­ods for mar­ket-driven re­turns is typ­i­cally just af­ter the worst one. This un­der­scores the risk and sig­nif­i­cance of tim­ing. Who was ready to dive into the mar­kets with both feet in March 2009?

Test­ing along the way

Another way that you can talk to your clients about volatil­ity is to stress test their fi­nan­cial plan. You can run “what-if” sce­nar­ios re­gard­ing the vari­ables not go­ing in their fa­vor. You may test for a higher in­fla­tion sce­nario, port­fo­lio losses, or higher spend­ing.

Dur­ing times of volatil­ity, you may end up re­vis­it­ing many of these same tools that you used at the start of your plan­ning re­la­tion­ship to see if any­thing has al­tered. In prior years and mar­ket corrections, we’ve re-tested some clients’ risk tol­er­ance. For the most part, there were no ma­te­rial changes in their tol­er­ance for risk. In my ex­pe­ri­ence, the in­vestors who get spooked by volatil­ity were fre­quently the more con­ser­va­tive in­vestors whose port­fo­lios were mod­er­ate to low-risk port­fo­lios in the first place.

Your most im­por­tant role dur­ing tur­bu­lent times is to be there for your clients. Make proac­tive phone calls to let them know that you are watch­ing and think­ing about them. Hid­ing or ig­nor­ing head­line news about losses is not ad­vis­able.

You may end up re­vis­it­ing the port­fo­lio as a whole in terms of how it was con­structed based on their needs and tol­er­ance for risk. Show them some of the risk sta­tis­tics and the con­se­quences of the cur­rent mar­ket con­di­tions on their fi­nan­cial sit­u­a­tion.

Re­mind your clients that this is one of the few el­e­ments in their fi­nan­cial plan that is out of their con­trol. This could be a good time to take a look at some of the Cal­lan charts that show the sec­tor lead­ers and lag­gards in year-by-year for­mat. This un­der­scores the un­pre­dictabil­ity of in­vest­ing and helps your clients to un­der­stand why di­ver­si­fi­ca­tion may be help­ful in any given year. Of course, di­ver­si­fi­ca­tion is also no guar­an­tee against losses or bet­ter per­for­mance.

For the most part, the fi­nan­cial planner who has been prac­tic­ing proac­tive and holis­tic fi­nan­cial plan­ning is prob­a­bly not re­ceiv­ing a lot of client calls when mar­kets get volatile. Their clients have learned to ap­pre­ci­ate their planner be­cause of all the other good things that the plan­ning team has done for the fam­ily. That doesn’t give you a pass for lousy in­vest­ment per­for­mance, but it sure takes the pres­sure off when they know that you’ve got their best in­ter­ests at the top of your list when de­liv­er­ing ad­vice, in­clud­ing in­vest­ments.


John P. Napolitano, CFP, CPA, PFS, MST, is CEO of U.S. Wealth Man­age­ment (www.uswealth­napoli­ in Brain­tree, Mass. Reach him at Johnpnapoli­tano on Linkedin or (781) 849-9200.

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