What happens when your client’s portfolio falls by 40%?

Back in 2000 I was an investment adviser in the UK. We had enjoyed a long period – ten years or so – of relatively steady returns and 1999 was notable for the tech boom. Then, in 2000, the markets crashed and we had three consecutive years of negative returns. In quick succession we had the tech bust, 9/11, the first war in Iraq and a scandal in the UK split capital investment trust market.

The extent of clients’ investment losses varied, but losses of 40% were common, and investors with heavy exposure to tech stocks and split caps were staring at close to 90% falls. We also had some fairly significant failures in the structured product market, which were supposed to protect investor capital, but clearly didn’t. 

It was carnage and it resulted in some extremely difficult client conversations.

I’d like to tell you that I managed to cleverly protect all my clients from such losses, but that wouldn’t be true. Why not? Because I had no control over what the markets did, and almost nobody saw it coming. I still don’t have a crystal ball, and I’m not saying stock markets are going to crash, however, we’ve had 9 years since the 2008/9 global financial crisis and I believe the world is in a precarious place right now, politically and economically.

I’m absolutely convinced the Sovereign debt crisis is going to unwind itself in the next two years, and I think it’s going to be chaos for investors. I get the sense that this will be as big, if not bigger, than both the previous crises.

My question, though, has less to do with a debate about whether and which markets will fall, or what that number will be, but what the impact will be on you, your financial advice business and your clients. 

What will happen to your workload?

When do clients most want to talk to you? When everything in the garden is rosy?  Or when they’ve been triggered by losses? Heck, some advisers in South Africa are having a rough time because markets have been flat for a year.

You know all those ‘small’ clients you never hear from? Those C’s and D’s. The ones you know aren’t profitable but you can’t bring yourself to ‘manage out’ because “they don’t really cost us anything.” The ones that you only want to deliver a reactive service to, even though they still think you’re on-call 24/7. Imagine they all start calling in, asking questions, wanting to see you. Or worse, they just start complaining because the performance on the portfolio isn’t what they expected it to be, and you haven’t been having great conversations with them lately, or at all…

What does all that mean for your workload?

What will happen to your service standards?

If your workload goes up because you’re trying to keep everyone including your C’s and D’s happy, where does that leave your capacity to deliver what you really want to deliver (and promised) to your A’s and B’s? What happens if you can’t, or don’t, keep your promises? If you think you’re busy now, while things are relatively easy, wait until there’s a crisis. That’s the point when you’ll wish you’d spent a bit more time on that client segmentation exercise.

If you can’t deliver the service, your reputation will suffer.

What will happen to your revenue?

Most IFA firms have moved to an AUM model, or are trying to get there. Fair enough. But whilst this works nicely when markets are rising, it’s a bugger when markets are falling. Bad enough that you’ll lose revenue, but worse, revenues start falling when your workload is probably rising.

{ M < W } = R

Less money + More work = Resentment

You can kid yourself that your AUM model is ‘aligned’ with your clients’ interests, but the reality is that you have no control over markets, and positioning your value as an adviser on investment knowledge, investment returns and the investment conversation is going to hurt you at some point.

If you’re carrying unprofitable clients now, what will that mean when your revenue goes down and your workload goes up? And how will you feel about that?

What will happen to your client relationships?

We all want lasting relationships with clients. At the very least we want a lasting relationship with their money! If we don’t have their money, how do we get paid? Client relationships are fairly straightforward when there isn’t any bad news. If there’s bad news and the client thinks you caused it because you told them to invest in (whatever it is that’s now gone down) then that causes strain. That’s part of the responsibility we take on, as advisers.

The extent of this strain will be determined in large part by what the expectations of the client were when you spoke to them first, and how those expectations have been managed since you took them on. That’s about quality of client conversations, controlling what you can control and focusing on the right things.

No matter how good you are, you cannot control investment returns. Now matter how much you care about your clients, you cannot control investment returns. In a serious downturn, your relationships will be tested, and everyone finds out where they stand, but by then, it’s a bit too late if it all goes wrong.

You need a deeper relationship. You need a different conversation.

In South Africa, the last ten years have been easy for investment advisers. I’ve got a feeling the next few years are going to be insane… coupled with, of course, RDR being implemented in South Africa.

Still think you’re ready?

I would strongly encourage you to get external help with your clients’ investment portfolios. Whether that’s a model portfolio service, in-sourced discretionary management service or something else is for you to figure out, but this is a dangerous time to be playing the ‘I’m an investment manager’ game.

What’s more, if you re-frame your conversations, you can add significantly more value to your clients by delivering a strategic planning and coaching service.




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