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Gail MarksJarvis: For financial advisers, sussing out fear moves to the forefront

McClatchy-Tribune Information Services

September 19, 2016


Does your financial adviser really know you?

He or she should. And Iím not talking about a handshake as you enter the office followed by an exchange of pleasantries such as, "How are the kids?" When the adviser launches into a plan for your money, and you simply nod "sure" without knowing what it really means, you are both set up for trouble.

If youíve been there, you arenít alone. Most of the financial consultants, financial planners and financial advisers who deal with money donít really know their clients deeply even though this is a precept of good financial advice.

And thatís a problem.

If you and your adviser donít know each other well, you are likely to give that complacent nod on a sunny day when you are feeling relieved that someone else is dealing with your money and freeing you to go about your daily routine. Later, you could regret it as a quirky investment product or a horrifying stock market starts destroying your investments.

People and their advisers found out how dangerous superficial relationships could be in 2008 and 2009, when a cruel stock market took giant chunks out of lifetime savings and disappointed clients dumped their advisers. But in a few months, the stakes are going to get even greater for advisers. New federal rules, known as the fiduciary standard, are going into effect next year and 2018. Then, for the first time, people who give money advice will be required to act in your best interest. And that will take getting to really know you. Or, at the very least, advisers will have to go through a bureaucratic procedure that suggests theyíve attempted to know you.

Given that change, attention is being focused on one of the tools advisers typically rely upon. Itís known as a "risk tolerance" questionnaire, which is supposed to indicate whether you are daring or cautious, and how that translates into how you will feel if you make an ignorant or trusting move with money and lose some. Based on the answers, the adviser fashions investment mixtures for you.

But consultants are warning the questionnaire is a pretty flimsy way to access emotions. Michael Kitces, an adviser who teaches others how to manage their financial planning businesses, circulated advice to other planners this week on the "sorry state of risk tolerance questionnaires."

Although regulators want advisers to know clientsí risk tolerance before sticking them into stocks, bonds, annuities or other products, Kitces noted that none agree on how to measure what people are feeling.

Various factors can affect how a person reacts to losses, he said. For example, "an investor whose portfolio recently ran up from $1 million to $1.2 million may not stress about a subsequent $200,000 loss because theyíve still got their $1 million, and the lost gains were just Ďhouse moneyí to them. But someone else who just inherited $2 million, and uses the full $2 million as a reference point, may be far more stressed about the same dollar amount decline even though itís actually a smaller percentage."

While the industry tries to figure out how to access your emotions, thereís no reason to wait for the right questionnaire. If you donít think your adviser is probing enough, help him or her. Talk about how you felt in 2008-2009 as the stock market plunged 57 percent. Did you vow, "never again"? Did living through that crisis convince you that your investments will survive the next plunge?

If you are going to bolt if the market turns scary again, your adviser needs to know and adjust quantities of stocks and bonds now so they will be less risky and wonít terrify you later. But advisers sometimes make the mistake of stifling conversations by reciting buy and hold mottoes and tossing around historical percentages.

So with your adviser, run scenarios in actual dollars using the 2008 crash as a discussion starter. For example, if in 2007 you would have had $10,000 before the crash, and you invested 60 percent in stocks (Standard & Poorís 500) and 40 percent in bonds (long-term U.S. Treasury bonds) at the worst point in 2009, you would have had only $7,140 left. Were you panicked? By early March 2012, you would have had about $12,340 just by letting your $7,140 heal. It was a happy ending. But did you wait? Will you wait in the future if the loss is even worse?