your financial adviser really know you?
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.
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
thatís a problem.
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.
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.
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.
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
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.
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
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?
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.
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