How NAPFA members discuss investing and its challenges with clients

By Alexandra Baig

The stock market is not a factor in the dystopian future described in many science fiction novels. This may provide some assurance that we are not yet there. Even so, the prolonged pandemic, followed by the horrendous invasion of Ukraine, has kept the market on a rollercoaster and some of our clients’ fingers on the speed-dial button to us.

We understand that investment strategy is a key component of long-term financial planning, but not the sum total of it. But at times like these, it is a key touchpoint for many of our clients because they are seeing uncertainty around the globe, and they are concerned with how it affects their investments. I reached out to a few of my fellow fee-only planners to learn how they accomplish the investment component of their work with comprehensive planning clients.

What process do you use with your clients to develop an investment policy statement (IPS)?

Tom LeClaire, principal and senior wealth manager at Caliber Wealth Advisory, asks clients to complete a risk tolerance questionnaire. “Here’s the language that I use with prospective clients: A risk tolerance questionnaire is one of the tools that we use to get to know the client. Some clients say, ‘I’m beyond that.’” But, Tom observes, sometimes the client thinks they know what type of adjustment they need to make—say, from growth to moderate—only to find out from the questionnaire and process that they really need to move back to moderately conservative.

Curt Stowers, partner at F5 Financial, describes his process like this: “What we do is ask questions about [the client’s] comfort level with market volatility. Then we talk about probable returns of a 100% equity portfolio and ask them what they did in previous market downturns. And then we guide them toward [an] appropriate portfolio.”

I start with a risk tolerance questionnaire and then help clients identify aspects of investing that are important to them. In my practice, which focuses on families that have a member with a disability, a number of clients have a diversity, equity, and inclusion “lens.” At the same time, because parents may be preparing to support their child with a disability for their entire lifetime, minimizing fees is also very relevant.

What are the aspects of investing about which you most frequently find you need to educate clients? 

Greg Knight, owner of Engage Advising, says he educates many clients on “The basics. Most [clients] do not even know the difference in account types—taxable, tax-free, tax-deferred, etc.—or why they are using these accounts.” Knight also helps clients understand, “It’s time IN the market, not timing the market,” and “that it’s diversifying to reduce risk, not stock-picking.”

Stowers echoes that advice. “The first thing is about beating the market or not beating the market. Facts and data do not bear out that you can. The second thing,” he continues, “is about volatility. If you go back and look at history, in a diversified portfolio what you can lose is up to 50% of the equity portion. So we talk not so much about returns as about what they can lose.”

Dee Dee Baze, owner of Alphemita Financial Services, concurs. “I go over the potential risks versus the potential earnings over time. I do have to explain the volatility and what that may look like for them if the market goes south for a while.”

When a market downturn spurs a divestment request from a client, Stowers refers them back to their signed IPS and reminds them that, according to this agreement, he is obligated to manage their assets in the way previously agreed upon, and he cannot simply “sell everything.”

Stowers shares this anecdote. “In March of 2020, we had one family that said: ‘We want out.’ I said, ‘We can do that.’ I said, ‘Do you want to buy back in when the market is down 10%, down 20%?’ I explained that they could not want to buy back in at a higher point, because then they would be guaranteeing themselves a loss. The only way they could make money is if they bought back when things were lower.”

Many of my clients recognize that it may be helpful to create a special needs trust for the benefit of their young or adult child with a disability. I help them to understand that for the trust to be truly useful, they have to make a plan to fund it and that certain assets may work better than others for that purpose. For example, it can be very complicated to leave traditional retirement assets to a special needs trust.

What aspect of investing do you find most challenging within your client niche?

Baze: “I work primarily with mature women who have experienced death, divorce, or the sale of a business and come into sudden wealth. Most of them have not had much experience with investing. They are worried about ‘losing it all’ in the market, not realizing diversification within the portfolios I offer can add an element of long-term statistical predictability.”

LeClaire points out: “Clients may have significant appreciation in their portfolio, especially after the last few years.” This makes it more difficult to transition the client to a more appropriate portfolio, because he does not want the client to take a tax hit. He has a responsibility to help clients move to a lower-risk profile with lower turnover. So to get those two messages across—safer portfolio, tax issues—he tells them, “It’s not what you make, it’s what you keep.”

Many of my clients are already carrying a lot of stress about the bigger picture. They are focused on whether and how their young or adult child will get the necessary services. For some, this means they have little energy to focus on investment discussions. For others, this means that they are particularly concerned about market downturns, knowing they have that extra family member to support.

How do you integrate investment management and comprehensive financial planning?

LeClaire responded: “I believe that investment management is crucial in the client’s life. If they are sleeping at the wheel, they will wake up one day and their risk profile will be way out of whack because they have neglected their investment management.” In his practice, financial planning is a hub-and-spoke approach with investment management as one of the spokes.

Knight, too, links investment management to the client’s overall goals and also reminds them that investment management is just one aspect of planning.

Stowers shared some of the practical steps he takes: “We use average returns for financial plans. We run a Monte Carlo [simulation]. Then we ‘crash’ the plan,” using a 20% market decline in their first year of retirement and another 20% in their second. Then, he runs another Monte Carlo to see if the plan holds up even under those conditions.

Baze offers her clients all five services—ongoing financial planning, investment advising, tax planning and preparation, estate planning, and bookkeeping—for one price, no matter how much they invest with her, thus ensuring that clients have access to investment management that is integrated with their financial plan.

I try to err on the conservative side. I use realistic but modest assumptions for asset returns and stress test the plan for negative scenarios. My clients’ plans must generally “work” over two generations, and it will be very hard for the adult child with a disability to make any adjustment to their income or expenses to compensate for the plan underperforming. I remind clients that we want to be sure the plan can survive the unexpected; for instance, a global pandemic followed immediately by a global response to the invasion of a sovereign country.

How do you proceed if/when you find a financial planning client has a very different approach to or philosophy of investing than you do?

Most of my sources agreed that they do their best to screen out from the beginning those clients whose approach would conflict with or obstruct their advice. Stowers believes that the IPS is effective in situations when clients may abruptly change their approach under stress.

Knight uses these situations as an opportunity to continue to educate the client. “I state my case and reiterate the ‘why’ and ‘how’ [the investment approach] is linked to their goal. Ultimately, it is [the client’s] choice, but I do not abandon the client or belittle them for not making the changes. Sometimes people need to think about a recommendation for a while before implementing it.”

 

Investment management, like many aspects of life, may be subject to both rational, objective analysis and emotional, subjective reactions. Our role as professionals is to guide our clients by the former and hear them on the latter.

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Alexandra Baig (alexandra@companionsonyourjourney.com) has an MBA from the University of Michigan, her Certified Financial Planner^® designation, and practical, professional experience in both finance and disability support. She focuses her practice on people with disabilities and their families, helping them to maximize public and private resources to underwrite a quality life.

image credit: istock.com/gopixa