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Whenever I start with a new advisor as a client, we go through an exercise that helps me learn about their business. I ask the question, “What is the most disappointing reason you ever lost a client” or “What is an example of a time when you didn’t click with a client,” here’s what I get as the response:

  • I lost a client I really liked because the market went down and he/she felt uncomfortable with how much they lost.
  • We’re in the process of losing a client because he/she always takes credit for the good stock picks in the portfolio yet we get credit for the stocks that don’t do well, even if it’s only a short term decline.
  • They left me for another advisor who promised them better performance.
  • They had unrealistic expectations about what level of return they should achieve given how much risk they were able to take.

A perilous road for both advisor and client

I have personally experienced this problem myself. When I was an advisor, I had one client who had moderate risk tolerance. After years of telling me she was happy with the performance, one day she dropped a line on me that went something like this:

(In an edgy tone of voice). “Lately it seems like I’m losing more money than I’m comfortable with. I want that to be fixed right away.”

Fix it? Like I can wave a magic wand. I didn’t know what to say. I felt betrayed. To make it worse, this client was an attorney and I had the fear I was going to get sued.

And that’s the whole problem. We’re both afraid for our life savings; she doesn’t want to lose hers in the market, and I don’t want to lose mine getting sued by her.

The communication between two people defines the relationship. There’s a major misalignment of expectations between the client and advisor when it comes to risk, and it’s not the client’s job to solve the problem.

The whole risk conversation has to change.

Six phrases to avoid using when talking about risk

1. “This model portfolio averages 15% return year-over-year.”

They hear: I’m going to make 15% this year.

When this becomes problematic: Remember that it is statistically a rarity for the market to achieve its average – Aaron Klein of Riskalyze and I discussed this on a podcast that you can listen to here. Inevitably you’re setting your client up for disappointment.

2. “According to this risk questionnaire, you’re a conservative investor.”

They hear: I won’t lose any money.

When this becomes problematic: The problem with putting people into categories based upon what a risk questionnaire says is that the output isn’t clearly defined.

It’s not like taking a blood test where I know I need medicine if my blood sugar is too high. The typical terms that advisors use, such as “conservative,” “moderate” or “aggressive” can be interpreted to mean so many different things.

It’s like saying, “Based upon this style assessment, your best color to wear is blue.”

Okay, great! I like blue!

But what does that mean? Navy blue? Baby blue? Teal blue?

Moreover, risk questionnaires tend to be based on all kinds of fallacious ideas such as the younger you are, the higher your ability to take risk. Do you know how hard it is to score as a conservative investor on one of these questionnaires if you’re young?

Or that women are more risk averse than men. Who said this by the way? Is there any real evidence supporting this? It’s a myth that everyone believes for no reason, just like Santa Claus.

3. “This portfolio has a Sharpe ratio.”

They hear: Nothing. People couldn’t care less about performance relative to risk. The only people who would even know what risk-adjusted returns are would be the people who took CFA Level one a year after college and failed, deciding to go work selling pharmaceuticals instead.

When this becomes problematic: Although you may feel you’re gaining credibility or showing competence by bringing up this metric, you’re probably just annoying your client.

Forget about relative terminology; people care about absolutes when it comes to their money.

4. “The maximum drawdown over the last 20 year period has been 25%. In dollar terms, this would mean a loss of $200,000 based upon today’s portfolio value.”

They hear: I could lose $200,000 in a catastrophic event like 2008, but that probably won’t happen anytime soon. The crisis is over and I don’t want to miss out on the bull market! I’m fine with this.

When this becomes problematic: People tend to overestimate risk in a bad market and underestimate it in a good one. Moreover, times of high volatility can skew the numbers. Taking a snapshot of a point in history, while it is well meaning to issue some kind of warning about how much the investor would have lost in the past, is providing false hope that it won’t do any worse where it very well might.

This stat also does not convey information about how frequent these types of losses were, or the amount of time it took, on average, for people to recover.

5. “We manage your portfolio with the long term in mind and leverage short-term market declines as buying opportunities.”

They hear: Oh good! The market may go down in the short term but that’s just a time for a shopping spree! My advisor will make it okay in the long term.

When this becomes problematic: This isn’t how people behave. I don’t care how objective and level-headed you may be; nobody likes the moment when they are losing money. Instead of encouraging you to take advantage of buying opportunities, what they end up doing is freezing their whole account or selling.

Look, pain is real. There’s nothing you can say to make people enjoy pain. Thinking any other way is a formula for getting yourself sued.

I’ll give you an example. When I gave birth to my third child, there wasn’t time for an epidural. The whole delivery lasted about 5 minutes but let me tell you, it was the most excruciating 5 minutes of my life.

And the whole time the nurses are sitting there saying, “Calm down, it’ll be over soon.”

To which my response was, “Hola! Buenos dias? I don’t care what you say about 3 minutes from now! I feel like I’m being sawed in half! I feel like my body is being cut in two! Stop this, and stop it now, nurse!”

Don’t ever try to rationalize pain.

6. “The model portfolio we’ve designed for you is expected to fall above the efficient frontier. See here? (point to dot on the graph)”

They hear: Oh that’s cool. What a neat diagram – my portfolio sits falls in the region above the line. What does that line mean again?

When this becomes problematic: This is really a nonsensical conversation with no meaning behind it. I used to create these Markowitz efficient portfolios when I was a buy side analyst. Guess what? I never created a portfolio that didn’t look great.

Nobody ever says, “My portfolio went down 25% last month but I’m not upset about it because it was Markowitz efficient. That makes it okay.”

Just as the Sharpe Ratio is useless, benchmark comparisons are equally as irrelevant to people.

Sara’s upshot

Want to be able to have a conversation about risk without sounding like this? I’m having a webinar with Aaron Klein of Riskalyze where we’ll discuss better ways for advisors to have this conversation. To join us on March 5, please sign up here.

Sara Grillo, CFA, is a top financial writer with a focus on marketing and branding for investment management, financial planning, and RIA firms. Prior to launching her own firm, she was a financial advisor and worked at Lehman Brothers. Sara graduated from Harvard with a degree in English literature and has an MBA from NYU Stern in quantitative finance.

Read more articles by Sara Grillo