One of the most effective ways to win over a new client is to show them weaknesses in their current portfolio that need correcting.
Here are 6 red flags to look for in your first meeting.
In an ideal world, portfolio evaluation would be like SCUBA diving, which is to say you plan the dive and dive the plan. But let’s face it, sometimes prospects aren’t willing to share their most recent portfolio statement even if you were referred by one of their close friends or associates.
Sometimes the first look an RIA gets at a prospective client’s portfolio is when they meet. While you can and should explain that you’ll need time to analyze the portfolio before making any recommendations, the smart RIA knows they must get a lot done at that first meeting. The list includes deciding whether they can help the client; deciding if they want their business; and if they do, doing as much as they can during the meeting to win their trust.
One of the most effective ways to do that is to zero in on weaknesses in the prospect’s current portfolio that need correcting. While every client has specific needs, all are vulnerable when fundamental portfolio management principles are neglected. The five flaws listed below are red flags no matter the client’s risk/reward profile, goals, investment horizon or tax situation.
Ask how much a new client has been paying for their financial advice. If they’ve been paying more than 0.99 to 1.02 percent on an account of $1 million or more, they’re being overcharged. Scan their quarterly statement to get a quick sense of what they are paying their current advisor and whether you can reduce those fees.
Compare the largest three segments of their portfolios to an appropriate benchmark to get a sense of how they have performed against broader unmanaged market indices. If 30 percent of their portfolio is in large cap stocks, how did those stocks perform against the S&P 500? How did their international bond investment perform against the Bloomberg Barclays Global Aggregate Bond Index and how did their real estate investments perform against the S&P US REIT?
This may seem daunting, but RIAs with access to effective investment tracking technology can quickly gauge how well a portfolio has performed compared with certain benchmark portfolios. Your findings may shed additional light on whether the prospect is getting their money’s worth from their existing advisor.
Lack of diversity
Diversity is the golden rule of a resilient and flexible portfolio. A diverse range of assets helps to mitigate market downturns, maximizing long term earnings and capital gains and even lock in steady income, as we discussed in our previous blog on the role of variable annuities.
A portfolio that allocates more than 10 percent to a single security, industry, country, or bond maturity could be deeply flawed.
No clearly defined long-term goals
Every client should be able to describe the primary goals of their portfolio and how much risk they are willing to undertake to achieve their goals. If they’re uncertain as to their comfort level of risk and don’t know what their investment horizon is, then chances are high you can help them just by asking some basic questions and listening carefully to their responses.
Is their primary objective to save enough to start a business or buy a second home, or are they focused on saving for retirement? Do they have significant money invested in a business they plan to sell to fund their retirement? What are their monthly household expenses? How much money will they need to live comfortably after retiring? Do they want to leave their children or the community a legacy? How big of a legacy?
If you do your job correctly, their responses to these and other questions will lay the foundation for not just a successful investment strategy, but a long-lasting relationship. The RIA who cannot answer these questions setting themselves and their client up for disappointment.
Lack of discipline
Keep an eye out for turnover or erratic trading patterns and try to ferret out what was behind them. Did the client make these decisions based on qualified advice and personal reflection, or were they based on some irrational fear or exuberance. The best investment results come from a consistent, well-informed and rational analysis of the best available information. Is the client going to derail your carefully planned strategy in the future based on some hunch?
No plan B
A final red flag to consider, particularly this late in a bull market, is absence of planning for systemic risks, such as recessions, financial crises and other events outside any one investor’s control. While this is a subset of diversification, it bares its own mention due to where the we are in the economic cycle. The American stock market is currently enjoying the longest bull run in its history and while there are no obvious bubbles on the horizon, many investors feel a correction is long overdue.
When evaluating your prospect’s portfolio, be sure to consider not just how diversified they are, but how liquid their holdings are. Perhaps you could help them not just mitigate the impact of the next recession but prepare them to profit from it by having substantial cash on hand to invest after prices have fallen.
PKS Investments is a full-service broker/dealer and financial services firm with over 500 locations and 1200 Registered Representatives. Our Registered Investment Advisors (RIA) offer a full spectrum of investment choices, including insurance policies as part of a long-term financial strategy. If you are an RIA, contact us today to discuss your future.