To qualify as a profession, we have to contribute to improving the quality of our clients' lives. It is time that we learn to talk about the things that really matter to them. By Kees Stoute
Mr James, 50 years old and married to 47-year old Johanna, has USD2 million in his bank account. He wants to know whether he and his wife can sustain their current lifestyle until age 90. What does he need to do maximise the likelihood that this USD2 million is sufficient?
Furthermore, they are active volunteers in a charitable organisation and hope to be able to leave some money behind for this cause.
Mr James does not really know where to start to obtain the clarity that he is looking for. So, he decides to call professional wealth manager, Mr Jeffrey.
After listening to Mr James, Mr Jeffrey explains: “According to (post)-modern portfolio theory, there are a number of principles that are important to take into consideration when investing:
- Typically, investors are risk averse; taking risks may only be justified if the potential return compensates for it.
- The markets are efficient; all available information is priced into the market and it is not possible to obtain better factual knowledge than others about the direction of the market.3
- Asset allocation has a much bigger impact on investment returns than individual security selection.
- Target return and level of tolerable risk can be balanced through an optimal allocation of assets; this maximises the probability of achieving the desired returns, whilst minimising the risks required in doing so.
- The longer the time horizon of the portfolio, the more likely that the portfolio takes advantage from typical long-term upward market characteristics.
- In the long term, it is important to ensure a low correlation between the assets in an investment portfolio.”
Mr Jeffrey continues: “Given the current market circumstances – high levels of uncertainty and a persistently-low interest rate environment – it won’t be easy to achieve a 4% return. We recommend to spread the assets equally over municipal bonds, junk bonds, financial company bonds and defensive stocks.”
Being relevant
How does this monologue by Mr Jeffrey, a wealth management professional, help Mr James?
- Mr James looks for clarity in regards to his financial situation and health. Mr Jeffery does not address this at all
- Mr Jeffrey assumes that Mr James is looking for help to professionally manage his wealth. In fact, for now, Mr James is not at all concerned about asset management; instead he is concerned about his lifestyle going forward as well as about his legacy
In short, Mr Jeffrey does not improve the quality of Mr James’ life whatsoever.
This might well be an exaggerated example. But the reality is that the discrepancy between what the wealth manager thinks clients are looking for – ie. investment advice – very often does not match with what clients tend to really be looking for: clarity about the implications of their wealth for their life, about their financial health and situation, and about an actionable plan – which may include an investment component – to maximise the likelihood that they can achieve what they aspire to.
Contact Kees: [email protected]
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