The reality of balanceArticle added by Steve Lewit on March 29, 2012
Buffalo Grove, IL
Joined: February 27, 2008
Ranked: #15 (3,361 pts)
We know that the irrational client is a client who is out of touch with reality. I believe that our job as financial professionals, first and foremost, is to help our clients regain a true sense of what they are doing with their finances so that they can make better and more informed decisions.
I find most clients are pretty irrational when it comes to their money. The last client I had in my office decided that the market is going up over the next few years. When I asked her how she came to that conclusion, she said, “Well, I’m a very positive thinker.”
Other clients list their top priority as preservation, but have all their money at the mercy of the market; yet others tell me they are aiming for a 8 percent to 10 percent gain in the market and when I ask them what percentage of losses they are willing to sustain in attempting to get those returns, their answer is always “none.”
While hope might spring eternal in all of us, hope with regard to finances is a sure fire road to failure – for both our clients and for us as well. Hoping the market goes up is a terrible way of managing finances. Likewise, hoping you can help a person who is irrational is a terrible way to go about your business.
To move you and your clients ahead, you must find a way to cut through the irrationality, get their feet on the ground and bring clients into a reality-based view of the world. As I believe that balance is one of the keys to successful living as a whole, it’s not surprising that my first step with clients when it comes to their money is to talk about balance in their monies.
We know that the irrational client is a client who is out of touch with reality. I believe that our job as financial professionals, first and foremost, is to help our clients regain a true sense of what they are doing with their finances so that they can make better and more informed decisions. In other words, help them get their feet on the ground so they can see what they are really doing and how it affects their money and their lives, which is very different than trying to convince them of anything or trying to sell them something.
In my selling world, that first step is about helping my clients understand financial balance, the balance between risk and safety, or what I call red money and green money. Here’s how my system progresses.
Right at the beginning of my first meeting with a client, I determine what their core priorities are by having them rank, in order of importance: income – preservation – growth and liquidity. Most of my clients put preservation as their number one priority.
A little further into the meeting, I get their assets listed by asset class using this chart:
It is not unusual for most people to have a majority of their money on the red side of the equation even though their core priority is preservation.
Most clients, when I ask them to explain how that happened, how they developed a priority of preservation and yet have a majority of money in the market at risk, begin to see the fault in their reasoning and in their actions. Most agree, at this point, that they have too much risk.
The next step in helping my clients regain balance is to introduce the Rule of 100. You all know the rule: You take 100 minus your age and that is the amount of money you should have at risk (red) and the balance is how much you should have safe on the green side. Here is the chart I use for this exercise:
If their red money is too heavy in relation to the rule, then they are what we call upside down (the inverted triangle on the bottom). In that case, it’s like having the foundation of their house smaller than their house. It could easily fall over.
If they truly believe they have too much risk for the preservation priority, then money needs to be moved from red to green so that they can look like the upper triangle, very solid, with a financial foundation which is much larger than their house.
When I check in with my clients and ask if this makes sense, they all say it does. Then we talk about how much money will be moved to get them to a balanced position which reflects their core priorities.
Contrary to what most advisors believe, people really do know what is good for them and which decisions they should make. Unfortunately, that wisdom gets buried under emotions, misinformation and misplaced ideas and beliefs (like hope).
Letting your clients process information in a way where you are not in the middle, where you are just a bystander watching and helping them process the information you are laying before them, will help them cut through their own irrationality and eventually give you what you ultimately want (and what they want, too) –- a thumbs-up signal that funds need to be repositioned from one side of the ledger to the other.
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