Managing expectations like a pro: Having "The Conversation"

Talking to clients about portfolio volatility in an era of ultra-low interest rates.

Managing expectations like a pro: Having "The Conversation"
In an age of lengthening lifespans Canadians with modest portfolios will outlive their retirement money is a growing worry. For advisors tasked with managing the retirement fund flows, is it time to check client expectations? 

According to advisors it is more important than ever to let clients know that risk is inherent in markets. Stock markets are at record highs. But other experts suggest a pull back could occur at any time. Today, more than ever, it is important to warn clients that another "2008" is not out of the question. 

"Communication is important. I find people are often over-confident," says Jason Abbott, a financial planner and principal of "For conservative investor put the fact on the table. Remove the industry jargon and lingo and Say this is a two or three out of ten on the risk scale. I find that helps. I find it helps to manage for the worst case scenario. Explain what could happen in a situation like 2008. Show them what they could lose at most."

As well, don't talk up positive returns. "Be like a sports coach; keep an even keel all the time," says Abbott. "We have to manage expectations. You have to have a different conversation than the cheerleading one." Keep the focus off the returns, talk about sustainability, life-stream, the importance of preserving cash and capital. Simply relying on an assumption that markets always go up is dangerous. "You have to explain there is no free lunch. If they want 5% in a world of 1% interest rates, but they don't want to take the risk, well, you have to tell them this isn't possible. Either you take on more risk and growth in a portfolio, or you reduce the withdrawal rate from the portfolio. Ultimately it's up to the client. If they need more cash...there are some things the market can't do. There is no free lunch," says Abbott. 

It is an awkward conversation to have, but it's key to maintaining a long-term book of business. "The tone and content of the conversation is key. Be respectful. Err on side of conservatism. Talk about 'when' not 'if' markets go down. Explain that it's about getting the asset allocation right. Storm-test the portfolio. Don`t go through average estimates...but take them through the extremes. Work through a thought experiment: 'What if there is another incident like 2008?' and take them through that," says Abbott.

Increased client trust will be the return.