Six Conversations With Clients You Need to Have

"If you merely tell a client: 'When one asset goes down, the other goes up,'" Statman notes, "you give the impression that they'll never have losses. Typically, everything goes down; but they go down by different amounts. If you put all your money in one asset, you'll either be the hero or the goat. But if you spread it around, you'll be neither, and that mitigates losses."

Nagdeman calls this conversation "risk assessment — trying to identify the risk parameters the client feels comfortable with. I know of an advisor," he says, "who has a risk-sensitivity scale based on a number of what-if questions. They give him a good feel for the risk sensitivity of a new client."

Smetters insists that clients really don't know their risk tolerance or even what the term means. Rather, he says, "the advisor should be thinking about risk capacity and actually calculate it. That is: Can the client afford to take the risk they claim they're willing to accept?"

Statman's research has found that people who are overconfident in their investment ability also say they're willing to take more risk. "So if the advisor asks only about risk tolerance," he says, "they won't be able to tell whether the client is really willing to take more risk or simply so stupid as to be overconfident in their ability to control risk."

In general, however, Lapin sees the advisor-client relationship as a collaboration. "Many advisors like to tell clients: 'This is what you should do.' But nobody likes solutions imposed upon them, even if they're good ones. Clients need to feel they're being served some options from which they can make an informed choice."

Noonan points to research showing that, three years after the global financial crisis, "consumers [still] believe the market system is rigged against them and regulators are out-to-lunch."

Surprisingly, though, he says that "the more advisors focus on trying to explain things, the less successful the conversation will be. It needs to be the other way around: The advisor has to pull out of the investor what they're trying to accomplish. The onus is on the advisor to persuade the investor that the decisions they're making are aligned with getting them to the finish line."

But certainly, many clients would rather avoid delving into detail. "They don't want to understand how the car runs — all the nitty-gritty. They just want to know they have a mechanic — an advisor — they can trust," Smetters says.

For Noonan's part, reducing investors' anxiety about long-term retirement planning is paramount. "Unless you do that, you can't get clients to engage in a constructive way. You do it by assuring them that you have no higher interest than creating a sustainable future for them and have the technical know-how to bring that about."

5. Rehearsing for a Sharp Market Decline

"It's pretty much guaranteed that a significant market decline will happen at some point," says Michael Kitces, a partner and director of research at Pinnacle Advisory Group, headquartered in Columbia, Md. When that occurs, "clients go into panic mode because it's typically the first time they've been confronted with the issue. Having a conversation in the middle of a disaster about how to adjust is an absolutely horrible time because the client can make bad, rash decisions."

To prevent that, Kitces, who writes the financial blog Nerd's Eye View (www.kitces.com/blog), urges advisors to hold a conversation to create a plan of action that is an integral part of the overall financial plan. "Clients will need to make some decisions and tradeoffs: 'What's more important to you if you can't afford everything?'" In the rehearsal, they may opt, for example, to cut spending or save more or postpone retirement.

Given that investing is famously fraught with emotion, Nagdeman makes this observation: "If you're able to set parameters prior to [a steep decline], you're minimizing the emotional investment and thinking with the head instead of the heart."

Furthermore, Statman recommends getting a fix on the client's basic attitude early on. "If they tell you they see this country going down, down, down, you know they're probably overly pessimistic. If they say the country is still the captain on the hill, they're excessively optimistic; and you have to serve as the rudder to straighten them out."

It's vital to have a rehearsal-for-a-crash conversation and to memorialize it in a document, Lapin says. But what if the client simply refuses to talk about even the potential for a severe drop? Ask them: "'What is your worst concern about discussing this now?' Try to get some information as to what their fear is. Keep probing," Lapin says, "because this conversation will serve the advisor and client well when things don't go the way that is anticipated."

The time to have such a discussion is when things are okay. "Go through the exercise and rehearse exactly what the client would do," Kitces says. "Then, when a decline does occur, everything will be known ahead of time and you'll have a bona fide plan to execute. If a client utterly cannot stand to have this conversation, stop being their advisor."

6. Is the Investment Strategy Meeting Client Needs?

"Here you're looking at the advisor's value proposition — their raison d'etre," Nagdeman says. "If you're not continually watching a client's holdings, you're not doing your job. This is where an advisor proves their worth. If an earnings report is [poor] and you're concerned about an investment, that's when you should have this conversation — not wait until the quarterly review."

At the start, though, work out an agreement with the client as to how often you'll have a "check-up" conversation. Use this as a guide; renegotiate later, if necessary. Both investors and retirement plans need to be flexible: Who knows everything that the future holds? But suppose a client announces suddenly that they want to invest more aggressively, when this is clearly not in their best interest?

"You can be incredibly influential through questioning rather than stating and declaring," Lapin says. "With subtle questioning, the advisor can help the client understand the risk involved and the need to have a conversation about the pros and cons of risks, costs and benefits."

On the other hand, Statman recommends a far different tack: being blunt. This is the way, he says, that would sound: "I've helped you by dividing your money into two pots — one for not being poor, one for being rich. If you take money from the not-being-poor pot and put it into the getting-rich pot with a risky investment that loses value, you're going to be plunged into poverty. This isn't a reasonable investment, and I would not stand by you. Maybe you should look for another advisor."