Client interaction and client education is a year-long, or rather, a life-long activity.
However, when the markets are good, advisors tend to think that the client will do all the learning himself or herself.
The clients get over-confident of their own skills. Sometimes they accept the role of the advisor, sometimes they think “we did it ourselves”.
December is a good time for introspection - January is a good time for resolution.
This is also a time when there is a huge temptation to invest in Bitcoins and such other assets which are not well understood, and more importantly, not regulated at all. Let us see what mistakes advisors are likely to make and what we should avoid.
Possible mistakes
Telling the client ‘I got you 37% return in 2021’.
Suggesting they have reached the absolute amount target for 2027 already, so let the money remain in equity
Suggesting that increasing the target amount for 2021 based on the current CAGR.
Saying even if it is a little lower, 2022 also looks promising, so you can expect 20% if not 27% return.
Taking sectoral calls - pharma and IT are the tempting ones I hear?
Encouraging client committing more to equity seeing the 2021 numbers.
What you should do
Explain that 2017, 2021 were an aberration.
Explain that 2020 and 2021 reported CAGR will be even higher - remember 2008 has been dropped!
Explain 3 year and 5 year rolling average and not just CAGR.
Use the excess return of 2021 to invest in debt funds especially for targets which are in 2025-2027.
Explain that the returns were gained by the market, not by you or by the client. Luck, not skill.
Admit that you do not know what 2022 will do.
Do not assume that Estate duty will NEVER come back.
Remember Capital Gains Tax has come back - and STT has not been removed.
Do not take sectoral calls - stick to asset allocation as per client’s needs, NOT as per market performance.
Clients may or may not accept that returns are not because of their own skill - say it gracefully.
Stay away from Bitcoins and its ilk. Clients should be clearly focused on the Training program, learning, and then decide not to invest in new asset classes!
Explain the concept of Asset Allocation - via other assets, real estate, etc.
Understanding (and accepting) that the returns were not because of the client’s skill is really tough, but it has to be said nicely.
PV subramanyam
writes at www.subramoney.com and has authored the best seller ‘Retire Rich - Invest C 40 a day’