Successful advisers must make clients understand volatility

Market volatility can precede big fallsThe key to successful advice is making clients realise the difference between temporary volatility and permanent loss, an American financial adviser has said.

Speaking yesterday at the Science of Retirement Conference in London, author and coach Nick Murray gave financial advisers tips on how they should approach their clients.

Murray is based in the US, has over 50 years of experience as an adviser and has written several books on the profession.

He argued advisers should not waste time trying to educate clients and increase their financial literacy.

This is because human nature stops them from understanding the nature of money and making rational investment decisions.

Instead Murray says financial advisers should focus on managing a relationship with clients that takes a long view of market cycles.

He says: “Human nature is a failed investor and it cannot tell the difference between temporary volatility and permanent loss. You will never have a successful career as an investment adviser if you cannot help clients understand the difference volatility and permanent loss.

“Investment education never works when it should count and losing money feels twice as bad as making money feels good.

“Clients cannot tell the difference between money as purchasing power in the long run. This is due to physiological, psychological, intellectual and cultural reasons. They are all ill and we as financial advisers sell the serum.”

Murray gave suggestions on how advisers can deal with clients who have seen their investments go down.

He adds: “The serum has two strains: 20 per cent planning and 80 per cent for the rest of the client relationship is trying to stop them from blowing the plan up you have worked out with them for the rest of their lives.

“I will have to stop a client every one to five years from blowing up the plan we have set for ourselves.

“If they see markets have gone down, I say: ‘You have suffered a temporary decline and it will right itself. The historic rate of compound interest will be about 7 per cent above inflation’.

“That is the story of equity investing. Investing in companies through equities gives you double the return than that of investing through bonds.”

Murray pointed out it is important advisers believe in themselves and says: “My whole value proposition is the whole world is fatally ill and we have the serum. This is a calling and we have the capacity to be the light of the world.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Good article

  2. Most FA’s naturally want to educate their clients against making wrong, short term decisions such as cashing out at the worst possible time.

    But there will always be a few, no matter how hard you’ve tried to forewarn them of bad spells as well as good ones, who, upon receiving a couple of negative valuations, write off their investment as a failure and do exactly that. It’s an unavoidable fact of life.

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