Is the glass half-empty?

As just one example of this new mindset, a recent study of affluent Americans by Connecticut-based insurance research association LIMRA found that a substantial number of clients lack the confidence that they’ll be able to retire comfortably. The study found that this lack of confidence extends to 43% of mass-affluent clients (those with investments of $100,000-$1 million); 21% of millionaires (investments of $1 million-$10 million); and 14% of ultra-high net-worth clients ($10 million-plus).

– Malaise hurts clients

Among many clients in their late 40s and 50s, the pessimism is almost tangible.

Helping to drive this pessimism are dismal market returns of the past 12 years and the escalating global slowdown, neither of which shows signs of turning around anytime soon. Add in continued shrinkage in manufacturing, stubbornly high unemployment, clawbacks of retirement benefits, the culture of austerity among many employers and uncertain job prospects for young people, you get a toxic brew of bad news that for many clients, saps their optimism about the future.

This malaise hurts your clients and also can have a negative impact on your business. Many clients are making capital preservation their only consideration, and thus will miss out when markets rebound. Even those clients who aren’t pulling assets from the market often are reluctant to make new commitments. The general mood of skepticism increases the odds of your clients defecting – they are more vulnerable to approaches from other financial advisors. And many in the next generation of clients have a jaundiced view of advisors; when assets are transferred to the next generation, those assets become at risk.

– Regaining control of the future

There’s good news and bad news here. The bad news is that you have no influence on market performance or macro issues. The good news is that there are steps you can take to reduce the chances of these negative outcomes and, indeed, capitalize on the dark mood that’s prevalent today.

Mark Twain famously said: “Everyone complains about the weather, but no one does anything about it.” Rather than focusing on things that you can’t influence, put your efforts into areas in which you can have a positive impact.

Among the latter is helping your clients develop a plan for their financial future that they view as providing a realistic path to achieving their retirement goals.

American consultant Scott West has said that advisors are in the transportation business, moving clients from lives of insecurity and fear to lives of freedom and peace of mind. Central to that “transportation” is putting in place financial plans to help your clients establish a sense of control over their financial future.

One of the factors that drive clients’ pessimism is the sense of lacking control over their financial future. Regaining that sense of control is critical to creating a more positive mood. You have a crucial role to play in this area.

In the past, I’ve heard two big beefs from advisors, beyond the time involved, when it comes to financial plans. First, many top-end clients historically haven’t seen the need for plans and couldn’t be enticed to participate. And, second, most plans don’t lead to action.

These complaints may have been true in the past, but the world has changed. Even many top clients are anxious about the future and are open to a planning conversation. And there are things you can do to increase the odds that financial plans aren’t just an academic exercise. Here are four elements of an effective financial road map that addresses today’s clients’ mood:

1. Focus on what clients can control. The first essential step to regaining control is offering financial road maps with short-, mid- and long-term goals that your clients see as being realistic and tailored to their situation. (Notice the use of “road map” as opposed to “plan.” Many clients view plans as being abstract, while every client understands the value of a map in driving to a distant destination.)

As part of this process, highlight the levers that your clients have available to them. Identify the two factors beyond their control: inflation and market returns on stocks and bonds.

Then, highlight the factors that your clients can control:

– how much they save leading up to retirement;

– how long they work full-time (subject to company layoffs and health issues);

– income from work after retirement;

– spending in retirement;

– the amount invested in stocks and bonds leading up to and after retirement.

2. Identify living costs in retirement. As part of this process, help your clients get a realistic sense of what it will cost to live after they have retired. Research indicates that the majority of clients don’t have a good sense of these costs, and that uncertainty is one of the morale-sapping influences that undermine a feeling of control about the future.

This step doesn’t need to be precise to be useful. One shortcut is to use Statistics Canada’s Survey of Household Spending (www.statcan.gc.ca) as a starting point. Ask your clients if they think their spending will be higher, lower or about the same as the average for each category.

Don’t assume that even affluent clients aren’t concerned about living costs in retirement. Earlier this year, I wrote about an advisor who had offered last autumn to meet with retired clients to put together a detailed cash-flow forecast of money coming in and going out – and was overwhelmed by the level of interest.

3. Adopt a scenario approach. One of the challenges in developing financial plans today is selecting the rate of return assumption on stocks and bonds – which has a huge impact.

Depending on which strategist you listen to, real return on stocks over the coming 10 years can range from 2% (4% before adjusting for inflation) to 7% (9% before inflation). Choose a number that’s too high, and you risk a shortfall. Too low, and you may get a dispiriting outcome that shows clients unable to come close to their goals.

Consider using the scenario approach, using three forecasts for real return: low, mid-range and high. Explain that these are estimates, that actual outcomes could be lower or higher, and that forecasts will be updated annually. Using this method helps your clients focus on a realistic number while building in the possibility of lower returns and the need to make some trade-offs as a result.

4. Get clients involved. One of the reasons why many financial plans sit on the shelf is that clients don’t feel involved in the process of developing the plans and don’t really buy into them as a result.

One advisor I have spoken with has replaced traditional financial plans with what she calls “real-time planning.” She meets with clients in her boardroom and attaches her laptop to a projector, highlighting the different decisions that her clients can make. This advisor is able to input changes on variables such as retirement age and savings levels on the fly, and show the impact of these changes on the screen.

As a result, this advisor’s clients are much more engaged, taking greater ownership of both the process and the outcome. The advisor still emails her clients a summary of their conversation afterward but has dispensed with the bound hard copy of the financial plan that she used to provide – a document she finds her clients don’t miss in the slightest.

Given today’s environment, it’s easy for both your clients and you to get discouraged. Being proactive about the things in our control will allow us get through this challenging period and to emerge stronger from the game-changing threat facing our business. IE

Dan Richards is CEO of Clientinsights (www.clientinsights.ca) in Toronto. For more of Dan’s columns and informative videos, visit www.investmentexecutive.com.

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