A successful advisor recently commented on how much more positive the tone of recent client meetings has been compared with those in 2003, and even 2004 and 2005, when the overhang from the high-tech meltdown still preoccupied many clients.

“They think I’m smart again,” he said. “The only issue is how to keep clients from assuming that they’re going to continue to see double-digit performance and that I’ve become stupid when that doesn’t happen.”

This is the eternal dilemma that plagues advisors: in the satisfaction clients feel for strong performance lie the seeds for disappointment down the road.

If you share this advisor’s concerns about return expectations spiralling upward, there’s both good news and bad news.

The good news stems from recent research with affluent investors concerning the kind of returns they are looking for. Clients were asked what kind of returns would make them feel that their advisor is doing an “adequate” job, and what returns would cause them to say that their advisor is doing an “outstanding” job.

The majority of clients identified 6%-9% as the return it would take for them to say they were getting adequate advice from their advisor, with the threshold for outstanding advice typically in the 8%-15% range. This is a far cry from the superheated expectations from the early part of this decade — in early 2000, the median return for advice to be considered adequate or outstanding was 11% and 17%, respectively — demonstrating that most clients still remember the lessons from the bruising they got.

So, the good news is that upside expectations remain in the domain of reality.

NOT READY FOR SIGNIFICANT DROP

Dig deeper, however, and there’s bad news in the readiness of many investors for a significant decline in their portfolio.

When investors were asked to describe their investment orientation, the majority described themselves as “conservative” investors. Asked what that meant, most talked about staying away from tech stocks and speculative investments, and advocated investing in blue-chips — with the banks used as the most typical example. When asked how much of a decline in their portfolio it would take for them to become significantly concerned and consider making a change in their investments, the most common loss fell into the range of 5%-10%.

“The reason that I’m invested in blue-chips,” one investor said, “is so I won’t have to worry about big losses in my account.”

Experienced advisors know you can convey only two or three core messages effectively in a client meeting. As you think about the key points you want clients to take away from your meetings, you may want to consider including the inevitability of a broad market pullback as one of those messages.

So, that’s the first key decision: should a reiteration of downside expectations be among the key points that you drive home in client meetings?

Bear in mind that the time to have this conversation is before a decline, not afterward — after the fact is too late.

Your conversation might sound like this:

“Joan, we’ve had four very good years in a row and you can feel very good about how your portfolio is doing — you’re back on track to be able to retire at age 60 and, in fact, you are a little ahead of schedule right now.

“We’ve talked in the past about the fact that on an ongoing basis we are looking for a return of about 7%. While there continue to be positive indications that stocks will be a good place to be and the market does seem fairly valued, we can’t expect the kinds of returns we’ve seen in the past few years.

“As well, I did want to remind you that at some point we are going to be experiencing a pullback in the markets, a pullback that will likely be 10% or more. I wish I knew when that decline will take place so that we can get out of the market and avoid it, but unfortunately, no one has demonstrated the ability to predict that. The price we pay for participating in good markets such as we’ve seen recently is that we have to be prepared to hang in through the tough times.

“All we can do is to be positioned in such a way that we participate in much of the upside of the stock market without being unduly exposed when there’s a decline. The changes in your portfolio that we discussed today are designed to do exactly that.

@page_break@“In the meantime, I did want to be sure that you understand that at some point your portfolio will experience a dip of 10% or more and that you’re OK with that, and also to answer any questions about this.”

The next issue is how you drive this message home in a way that has the maximum likelihood of sticking.

Advisors know from sad experience that simply having a conversation once is not enough. If you want a message to stick, you have to find ways to repeat it (which is not unlike talking to your children).

The trick in doing this is not to sound like a nag or a broken record when you make your point — clients will sometimes tune out the same old message in the same fashion that teenagers will. Instead, you need to find ways to keep reinforcing your point, using different words and different media — and also in as positive and upbeat a fashion as possible.

YOUR KEY MESSAGES

In addition to your conversation during the meeting, you may want to follow up with a summary letter of topics covered at the meeting and the next steps arising from your discussion, in which you summarize your talk about future returns.

If you have a client newsletter, you may want to consider including references to credible third parties that support your point. If you conduct workshops for clients, you may want to include a brief summary of recent commentary on return expectations. Or you may want to include an article on this subject in your next client mailing.

Key messages and how they are communicated will vary for each advisor. But whatever those messages are, there are two points to remember:

> clients can retain only so many points. Make too many points and you risk clients absorbing none of them;

> to make a point stick, you can’t just make it once or twice. You have to find ways to keep threading your message into communications with your clients. IE



Dan Richards, president of Strategic Imperatives Ltd., can be reached at richards@getkeepclients.com. For other columns in this series, go to www.investmentexecutive.com.