Client Service

Advisers and Clients Must Discuss Risk Together

A new survey finds that only 27% of clients have been informed on potential loss in a market crash.

By Amanda Umpierrez editors@strategic-i.com | February 22, 2017

In a survey of 492 investors conducted by FinMason, a Boston-based financial technology and investment analytics firm, it was found that advisers and clients may be lacking on conversations concerning risk.

Among survey findings, only 1 in 4 investors were notified by their adviser on the potential loss their portfolio may face given another market crash, and of those reported, 62% stated the damage would be smaller than what their stated exposure to equities previously noted. What’s more—57% of clients are likely to sell their equities during a potential market crash out of fear.

“I understand that many advisers don’t want to potentially scare their clients with talk about possible volatility in the market. But, if an adviser has a conversation about a crash now, in the light of calm markets, they can have a very rational discussion of why it is important to take that risk. The adviser can form a clear mental link between that risk and the potential rewards, like having a higher income in retirement,” says Kendrick Wakeman, CFA, CEO and founder of FinMason. “That turns a potentially scary conversation into a healthy and productive one. The investor now knows how much they could lose and agrees that it is important to take that risk to achieve their ultimate rewards.”

Wakeman recommends advisers discuss this with their clients as soon as possible, in order to avoid emotional turmoil when an unexpected crash occurs.

“It’s an opportunity to anticipate what could happen in a crash before it occurs, thus eliminating (or at least reducing) the emotional, sell-off response,” he says. It’s in the best interest of both advisor and client to avoid a situation where the client feels tricked or that their world is collapsing.”

More information on the survey can be found here