How Do You Talk to Clients About a Portfolio That Doesn’t Perform vs. a Common Benchmark

The Wall Street JournalIt’s a thorny issue all advisors face. What to say to the client when the portfolio, and investment plan you agreed on, doesn’t surpass or match a broad benchmark like the Dow or S&P 500? Steve Blumenthal, CEO of CMG Capital Management Group, writes in the Wall Street Journal Wealth Adviser (subscription required) about this delicate topic, and how to use the opportunity to educate clients about long-term investment strategy. Writes Steve:

I was recently on the phone with an adviser who has been in the business forever, and he was scratching his head because the S&P was up 20% and his clients were calling him to complain because they weren’t up 20% as well.

As human beings we’re competitive and we want what’s best. So when clients see the S&P outperforming their portfolio they want to know what they can change to keep up. But as advisers we have to explain to them that the S&P is not a good benchmark for a broadly diversified portfolio that combines a lot of different risks.

Steve elaborates on this topic further in his “Blumenthal Viewpoint” called Behavior Gap.  He offers real data about portfolio construction, and historical market performance, and a way to assure clients that you have their long-term interests in mind.  An excerpt:

Most stock mutual funds fail to outperform their benchmarks.  There are smart managers running those funds.  The individual investor is up Behavior Gapagainst the greatest pros in the business and those pros work 70 hours a week.  They can’t pick the top winners all the time.

As you answer your client’s questions about returns, ask him if he is a speculator or an investor.  Speculation might be his path.  That’s ok but he should know that very few, even the greats, might make millions yet might lose the same on their next targeted bet.  If he is an investor, coach him back to plan.  If he is a speculator, there is a good chance he will not be your client for long.

This is a game of probabilities and while you might be 100% correct on a particular risk, you might just not have the time and inner belly to patiently live through the painful decline you’ll experience along the way to being right.

Sign up for the Blumenthal Viewpoint (link to sign-up) here.

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