Client Education Points and Opportunities

Even during volatile market cycles there are opportunities to advance your clients’ financial pictures. Read on to learn about opportunities you have right now.

Managing Risk for Every Dollar of Return

As Advisors, our responsibility is to balance the clients’ desires to focus on performance at all costs with their need to avoid risk no matter what the cost.  Our responsibility is to manage risk for every dollar of return.

If performance was the only filter for which we make investment decisions, small cap stocks would be the only investment asset class we would use. From a performance perspective, over the long term, it is the asset class that has the highest compound average returns.¹ Alternatively, we would only use three-month treasury bills, certificates of deposit or fixed annuities if we were out to avoid risk no matter the cost.  While this election reduces market risk, it simultaneously drastically increases the risk we will underpace increases in the cost of living.

There are three primary ways to manage risk for every dollar of return. 

1. Correctly match the clients’ tolerances for risk and time horizon with the asset class allocation.
2. Conduct or delegate a due diligence process to ensure the managers of the funds or securities we utilize within each of the asset classes can stand on their own as being excellent.  The emphasis here is on factors such as: risk adjusted return, purity of style and how long the management has been applying their talent. Undertake the process continuously, not just at the entry point for clients.  In addition, it is vitally important to your consolidated portfolio that the investments and fund managers do not overlap or create excessive correlations.
3. Make appropriate “mid-course” adjustments. Changes in clients’ current situations, feelings, future horizons and family dynamics may warrant a change to the asset class allocation.

With the impending Baby Boomer phenomenon, this could be the most important year of your financial services career. Seventy-seven million Baby Boomers will be retiring over the next 18 years.² With U.S. retirement assets totaling $17.6 trillion³, these clients need your help! In fact, your clients will come to you with questions about their retirement whether you are ready for them or not.

More good news for you is that although there is currently a great need for financial advice, according to a recent study, The Broker-Dealer of the Future⁴, there are too few Advisors available to help those clients. Talk to your clients and prospects about how you manage risk for every dollar of return before they collect their retirement checks!

A Best Kept Secret: the 2010 Conversion Opportunity

In 2010, clients will be given the opportunity to convert IRA balances to a Roth IRA and spread the tax over a two year period, regardless of their adjusted gross income (AGI). Explain this nuance to your clients with an AGI over $100,000 as soon as possible.

There are two big benefits to clients:

1. The qualified distribution will come out tax free.
2. They will avoid future required minimum distributions (RMDs).

The action item is to make sure you are maximizing IRA contributions in anticipation of the conversion opportunity. It may also make sense to make plans to convert their Rollover IRA accounts. This is a way to demonstrate your skill as a strategic financial advisor.

¹Safehaven.com, “Will Small Cap Out-performance Continue?” January 30, 2006
²Financial Advisor magazine, “Advisor Focus Shifts To Retirement Income,” May 11, 2007
³American Banker, “Retirement Assets Reach $17.6 Trillion,” July 24, 2008
⁴Independent study conducted June 2, 2008, by Pershing, LLC, a subsidiary of The Bank of New York Mellon Corporation, InvestmentNews and CAST Management Consultants, Inc.

Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.