How to Deal with Loss In The Exempt Market
By: Nadine Wellwood
But I’m just a sales person…or are you? With the new regulations now in effect, you are no longer just a sales person but an advisor and your clients are looking to you for answers. Gone are the days when you simply sold an investment. You now have a duty of care to know your product, to know your client, and a responsibility to offer suitable investments that meet your client’s needs. But do you have the right tools to do the job effectively?
More and more we hear about those investments that did not work out quite as planned. So what do we do as an advisor when things don’t work out? How do we prepare our clients for the very real risk of loss? With every new client, start with that very real possibility in mind. Talk about loss up front! Manage your client expectations! Educate yourself and ensure a portfolio is truly diversified enough to handle a project or two that does not perform as expected.
Welcome to the new Exempt Market.
- Talk about loss up front. What would the portfolio look like with a 20% loss? What would it look like if two out of every five investments failed entirely? Ask your clients to choose the two projects and delete them from the plan entirely (a complete loss). What does the portfolio look like now? What is the anticipated return profile? Are they willing to accept the risk? If not, maybe they are better off with another investment strategy.
- Manage Expectations. When working with your clients know that not all investments will work out the way they were planned. Some will do better, others will do worse, and once in a while some will fail entirely. When you work with your clients to proactively manage expectations you will succeed, even if all their investments do not. Be sure your plan under promises and over delivers, but whatever you do…keep it real.
- Educate yourself. We have all completed some sort of financial education course, but does one course really qualify you as an advisor? It is time to start thinking about where our industry is going and how we are going to take it there. We have a choice to make; and now is the time to make it. Either we as an industry start working together to look at the bigger picture and develop our own standards or else we will have them dictated to us. We cannot afford to become complacent as change is the new norm. The better informed we are, the better everyone will do. You may want to consider taking some continuing education courses.
- Diversify. Ensure your clients are not over concentrated in any one investment. To do this effectively you must truly know your client, and you must have developed a robust plan. Mitigate the risk with a well-diversified portfolio and when, not if, a project goes sideways the loss is always easier to discuss when viewed in the context of the entire portfolio.
- Don’t hide! Whatever you do, do not shy away from your clients when things go wrong. This is when they need you most. Be honest and upfront with them. Show leadership and stamina despite the discomfort; and although they will not like what you have to say, they will respect you for saying it. Do not run away from mistakes or losses. When you follow the advice above, are honest, work with good intent, and a well planned, well diversified portfolio people will forgive a mistake or two. But that will truly depend on how you chose to deal with it. What you do when an investment loses money will speak volumes about who you are, and it is directly proportionate to your success in this industry.
Get actively involved, not only with your clients but with other Advisors. Believe me when I say that they will be happy to know they are not alone.