First things first: Helping your brand-new clients get started

Remember the heady days of early 2020? The longest bull market in financial history was still going strong almost 11 years on, and it seemed like the good times would keep rolling.¹ Then came March, and the worldwide coronavirus pandemic ground the economy to a halt.

This economic uncertainty has shaken the confidence of many DIY investors. During the good times, these go-it-alone investors were content to make their own trading decisions. But a recent survey found that nearly one-quarter of investors sought out professional assistance for the first time in the wake of the current challenges.² You've probably registered this change in your own work, as new clients clamor for financial advice from seasoned experts.

While the opportunity to add clients is great, you may need to take a different approach with these prospects. Here, we will dig into a few ways to help this new group of advice-seekers and explore how you can establish a relationship that stands the test of time.

Understand what makes novice investors tick

Before you can tailor your advice to these new clients, you may need to calm their nerves. As Robert R. Johnson, Professor of Finance at the Heider College of Business at Creighton University, reminds advisors, “Many novice investors have never been through a complete market cycle—that is, a bull and bear market—or any sort of market dislocation."

No bear market is easy, but this COVID-19 downturn has also completely upended investors' normal routines—from work to school to shopping—not to mention added worry about legitimate health concerns. That means when they see the proverbial sky falling, they may be more anxious than an experienced investor. Take the time to tell them about how you have survived previous downturns.

DIY investors also tend to think investing is all about identifying a few unicorn stocks and riding them to the top. Johnson explains, “Many novice investors believe that identifying a good investment is as simple as purchasing the stock in a company that provides a good product or service." You'll want to explain that in the real world, investing isn't about picking winners. Instead, it's about creating a sound investment plan that aligns to life goals, and sticking to it.

Listen first, then educate

Before working with your new client to develop an investment plan, slow down and listen. What do they really need from you? What do they already know about the basics of investing?

After you hear them out, play the role of teacher and explain your thought process. Johnson recommends that advisors should not just prescribe a path for these clients, but involve the clients in the thinking behind the approach.

Patti B. Black, a CFP and Partner at Bridgeworth Wealth Management in Birmingham, Alabama, suggests advisors start at the beginning. “There's a big difference between savings (short-term) and investing (long-term)," she says. Breaking this down is often a good first step with new clients who may have a different perspective.

Don't automatically skip the basics. It doesn't hurt to define common terms like stocks, bonds, mutual funds, and IRAs. Novice investors may have only a vague idea of what these mean—or they may have an incorrect understanding. Explain concepts like risk tolerance and diversification as well, because you'll want to get on the same page as you work with them on their investment plan.

Help them focus on the long term

Right now, your clients may think their house is on fire. Your goal is to help them think beyond the current crisis.

Start by working with them on an investment policy statement (IPS), which will serve as the ground rules to their larger financial plan. Invite them to think of their IPS as the foundation they'll return to whenever they're unsure whether they should make a change to their investments.

Johnson suggests advisors explain to clients when they should adapt their IPS—and when they shouldn't. “The IPS should not be changed as a result of market fluctuations," he explains. Instead, the investment plan should shift only as a result of changes in individual circumstances, such as a change in income, a divorce, or an unanticipated life change.“ But it shouldn't be adjusted as a result of the crisis du jour," Johnson says.

Preach patience and discipline

After you develop a plan with a new client, you'll have to convince them to stick to it over the long run.

Patience and discipline are the two virtues that every investor should practice, says Johnson. The patience part is simple: Fortunes are made over the long term, not overnight. “Time is the key to successfully building wealth because of the effect of compound interest," he says. The real money is made over the course of decades, not days.

Discipline can be harder to put into practice. Johnson reminds advisors that it's painful to watch the markets fall and exhilarating to watch them soar. Novice investors might be tempted to do something, anything, to react to these fluctuations. But, Johnson says, “Remember the words of the late John Bogle, the founder and CEO of the Vanguard Group: 'Don't do something, just stand there!'"

Johnson notes that Bogle also cautioned investors on timing the market, saying that in 50 years in finance, he never knew anyone who could do it consistently. “Investors should remember that, 'Time in the market is more important than timing the market,'" says Johnson.

If this advice doesn't persuade your client of the virtues of patience and discipline, you can offer a cautionary tale. As Black says, “People who get hurt on the roller coaster ride known as investing in the stock market are the ones who jump off in the middle of the ride." Explain that every bear market in history has been followed by a rebound, and they're likely to get burned if they try to time the market. The bottom line, says Black, is “stay invested."

Explain what investors can control

Communicating what clients can and can't control is another key task ahead of advisors. You must help your clients understand that they can't control the stock market, and that trying to guess its next move is a recipe for frustration, or worse. What they can control is when they invest and when they save. They can control the amount of risk they're willing to take—as reflected in their portfolio's asset allocation. And they can control their actions when the market becomes turbulent.

Novice clients might think that making choices about finances involves executing high-wire day trades, but the reality is more mundane. As Black says, “Making sure you have the appropriate amount and type of medical, life, disability, and long-term care insurance is not glamorous, but it is a critical foundation of a strong financial plan." As you work with your client, focus on these key components of financial well-being.

Cultivate a relationship

Ultimately, it's in your client's best interest—and yours—to develop a lifelong relationship. Since you're working with someone who already has experience investing, you might need to work harder to demonstrate your value.

One way is to explain that sound investing generally requires tuning out the day-to-day noise of financial news to focus on the why behind their goals. Work to understand what's most important to them so you can remind them of what they're hoping to achieve in the long-term. This is especially valuable when times are tumultuous and they need a calming presence who already understands their objectives.

At the end of the day, Johnson says, “Trust is the currency of any financial advisor. Showing novice investors that the financial advisor has the investor's best interests in mind is paramount. And often, that means delivering news to a client that you know they don't want to hear." So be honest and share your point of view if these clients approach you with an ill-advised idea.

As your newbie clients see their portfolios steadily increase in value over the long haul, they'll appreciate your sound advice and steady hand.

For more on building long-standing client relationships during times of market unease, tune in to the "Crisis Counselor" episode from season one of "Beyond The Portfolio," our podcast series from and for RIAs.

Sources:

¹ "Market Milestones as the Bull Market Turns 10," Investopedia, Oct. 16, 2019. (Found here.)

² "More Investors Searching For Advisors' Help For First Time," Financial Advisor, April 23, 2020. (Found here.)

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