I think it was Nick Murray who called them lifeboat drills. He suggested calling your clients in good times to prepare them for the inevitable downturns in the markets. By preparing your clients, you can modify their future behavior and get them ready for challenges that may come in their portfolios.
Whether it’s a lifeboat drill or the safety demonstration that the flight attendants do before you fly, it always makes sense to know where the exits are (and how to work those pesky seatbelts) before there is an emergency. In our business, it is called “scenario planning.” I wonder how many of you are actually doing it?
Can I borrow your crystal ball? Mine stopped working
As soon as the election was over, the media started hyping the next big apocalypse: the fiscal cliff. As I listened to NPR this morning, I must have heard at least 10 mentions of this coming crisis. My belief is that, as with all impending crises, this will get solved (for better or worse), and the media focus will move to a new impending apocalypse.
But until then, how are we discussing this current predicament with our clients today? They know we cannot predict the future, but they expect us to have all the answers anyway. For instance:
• What if a tax hike happens in the first quarter?
• What about the Medicare surtax?
• If we enter another recession, what can we look forward to in the markets and in client portfolios?
Obviously the questions are endless. Your clients and prospects are thinking these things, if not asking them. And from what I am seeing today, many advisors are building scenarios to discuss with their clients.
Don’t sweat it
One of the best exercises you can do (and it does not involved cardio) is to start putting together a list of different topics that can affect your clients’ portfolios (and more importantly, their behavior). According to CEB Research, the following is a list that can help:
• Develop scenarios in small teams. (If you work alone, look for a study group of professionals, contact the local FPA or talk to your wholesalers and platform providers)
• Allow sufficient time for the exercise
• Distinguish between drivers that are mostly uncertain and those that have some degree of certainty
• Push yourself to make each scenario feel like an uncomfortably extreme caricature; go beyond the limits of what you think is likely or even possible
• Recognize that the future will likely possess elements of all your scenarios
• Use your scenarios and “wind tunnels” to pressure-test decisions and plans; how well did your decision hold up in each scenario?
Those are your Dos. Here are your Don’ts:
• Use the scenario-planning for forecasting
• Expect it to predict the future
The goal of the finished exercise is to walk clients through each of the scenarios that could happen in light of the upcoming “crisis.” Rather than pontificate on what you “know” the answer will be, let them know that you have thought it through, and discuss whether or not they need to make changes. (My bet is that they won’t). By preparing clients and showing multiple possibilities, you can prepare them for the future and ease their concerns. It is a proactive conversation, rather than a reactive panic.
Back to our lifeboat analogy – do you think your clients would you like to learn how to use a life vest now, or when the boat is sinking and they are up to their necks in water?
And if you don’t know where to begin in your planning, take a look at this new commentary from SEI on the Fiscal Cliff.
Image courtesy of FreeDigitalPhotos.net.