FinMason Survey Indicates Advisors May Not Be Having Adequate Conversations about Risk with Clients

FinMason Survey Indicates Advisors May Not Be Having Adequate Conversations about Risk with Clients

According to a new survey released today by FinMason, a Boston-based financial technology and investment analytics firm, advisors may not be having adequate conversation about risk with their clients. The survey of 492 investors with personal financial advisors found that only 1 in 4 investors had been told by their advisor how much their portfolios could lose if there were to be another market crash. Of those individuals that indicated that their advisor had talked to them about their potential loss in a crash, 62 percent said their loss would be less than what their stated exposure to equities would suggest.

“This is setting up the same way as it always does,” said Kendrick Wakeman, CFA, CEO and founder of FinMason. “The market will eventually crash, maybe not today or even soon, but when it does, investors will feel upset, betrayed and litigious.”

LIKELY TO PANIC AND SELL IN CRASH

The survey also found that up to 57 percent of advised clients will likely panic and sell on the next crash. Investors were asked two questions: first, how much they could stand to lose in a decline before they felt compelled to sell everything and second, what percentage of their investments are currently in the equity market. Assuming that the next crash is similar to 2008 in terms of equity price decline, the equity portion of an investor’s portfolio would produce a loss in excess of the stated sell level in 57 percent of the investors.

“I understand that many advisors don’t want to potentially scare their clients with talk about possible volatility in the market. But, if an advisor has a conversation about a crash now, in the light of calm markets, they can have a very rational discussion of why it is important to take that risk. The advisor can form a clear mental link between that risk and the potential rewards, like having a higher income in retirement,” Wakeman said. “That turns a potentially scary conversation into a healthy and productive one. The investor now knows how much they could lose and agrees that it is important to take that risk to achieve their ultimate rewards.”

REALISTIC CONVERSATIONS ARE KEY

Wakeman points out that some psychological studies show that surprise heightens emotional response by 400 percent. “That is why surprise birthday parties are so pleasant and surprise tragedies are so tragic. By foreshadowing what could happen in a crash, an advisor can help the investor be more centered, and perhaps less emotional, when the emotions of a crash start raging.”

“Having a realistic conversation about risk allows advisors to show the value they bring to the table,” said Wakeman. “It’s an opportunity to anticipate what could happen in a crash before it occurs, thus eliminating (or at least reducing) the emotional, sell-off response. It’s in the best interest of both advisor and client to avoid a situation where the client feels tricked or that their world is collapsing.”

SURVEY METHODOLOGY

The research was conducted by FinMason from August through September 2016. The online survey was sent to more than 1900 individuals and 1074 surveys were completed by respondents with either investment accounts or 401k-type accounts. Respondents ranged in age from 18-100. Asset information was self-reported by the respondents. Of those individuals that completed the survey, 1074 indicated they had either an investment account or a 401k-type account.

ABOUT FINMASON, INC.

FinMason is a Boston-based financial technology and investment analytics firm dedicated to providing tools that help financial advisors and their clients move forward with confidence. FinMason’s cutting-edge platform analyzes millions of global investments and delivers institutional-grade analytics at scale via three core products: FinRiverTM provides financial technology platforms with robust analytics and proprietary data sets via lightening-fast APIs; FinScore ProTM provides financial advisors with a quick, intuitive and uncomplicated risk assessment tool that systematically develops a mutually understandable, bright-line agreement on risk from each client and prospect; and FinScopeTM provides compliance teams with a way to screen through each client portfolio every night with robust analytics to detect problems before they become problems. For more information about FinMason and their investment analytics platforms, go to http://finmason.co/about or follow @finmasoninc on Twitter.

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