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Transitions Magazine


Keys to Your Client's Confidence and Your Success


By William R. Nelson, Ph.D. and Scott Winters

Fear and greed motivate most investors’ decisions, causing a herd mentality and poor performance. Greed causes one to buy when the market is high and keeping up with the Jones’s becomes important. Not a good strategy, but not nearly as costly as fear. Fear causes one to sell low, meaning that investors are unable to hold their portfolios long enough to benefit from the long-term trend of increasing equity values. The antidote to fear is confidence. A large part of investment advisors’ jobs is to supply and support investor confidence, thereby helping clients stay in the market rather than selling when equity prices are low. How do advisors attract and maintain a flock of investors who have enough confidence in the advisor and his/her advice that they stick with the plan during bull and bear markets? Advisors who accomplish this ambitious goal typically implement the following four steps: 1. Find a strategy in which to truly believe. 2. Perfect a simple way of conveying the wisdom of the strategy to investors by using non-technical language and stories to convey the main message without getting bogged down in details. 3. Deliver investments via a solution that makes you appear individually important and backed by significant institutions that establish you as secure. 4. Provide an impeccably professional, yet “real” persona that clients can relate to and trust. STEP #1: Finding an investment strategy one can have confidence in is a very personal journey. Our opinions have changed over the years because with age comes wisdom and humility. As ambitious college students designing automated trading systems, 30% annual returns were uninspiring. We wanted more. Now, with more experience and realistic expectations, 15% with limited risk is more than can be expected. In addition, our skepticism of track records built on small sample sizes of independent decisions increases the attractiveness of humble, strategically-allocated portfolios that, while over the long-term are unlikely to earn more than 10% per year, are also unlikely to fall in value. Many investors have confidence in

September 2010

Practice Management s

he greatest impediment to investing success is investors’ lack of confidence in their asset management philosophy, as demonstrated by the low average returns of mutual fund investors. For example, a DALBAR study found the average mutual fund investor underperformed the S&P 500 by 62%, 4.38% versus 11.4% between January 1, 1986 and December 31, 2006. Behavioral finance studies have found that the largest source of this under-performance was selling low and buying high, exactly the opposite of what investors intend.


Profile for Financial Forum Inc.

Transitions Magazine - September 2010  

Business Management for Independent FInancial Advisors

Transitions Magazine - September 2010  

Business Management for Independent FInancial Advisors