Cracking the Code for a Better Conversation with Financial Advisors

We know that it takes a lot of specialized knowledge to build an effective portfolio and this is why investors seek out the experts – financial advisors – for help with investing. 

However, it doesn’t seem like a good outcome if an investor blindly agrees to purchase a portfolio without truly understanding whether or not it’s right for them. 

It also doesn’t seem like a good outcome if an investor doesn’t fully know the benefits an advisor is bringing them through the investment portfolio. 

So how do we bridge that gap and allow investors to be a more active participant in conversations with their advisor? 

Creating More Effective Advisor Conversations

To start, let’s look at the way that we talk about the benefits of a portfolio. 

Lots of jargon is often thrown around to describe them like return, alpha, performance, etc. Instead, let’s use a concept that everyone can understand – a points system. 

We’ve talked about how to apply a points system to financial planning in a previous post. You can read a more in-depth description of what it means to plan with points here

But imagine that a financial plan is a collection of points that an investor can earn. Each decision they make about their plan – how much to save, how much time till they reach their goal, etc. – is translated into a corresponding number of points earned. 100 points means that they’ve built a successful plan that is expected to succeed. 

The investment portfolio now becomes one of those decisions and a way for the investor to earn points. 

All of a sudden, we have an easy way to think about how a portfolio can contribute to an investor’s plan and how it fits in alongside the other decisions made. 

The points system provides a framework for investors to have meaningful conversations with their advisor and express preferences that can guide investment decisions. 

Investment Passes 

When an advisor proposes a set of potential investments – what we like to refer to as a “pass” – the return on that pass is translated into points earned toward an investor’s goal. The more return, the more points. 

An investor will know exactly how many points they have to make up in their plan. For example, they may be on track for 92 points, meaning they need to find 8 additional points. 

Now, an investor and advisor can have a conversation about a pass that may be able to generate those 8 extra points. 

However, passes don’t gain points for free. As we all know, investing involves risk. Therefore, while a pass may gain points for an investor’s plan, it will also put some points at risk. 

Investors can express preferences around how many points they’re comfortable putting at risk in order to reach their goals. This will help an investor and advisor determine the right mix for a pass. 

In our previous example, the advisor may have proposed a pass that gained the investor 8 points and got them to an overall plan score of 100. But the pass may have also put 5 points at risk, meaning that the plan could result in a score of only 95. 

The investor may instead wish to choose a pass that only gains them 6 points, but also puts only 2 points at risk, leaving them with a total potential plan score of 96. 

The framework of a points system allows for an easy way to have a discussion around these tradeoffs. 

What Advisors Bring to the Table

Not only does the points system allow investors and advisors to be on the same page when talking about investments, it also can help to highlight the benefit an advisor can bring to the table.

Let’s look at a hypothetical scenario where an investor has built a plan that got them to 95 points. They share this with an advisor who proposes a pass that could gain them 10 points.

Now the investor is in the luxurious position of having a plan with 105 points! 

They may like the assurance of the extra 5 points and want to keep their plan as is. Alternatively, they may be able to use those extra points to update some of the other elements of their plan. 

For example, the investor could add 5 of the 10 points to their plan, bringing them to a score of 100. Then, the investor could use the other 5 points to reduce savings or time. 

The investment return (the 5 points) will offset some of the time or savings requirements, so the investor could trade a pass point for a time one and reach their goal one year earlier, or trade a pass point for a saving point and save less each year. 

The points system creates an intuitive framework for representing and discussing passes. One that brings advisors and investors on the same side of the table, speaking the same language. 

If this sounds like a conversation that you want to be having, Click here to download Lasso

One thought on “Cracking the Code for a Better Conversation with Financial Advisors

Comments are closed.

Up ↑

%d bloggers like this: