Kitces & Carl Ep 18: Talking Clients Off The Ledge From ‘Scary’ Markets

Executive Summary

When clients are panicking and on the verge of making emotionally-driven (and potentially irrational decisions),  there’s an opportunity for advisors to use empathy to build trust and strengthen the relationships to be able to talk clients off the ledge.  Recent insights from behavioral finance show us ways to genuinely relate to clients by understanding their fears on an objective and intellectual level. But once an advisor makes an empathetic connection, how does the advisor then move that conversation forward to help their client actually make a more rational decision?

In our 18th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards extend their last podcast and look at communication strategies advisors can use to set the stage for helping clients actually make better decisions after ‘talking them off the ledge’, using a three-part pyramid framework: the Plan, at the foundation of the pyramid (representing the financial plan itself that was developed around the client’s personal values and goals); the Process, in the middle (i.e., the method whereby an advisor helps their client determine how those values and goals will become reality); and the Product, at the top of the pyramid (which are the tools that were chosen but that are now the focus of the client’s fears and anxieties).

By using such an approach, an advisor can draw the client’s attention away from the initial cause of alarm – that place in the ‘branches’ of irrational ideas driven by emotional turmoil – back to the grounding ‘roots’ of the client’s financial plan, which (as they’ll be reminded) was built around their own personal values and unique goals. And then, once the client is (hopefully) back at a place where their point of reference is centered on their foundational values and goals (instead of on whatever external, uncontrollable news story or event that made them worry in the first place), it’s at that point where data and evidence can (finally) be brought into the discussion and how the plan originally factored in the potential for both good and bad outcomes to begin with!

Because changing the perspective back to the fundamentals of what they’re trying to accomplish can have a huge impact on a client’s behavior; without that context (and especially under the influence of sensationalized market news), the reasoning behind the product can be easily forgotten and difficult to understand, making that product seem arbitrary and potentially senseless in a turbulent environment. By contrast, with the (reminded) context of the plan, staying within the parameters of the client’s plan will almost always now seem the best course of action for them to weather whatever turmoil the market might be experiencing at any given moment.

Ultimately, the key point is that, by establishing trust through a connection built on empathy, we as advisors can help upset clients remember how the foundation of their plan, based on their personal values, was used to develop the unique portfolio and recommendations designed to bring their financial goals to fruition. And by re-centering the client’s focus back to their original plan, an advisor can make all the difference in helping a client maintain the grit they’ll need to stay on course regardless of whatever transient turbulence the client may perceive.

Authors:

Michael Kitces

Michael Kitces

Team Kitces

Michael Kitces is a Partner and the Director of Wealth Management for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Maryland that oversees approximately $2.0 billion of client assets.

In addition, he is a co-founder of the XY Planning Network, AdvicePay, and New Planner Recruiting, the former Practitioner Editor of the Journal of Financial Planning, the host of the Financial Advisor Success podcast, and the publisher of the popular financial planning industry blog Nerd’s Eye View through his website Kitces.com, dedicated to advancing knowledge in financial planning. In 2010, Michael was recognized with one of the FPA’s “Heart of Financial Planning” awards for his dedication and work in advancing the profession.

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Carl Richards

Carl Richards

Guest Post

Carl Richards is a Certified Financial Planner™ and creator of the Sketch Guy column, appearing weekly in the New York Times since 2010.

Carl has also been featured on Marketplace Money, Oprah.com, and Forbes.com. In addition, Carl has become a frequent keynote speaker at financial planning conferences and visual learning events around the world.

Through his simple sketches, Carl makes complex financial concepts easy to understand. His sketches also serve as the foundation for his two books, The One-Page Financial Plan: A Simple Way to Be Smart About Your Money and The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money (Portfolio/Penguin).

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Kitces & Carl Podcast Transcript

Welcome, Carl.

Carl: Michael Elliott? Michael…

Michael: Ernest.

Carl: Michael Ernest Kitces, it’s good to be back.

Michael: It’s good to have you back. We’re talking another week of scary markets. I feel like that’s a little bit of a downer to kick off with, but we finished the last one talking about scary markets. Your client has called, and they’re all worried, and how do you respond with empathy and maybe not with the gut response like, “Oh, my God, are we having this conversation again?” Right? The way that I think we do, sometimes unwittingly, makes our clients feel like they’re being dumb for feeling anxious and upset about scary market stuff. As we ‘d gone through that conversation, you kind of set it up not talking about how you actually get them down off the ledge, but just about how you respond constructively in the moment when they’re calling and freaking out. So we talked about that.

And now, for this episode, I really wanted to get back to the other part, which is literally about how you get them off the ledge when they’re really wrapped up and freaked out. Because, I’ll be honest, I don’t feel like I’m very good at this. I know this is our “Kitces & Carl” dialogue, our two-way conversation, but I’m mostly here to learn on this one. What is it you do? I know you spend so much time in this space on how to communicate well with clients, including, and especially through difficult moments like that. So how do you get the clients off the ledge?

A Framework To Use When Clients Are Upset – Overthinking The “Product” Is The Source Of Distress [02:40]

Carl: Yeah, that sounds fun. My favorite conversations with you, and my favorite things to do anywhere, are things that may not work. So this sounds really fun!

Here’s what we’ll do. (And by the way, I think in this conversation, there are other little places we can go, which we can cover another time, on overconfidence.) I think this conversation works well for ‘happy’ markets too, right? And by ‘happy’ I mean out-there-on-the-ledge greedy, like, “Hey, I really want to go do this thing.” Right? Like, “I want to move all my money to whatever, a new hot dot.”

But there are some subtle differences. I think this material is useful no matter what the call is about . Let’s just, for the sake of making the conversation fluid, pretend like they’re worried about something. And by the way, it’s so interesting to me what the something can be. Because we’ve all had these calls – sometimes it’s the market, it’s in the news, and you expect people to call.

Michael: Yeah. So I think for the sake of setting this up, we’ve all had the one-off situation where there’s something screwy in the news, and one client freaks out because they take the information wrong, or they’re particularly anxious about something else. They project it in a market, and they’re anxious about something no one else is anxious about; it’s just particular to them. I think for this, I’d rather focus on just the one we all know we have to deal with, which is, at some point, markets actually are tanking and really bad stuff is happening. It’s a horrible quarter. The market is actually down like 15% or 20% on the quarter. It’s off 30% from the highs. We’re in a full-on bear market. The market just went down 4% yesterday for the third day in a row. Right? I’m projecting back to the horror that was 2008. And it’s never the same, but it’s often similar. So the world is melting down. My client calls, all freaked out because the world is melting down. So how am I handling this?

Carl: Yeah, yeah, let’s do it.

So here’s the way I like to think about this. And it might help to just think visually, so we’ll describe this. For those of you that are just listening, we’re not drawing it here, I’m just going to describe it. Imagine a pyramid, like Maslow’s hierarchy of needs, like that pyramid. So a pyramid will be divided into three parts. We’re going to divide it into a foundation, a middle, and a top. And the top of the pyramid we’re going to label “product” or “market” or “economy.” To make it easy, I typically just label it “product.” And by product, I just mean the specific investment, the market, or the economy. Most of our phone calls come in there, right? That’s what they’re pointing to, is the top of that pyramid. And I think that’s the scariest place. It’s the narrowest. It’s the hardest to stand on, right? There are all sorts of metaphors we could use there. That’s where all the phone calls come in. And you can’t make any good decision there, right?

So just to remind people, we go through this quickly, we go through this step where the first thing we do is absorb with empathy. We give people a chance to be scared. It’s okay. Being scared is okay. We covered this in the last episode – being scared is okay. Acting on it is not, but being scared is okay. So we’re going to absorb with empathy. We’re going to use the police hold method. We talked about that, right?

Michael: Yep.

The Foundation Of The Framework Is The “Plan” Built Around The Client’s Values [06:38]

Carl: Yeah, we’re going to use the police hold method just to give us a little space between the stimulus and the response. And now it’s time to respond. So I want you to imagine that pyramid now, with the top part being “product”. Well, the bottom, the big foundation, we’re just going to label this – because this word has some problems with it – we’re going to just label it “plan.” And by plan – just everybody relax; I don’t mean a 2-inch thick doorstop – it could just be a simple investment policy statement if you’re focused on the investments. Whatever it is, it’s a document. If you don’t have one of these, the rest of this conversation will make no sense. All bets are off, good luck, throw performance figures at them and hope it works. I hope that’s coming across as super sarcastic because you’ve got to have one of these, right?

And all it is, is a simple document that spells out why you are invested the way you are. So if you call that a financial plan, great, if you call that a list of goals, great, if you call that an investment policy statement, fine. But there must have been some way that you made the decision to build the portfolio you did. So we’re making a bunch of assumptions, right? Like if you build smorgasbord portfolios, if you have a hunch and buy a bunch for clients, none of this stuff works. So, we’re making an assumption that you built a portfolio on purpose designed to help a client, in shorthand, to help a client meet their goals.

The way I like to say it is, “Why is your money invested the way it is?” The only right answer to that is that the portfolio gives me the greatest likelihood of meeting my goals with the lowest risk. So some document that spells that out – that’s what we’re going to call the “plan”. For most of the people listening, they know exactly what we’re talking about, and they’re good at that. They’ve got a financial plan or an investment policy statement that’s detailed and spells it all out. So that’s the base of this pyramid.

Why It’s Important To Remind Clients To Focus On The “Plan” Vs. The “Product” [08:49]

So we have to take people from the top when they call. If I were drawing this, I would have an arrow drawing a line coming down to the top, and then I’d have it sort of bouncing off the top and coming around to the bottom. Well, when we say, “Please hold,” like, “Hey, Michael, I understand you’re scared.” If it’s true, you can say, “In fact, I get a little scared too when I watch the news. And the reality is,” in 2008/2009, I could say, “The reality is these are scary times. Yeah. It’s hard not to be scared. Can you give me a minute? I want to go get your file.”

Right? There’s the police hold. I go get your file. And what happens when I get the file? This can happen in person, or it can happen on the phone. What happens when I get the file is we’re going to take you from scary, out in the branches, product, market, economy, back to this grounded place. I think of it as a touchstone. We’re going to remind you what you said when you were thinking clearly, and we’re going to do it gently. Maybe, in some cases, you might have the relationship where you do it like a drill sergeant.

So we’re going to say, “Hey, Michael, I’ve got your file here, and before we get into what’s going on with the market and any changes that we have to make – and believe me, we’ll get there – but before we get there, I just was reviewing my notes, and I want to make sure I’ve got a couple of things right. When we first met, and I think even last time we met, and then during our reviews – we just had one a couple of months ago – you told me the most important thing about money to you was to spend time with the family, mainly outside, and to serve in the community. I just want to check in – has anything changed there?” Right? So that would be step one. Checking in on – I would use Bill Bachrach’s word there – I’d use that word “values” or, I like the word “purpose,” some statement of purpose. If you’ve got that, that’s the place you check in.

And so if you said that to me, I’d say, “Yeah, yeah.” Now, be careful here, because clients can be tricky. It’s this next step that they often will change on you. So there I’m going to say, “Yeah, Michael, actually, that hasn’t changed. But what has that got to do with anything? I’m scared. The TV is blaring.”

Michael: Yeah. But like, “Yes, that was my goal, and it’s blowing up because we’re down 30% and it’s going to 0, and what the hell are you doing about it?”

Carl: Yeah, totally. And I get that, Michael. And I understand how…I just want to make sure because before we make changes, we typically don’t make large changes based on the market. We make changes based on your life. So I just want to see if we’re still at the same place. So that’s good.

After that, you told me the way that looks in your life. Now we’re moving up that ladder to goals, right? So goals would have some specific parameter around them. So I’ll pretend like you’re one of my clients, Martha, who you used to call. And I would say, “Martha, your goal was to spend time with your family. Actually, your goal was to never run out of money, never have to worry about money again, and spend time with your kids and your grandkids. Is that still true?” “Yes, that’s still true.” “Cool. Then you told me your goal was, in order to make that happen, you wanted to get $5,000 a month. And I just want to check – have any of these things changed? You wanted a check in your mailbox; you’ve been getting that. Is that still the goal?” “Yeah, yeah, yeah, totally, totally. Get on with it.” “Okay. And you also wanted $10,000 a year to spend with the grandkids on anything you want.” “Yeah, still the goal.” “Okay, cool.”

Now we’re going to move up to the next step. Now, listen, Michael, everybody listening to this needs to know, this is insanely unsatisfactory for people. Right? This is the worst form of getting people to behave correctly ever created, except for all of the others. That’s Winston Churchill’s democracy quote, right? So the next thing we’re going to do is say, “Look, for goals, we’re on the same page. Cool. They all check out.” Now, be careful here because clients will sometimes change the goals. They’ll be like, “No, you know what? I wanted that, but now I just want safety.” All right, goals we check in.

“Process” Is The Framework’s Intermediate Step, Bridging “Plan” And “Product” [13:00]

Next, we’re moving up that next ladder. The middle of that triangle, we haven’t labeled yet. We’re going to call that “process,” right? So we’ve just moved from plan, purpose, values, and goals; now we’re going to move to process. We’re going to say, “Now, remember, when we put this portfolio together, based on those goals you just reviewed with me, Michael, that you wanted $5,000 a month in your mailbox and you wanted $10,000 a year to spend on the kids and grandkids. We then went out and built a portfolio to give you the greatest chance of doing that. And remember, we did that on purpose. Remember all those conversations we had about it? Every piece of the portfolio is there for a specific purpose. And the goal of each piece is to give you the greatest likelihood of meeting those goals with the lowest amount of risk.” So each piece plays a part there.

Now, I want you to remember, I know it’s hard in times like this, but remember, when we built that portfolio, we relied on the weighty evidence of history to build it. We knew that markets go up and down. Because it’s in the data, right? The math that we used to build this portfolio incorporated really scary markets, and it also incorporated really good markets. So what I’m saying is we knew this would happen. Now, I’ve got to be clear with you, Michael, we didn’t know when. We didn’t know why. We didn’t know how bad. But we knew that these sorts of things show up because they have historically. It’s baked into the picture. So when we built that portfolio, we knew that there were going to be times like this where we were going to be worried or stressed out, we just didn’t know when. And believe me, man, oh, geez, Michael, if we had known when, we would have called you if we could find a better way.

Then remember, when we built this portfolio, that was sort of the portfolio design, right? And I’m thinking pie charts here, right? There’s small-cap, value, large-cap – I’m thinking asset classes. Now I want to move to this last piece of the ladder, the actual products. Remember, once we designed that portfolio, this portfolio was custom built. The specific allocation was built for you. We then needed investments. Sometimes we even use the word “product,” right? We needed to go find the best product to populate the plan. It was the last part of the whole process.

Now, this is much more interactive, normally. We’re trying to get this into 15 minutes, but this is more like a half an hour, 45-minute conversation, even an hour.

Michael: Sure, sure.

Carl: And it would be fun at the end. I’ve got a last-arrow discussion. So at the end, I want you just to be like, “That’s cute, Carl.” So you just be Michael to me at the end, and we’ll see how it works out.

Michael: Okay. I’ll be my obnoxious, rational self. Got it.

Carl: I didn’t say it! We get to the product piece and we just say, “Look, then we went and scoured the planet for the right products to use.” In other words, the right investments, the right mutual fund, the right ETF, the right manager, whatever we’re using here. Now, I want you to know, at every step, the plan – and we reviewed this – your goals haven’t changed. Why we’re doing this hasn’t changed. If you came in today and told me those same sets of goals, the portfolio would be the same. Even though it’s scary, it would be the same. And believe me, we’re on top of it sort of on a day-to-day basis in terms of anything changing at the product level. And the kind of things that would change there are certainly like somebody doing something that they shouldn’t be doing. You and I have talked about all the criteria we use to pick investments, to decide which investments we should use, and nothing there has changed.

So we’re left in this really unsatisfactory place, right? That, as painful as it is, this is how we would do it. The way I like to end this is normally, “So if it’s okay with you Michael, the only advice I have”, and I love this idea of being honest. I’m a little hesitant about this. And by hesitant, I don’t mean I’m hesitant in the advice. “I wish I could give you something better. But we’ve tried.” And I often use the Winston Churchill quote here. I would say, “Look, so to be honest, to be really direct,” I’m trying to get myself to stop using “to be honest.” “To be really direct, what this reminds me of, the way we manage money and the way we take care of sort of helping you meet your goals around here, it’s the worst form of managing money ever created, except for all the others.” Right? And I would tell them the Winston Churchill quote.

I’d say, “So in the end,” this is a 45-minute discussion now wrapping up, I’m saying, “Michael, in the end, I can’t think of any better advice right now. I know it’s unsatisfactory. I know emotionally, it’s not what you want to hear, but I can’t think of any better advice than we just stay the course. So if it’s okay with you, that’s what I’d like to do.” I like to end it with, “If it’s okay with you, that’s what I’d like to do.” Right? “I can’t think of any better thing to do right now than for us just to stay the course and jeez, turn the TV off. That’s all we can really do right now.” Okay? So now you get a chance to either ask questions or push.

Michael: So, you wrap that up with…what was your statement? “Is that okay with you?”

Carl: Yeah. “If it’s okay with you, given everything that’s going on and all the review we’ve just done and the fact that your goals haven’t changed, your values haven’t changed, the portfolio design and the investment products won’t change. We double-checked them again this morning; they’ve never violated any of our rules… if given all that, and if it’s okay with you… the best advice I can give you is that we stay the course. So if it’s okay with you, the best thing we can do right now is just to stay the course. Stay invested. Let’s take some real notes on how we feel right now, because to be honest, we’re in a lifeboat. And I don’t think it makes any sense to jump into the water, right? But when we get back on that ship, we want to remember how this felt. Because we can make some changes when we get back on the ship. But changing right now is the equivalent of jumping into the water. Right? So if it’s okay with you, the best advice I can give you is just to stay the course.”

Michael: “But we’re down 30! I just don’t know if I can stay in the lifeboat much longer. I just can’t take this!”

Carl: So let’s go here. Let’s pretend you’re even more like, “No, man, that’s cute, but I want out.” Right? Here’s what I’ve always called my ‘last-ditch’ effort. If somebody is really going to pull the plug here, would you and I agree that that’s a bad decision? You and I as advisors, right?

Michael: Yeah.

Carl: It’s a bad decision. Again, huge caveats that you’re a real financial advisor, you’ve got an actual plan, you built the portfolio on purpose, all those caveats. To blow out of a well-designed portfolio based on your values and goals because you’re scared is a bad decision. So we really don’t want this to happen. So you’ve got a couple options here. I used this with…I can remember a specific conversation with… How do I change his name? Let’s just call him…

Michael: You can call him Ernest if you want.

A Hypothetical Client Example – How The “Process” Uses the “Plan” To Explain The “Product” [21:12]

Carl: Let’s just call him Asher. Asher calls me. He’s like, “Yep, all my goals are the same, yes, my portfolio is the same, yes, to all that stuff, but I want out.” So here, this is another conversation that I think is really useful. Now, realize, you’re sort of putting the gloves on at this point. So if you’re going to save this, you’ve got two choices. Okay. That’s one choice, right? And I think if that’s the choice, well, let’s talk about two things. One is, we could scale the risk back a little bit. And I know there are some that are like, “I will not do that. If you are not going to take my advice, tell me where to send the money.” Right? Nick Murray style, right? And I think that’s a totally fine response. And if it fits you, that’s totally fine.

But then there are other cases where maybe there are other ways, that I think of as ‘righteous tricks’, right? Can we be thinking a couple of moves ahead, like playing chess instead of checkers? And think like, “Hey, I really want to help Asher long-term. Is there something I can do here to tone that back?” Now, that may be in the middle, like, “Okay, you know what? Asher, maybe we take a little risk off the table.” But I’m going to pretend this is all or nothing. So Asher’s like, “I want out.” And I say, “Okay, I got you. I hear you loud and clear. But let me ask you a question, Asher, is this permanent? You want out forever?” (You’re Asher, Michael.) “Do you want out forever?”

Michael: “No, not forever. Just not right now. Not in this meltdown.”

Carl: “Okay, cool. So I just want to make sure we understand if we’re going to get out, because we kind of like to have plans around here. Let’s just talk about what happens next. If we’re going to get out and it’s forever, then we can build a new plan around the idea of owning CDs for the rest of your life. That’s totally okay. It just means we’ll have to pull some other levers. But you’re saying we’re going to get back in at some point?”

Michael: “Yeah. When all this stuff is over.”

Carl: “Okay.” This is really fun watching you pretend.

Michael: “After the crisis is over, yeah.”

Carl: “Perfect. So let’s define that a little bit. So when will we get back in?”

Michael: “I don’t know, after the meltdown is done.”

Carl: “Okay.” So this is where you have to be careful, right? Because it’s so hard to not be sarcastic here. “Okay. So I’m going to write down in my notes ‘when the meltdown is done.’” And when I used this with Asher, Asher said, “When the dust settles.” Okay. I was like, “Okay, cool. Dust settles.” For these sorts of plans, it’s a really important decision, Michael. We like to be a little more clear. “So how would we know when it’s, as you said, when this is all over? How would we know when, as you said, the meltdown is done? How would we know when the meltdown is done?”

Michael: “I don’t know, when the market isn’t crashing anymore.”

Carl: “Okay, market not crashing.” All right, cool. Let’s add another parameter. “What do you think would be going on in the news when the meltdown is done?”

Michael: “People will start to talk about markets going up and how the banks aren’t failing and…”

Carl: “So the news would be good. If it’s not down, it would be good then?” Okay, so news would be good.

Michael: “Yes.”

Carl: “What would your neighbors be doing? Your buddies at the club or whoever you’re talking to now, what would they be doing with their money?”

Michael: “I don’t know, probably buying as well, once things are moving up again, and the dust has settled.”

Carl: It’s so fun to watch you!

Michael: We’re all in!

Carl: “They would be buying as well. So yeah, so news would be good, your neighbors would be buying as well.” So here’s the last question we sort of have to settle on, and this is the one you have to be so gentle with. “The economy, what would be going on with the economy?” It’s not the last question. Sorry. We’ve got one more.

Michael: “Well, it would be growing again and not with all the recession, and economic meltdown”

Carl: “It’d be better, right? Yeah. So it’d be better. It’d be growing again. So here’s the question I have for you. Let’s just try and peg something here. Where would the market be relative to where it is today if it was no longer melting down? Where would the market be? If the news was good, the economy was good, your neighbors were investing, where would the market be relative to today? Higher or lower?”

Michael: “Well, it will probably be going higher, as long as it didn’t go a lot lower first. I don’t know how far down it’s going from here, that’s why I want out.”

Carl: “So you understand, we’ve got two decisions to make if we decide to sell. One is when to sell, and the other is when to get back in. And I don’t think we can make either one of those right. Because, if we wait until the neighbors are buying, the news is good, the economy is better, I’m telling you, the markets are going to be higher than wherever they are now. Right? So the chance of getting both of those right is just a game I can’t play.”

When Data And Evidence (And Impactful Stories) Can Be Used To Support “Process” [26:34]

Now, remember that we talked about how we don’t want to throw data and evidence at people? Well, this is the spot at which you do. You’ve been empathetic, you’ve had hugs, now’s the time to blast people with data if you want to. Right? Average bear market is this long. If you miss this many…the top 10 days in a decade. All of those data points that we all throw around, now is the time that we can do that and say, “Look, given all the data and everything I know, I know of no better way to do this. Believe me, if there was a better way to do it, we would be doing it. But I don’t want to enter into a plan to sell low and buy a little bit higher on purpose. I just don’t think that sounds like a good idea. So again, I’m just going to suggest, pretend like you were going to go away for three years, and you had asked me to make this decision. I’m telling you right now what my decision would be. Of course, it’s your call at the end of the day. But if you asked me to make this decision, I would just grit my teeth and stick with the plan we built.” Right?

Michael: Okay. I’m feeling it! I want to hold it! I wasn’t actually about to sell, because I’m me now, and not Asher, but I’m freakin’ sold on this! I want to go buy more! I don’t even know what the market did today.

Carl: Yeah. And that’s another place you can go, right, is you can start telling stories; one of the stories I would tell every once in a while would be around, I had a conversation with an investment manager that you all know, and he was telling me about how in 2009/2008 in his personal life, he and his wife – and these are people worth more money than most of us will ever consider in our lives – he and his wife stopped buying books and started going to the library because they wanted to increase their automatic investments by $50 a month, right? They were trying to find every dollar they could find. There are people like that who are wired to rush in when the rest of us are rushing out.

“Most of us, like you and me, Asher, we’re not wired that way. I’m just asking… let’s put some roadblocks around this so we can at least behave that way right now.” Or the last thing you can do is say, “Asher, it’s crazy you called.” At the very end of this, you can say, “Look, it’s crazy that you called because I was going to call you, because it’s time for us to rebalance. We need to be taking money from the safe side of your portfolio and buying the stuff that grows.” So that’s all I’ve got.

Michael: Truly, I was sold as we went through the discussion. It’s a powerful piece because you can…I know, to me at least, say you can feel the empathy connect that builds, right upfront, “Hey, I know you’re scared, I’m scared. This stuff is scary.” I’m thinking back to 2008 going through that, acknowledging that this stuff is scary. And then your laddered approach, like, “Hey, I just want to check in about this information. These were the values. This is what we are working towards.” Then, “Here were the goals you said, and here was the process that we said we were going through in order to do that. So here’s the portfolio we built based on the process, based on the goals, based on the values.” You’ve laddered them all the way up. And you can say, “Was there anything wrong in this process? Okay. If not, then can we keep hanging out where we are?”

Carl: Yeah. I think what that all points to is taking them out of the trees, right? The trees where they’re way out on the branches of these limbs, right? And of course, when it’s windy out there, these things move. It’s scary. And we’re just trying to bring them back to the trunk. Like, “Here’s how we had decided. Let’s just walk through the rationale and the fact patterns behind this, and here’s how we got where we are.” And every point along the way, I think it’s really important that you can be competent. Like, “Look, I’m telling you, remember when we built that portfolio? You could spend the next 17 years of your life looking at everything ever written on portfolio design and I don’t think you would uncover a better way to do it.” I felt confident saying that. Like, “I don’t know what’s going on with the market, but I know that the way we built this portfolio relies on the best processes out there.”

Taking Time To Follow The Process Can Calm Clients Down And Prepare Them For Rational Discussions [31:04]

Michael: Well, what strikes me too, as I’m thinking through this conversation playing out, is that this will literally take time. If you’re going to go back and forth like, “Here were your values and here were the goals you said.” And considering that there’s going to be some chatter. And then, “Here was our process, and here’s what we did.”

Just the fact that that conversation takes time, I think, is part of the point. Because however wound up I was when this phone call or meeting started, all the anger I built up in the car driving to your office to tell you off – I’m so pissed my portfolio’s gone down – the sheer time it takes for the conversation to unfold seems like a part of what gives the client time to decompress out of that most emotional state. As you said, by the end, if you’ve gone through this whole journey, this conversation has lasted long enough, and they should be largely out of emotional space. You’re at least having a little bit more of a rational conversation. Now you get to use the data, not back then, but now you get to use the data because you’ve taken this conversation out long enough that you’ve given them time to get to the point where you can actually have that part of the conversation.

Carl: Yeah. Said another way, you’ve absorbed with empathy, you’ve absorbed all that anxiety. And I think at every step, it’s going to creep back up. You would have noticed when we mentioned the investment products, “Oh, I know, there’s news about this, news about that.” At every step, we’re looking for a chance to be empathetic, even to the point of saying, “Look, I know it’s terribly unsatisfactory. I know it doesn’t mean you can go home and sleep really well, because you’ve still got the financial pornography network yelling at you. But even in spite of that, I know of no better way.” So at every step, we’re trying to be empathetic.

The most common response – and I’ve had that conversation definitely north of 100 times; I don’t want to say thousands of times, but hundreds of times – and the most common response is, “Oh, thanks, man. Forget I called.” And then I get to the point with people often enough, that they would just call and go, “Tell me that story again.” Right? I never got to the point where anybody said, “Hey, can you just tell me story number two?” We never got to that. It’s more like, “Hey, I’m worried, can you tell me that story again? Walk me through that thing again.”

We’ve also got to recognize that sometimes it doesn’t work, right? There are examples where somebody is just like, “Yeah, great, man, my goals are different. I’ve had enough of this. It’s gone on too long. You told me that last month. We had this exact conversation last month. I’m down 10% again. I’m out.” And you finally just have to go, “Hey, man, I’ve totally done my best. I think you need to find a new advisor. But I’m here for you to make that process as clean as possible. How would you like to handle it? Do you want to just go to all cash? Do you want to do this gently? What would you like me to do? You tell me the endpoint and I will give you advice on how to get there, even though I don’t agree with the endpoint, because I’m your friend. And then at some point, we’ll find a smooth transition to get you to somebody new.” That has happened.

Michael: And failing anything else, you just start every call with, “Funny you called me. I was just going to call you to rebalance.”

Carl: Exactly. Or, isn’t it Nick Murray’s line? “Don’t do that. Don’t do that. Don’t do that.” Right? We can just have an answering machine that says, “Don’t do that.” Yeah, exactly. Okay, man.

Michael: Well, awesome. I hope this isn’t a conversation that we’ll have to have anytime soon. But as you said, with the inevitability of markets, it is a conversation we’ll have to have at some point with clients. So thank you for sharing a path. Hopefully, this will be a helpful reference point or inspiration whenever we get to the next round of these conversations in the markets.

Carl: Amen, Michael. Thanks.

Michael: Thank you, Carl.

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