How do you measure investment success or failure?

In Investment Management, October 2018, Steward Articles, Tax Planning by Adam Cufr

Written by Stephen L. Hanley, Investment Strategist
Evergreen Wealth Management

As an advisor and portfolio manager, nothing is more frustrating for me than having a disappointed client. After all, I’m in the business to help people and to ultimately please them. I certainly empathize with the emotions that are present during market declines, but having a disappointed client when everything is going great causes so many questions to arise. What did I miss? How can they be disappointed? We’ve done tremendous work for them and they’re ungrateful? If I’m really honest, this has lead to: they must be crazy, they don’t understand how well we’ve done, they have no real perspective, and many other very unfair and imposing judgments.

Over the years, I’ve developed a strategy to avoid these scenarios from occurring as often, and even with this strategy I can quickly forget and become frustrated. It usually takes me an evening or so before I can place things into proper perspective. Since I’m likely not alone in dealing with this occasional frustration (you may feel it too), I thought it might be beneficial to share my strategy.

Understand and acknowledge we’re all capable of becoming crazy, emotional, and irrational people.

Generally, behind emotion and irrational behavior lies a deeper rational thought. I’m reminded of my 18 month-old daughter who’s learning to communicate. She has limited capacity for words and sentences and often runs up against an intellectual wall for communicating. Her response after she has exhausted all communication efforts without success is to throw herself on the floor and cry. While a fairly irrational behavior, it’s based on a very rational thought. She simply wanted to have Cheerios for breakfast and couldn’t figure out how to communicate that to us. The same concept holds true for teenagers experiencing new and deeper emotions while still developing a framework for understanding and communicating. The truth is, we’re all emotional, and sometimes irrational, people regardless of age; our triggers and the way we hit intellectual and communication walls is different from one another, but we all have limitations that induce irrational behavior. So, before we start throwing stones at anyone, especially clients we care for and serve, please remember we’re all in the same boat.

Ask thoughtful, clarifying questions.

If I look back, almost all of my frustrations in life could’ve been avoided by asking better clarification questions before starting something. When it comes to client relationships, asking the right questions up front both reduces the odds of disconnect and can lead to a quicker strengthening of trust. Without fail, any disconnects I’ve experienced with clients seem to have stemmed from either failing to ask the right questions or my failure to truly listen and hear what the person was communicating to me. One clarifying question that I try to ask whenever possible is:

How do you measure investment success or failure?

Admittedly, it’s easy as an Advisor to hear what we want to hear during an investment conversation. I’ll share an example. We recently spoke with someone who will soon need retirement income from their investments. They’d prefer to take on less than full stock market risk to limit losses during market declines, which is quite normal. Now, it’s easy for us to make the leap to recommending a moderate risk portfolio with a focused-income objective in order to meet their goals. Thankfully, in this specific case, I paused and remembered to ask another clarifying question. Yes, they needed some income and yes they preferred lower risk but I still lacked the proper framework for understanding what they really wanted. When I slowed down, started listening more, and asked deeper questions, a different story began to take shape.

While they’re averse to risk, this person was planning to measure success or failure against the S&P 500, an index that tracks only stocks. It turns out that what he wanted wasn’t an income-focused investment portfolio at all, but he actually much preferred a growth portfolio! His logic was sound and he understood the risk, but he also understood he could keep extra cash for income needs out of the market (in a bank account) to cover 1-2 years of income and sell only select parts of the growth portfolio as needed. Failure on our part to keep pace with the performance of the S&P 500 would have failed his investment objective. Clearly, I almost blew it by forcing a structure upon him that by design would sacrifice upside growth to generate higher income and lower risk. By slowing down and asking more questions, I was able to broaden my perspective and better understand what he was ultimately looking for.

Strategy In Summary

For some reason, we’re wired to see what we want to see and hear what we want to hear. A common attribute among the most effective Advisors I’ve worked with has been their ability to understand and empathize with emotional behaviors. These Advisors hold common characteristics that I’ve been using to improve my own advice and to further develop my own communication strategy:

  1. Ask great questions.  Questions allow us to dig deeper ahead of time in order to understand what might cause expectation disconnects with clients. 
  2. Don’t be afraid to challenge norms and ask why over and over again.
  3. Slow down and be intentional around listening to what the person is saying. Hearing them and repeating back what I’ve heard in order to validate we’re on the same page.
  4. Don’t allow my mind to jump to a solution or product. Instead, stay in the moment to gain better understanding.
  5. Be fully honest. Not only in my limitations in what I can and can’t deliver, but also being honest about what I’ll do, what I’m in control of, and what I don’t control. 

Communication, listening and understanding is hard work. Inevitably, we’ll mess up at times no matter how hard we try. However, being intentional in our conversations, and being prepared with, and engaged in, some of the above tools might just improve your relationships and help avoid future frustrations, just as they’re helping me better navigate mine.