How to Properly Approach Conversations About Risk

The American College of Financial Services
May 18, 2020

With the world around us in a constant state of uncertainty, it’s human nature to want a sure thing to hang onto, especially with financial advice. Financial advisors and clients alike can sometimes consider a sure thing or a safe thing as shorthand for the best thing, and that often leads to the subject of risk management. It’s comforting that conventional wisdom tells us smaller, less risky growth over time is smarter than betting big and possibly losing it all: this is especially true of important financial decisions like estate planning, retirement planning, and handling life insurance, as well as during a massive unforeseen event like the COVID-19 pandemic that wreaks havoc on personal lives and financial systems alike.

But for financial professionals more than anyone else, emotions must be put aside and you must consider your client’s needs first. Are low-risk wealth management strategies really going to work for them when you think about where they are in their lives, the monetary support they’re looking for, and the assets they’re working with?

Many financial advisors may see risk as a monolithic subject that can be addressed with a simple, catch-all plan. When you consider all the elements that factor into proper risk planning, however, from wealth management and portfolio liquidity to securities, asset, and tax diversification, it becomes clear that risk profiles need to be individualized to find the proper balance between short-term volatility and long-term viability.

Researchers with The American College of Financial Services have repeatedly found reducing risk in savings accounts or retirement planning portfolios doesn’t track with better results: in fact, just the opposite may be true. As a financial planner, you have to balance keeping your client’s best interests front and center with the knowledge that being too cautious about risk management can lead to just as costly a mistake as not being cautious enough.

How do you determine what risks to take in personal finance matters? The answer is that it largely depends on what clients you’re serving: if you work in charter financial planning with mostly high-net-worth clients with large portfolios and high-value assets, perhaps they can get by with a little less risk. However, if you’re dealing with primarily lower- to middle-class clients, these groups have limited resources, and low-risk, low-return planning won’t cut it if they’re trying to use retirement planning to build a nest egg, find a life insurance policy that works for them, or get by day to day. The truth is that a little risk isn’t just a good idea—at times, it’s a necessity to get your clients on a stronger financial footing.

Don’t forget, however, that risk management is relative to the end goals your clients set. How ambitious they’re willing to be with their money, while not always dictating what guidance you should give, should be a barometer for your financial advice.

 

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In the crowded, competitive field of charter financial planning, the key to success and standing out from the competition is being able to address these and other misunderstandings about personal finance in conversations with clients. You need a strong, foundational curriculum focused on modern realities and continuing education requirements. Our guide, Five Financial Planning Myths, can give you the knowledge you need as you set out on your journey as a financial advisor.

The American College of Financial Services can arm you with the skills needed to advise a full range of potential clients on a diverse set of issues critical to understand in today’s volatile and complex financial planning landscape. Download our guide now or visit TheAmericanCollege.edu/ChFC or TheAmericanCollege.edu/CFP to learn more about becoming a Chartered Financial Consultant® (ChFC®), taking the CFP Board exam, and getting your CFP® Certification.

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Earning CFP® certification can increase your income, elevate your job satisfaction, and help you win new clients. But before you sit for the CFP® exam, you have to complete CFP® certification education. And there’s no better choice for that education than The American College of Financial Services, where graduates routinely pass the CFP® exam at a rate higher than the national average.

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