If your clients want to meet their long-term goals – to retire early, leave a legacy to their family, or start a business – it’s likely that they are going to need to invest some of their wealth.
Investing is typically the engine that powers a client’s financial plan. Of course, as the risk warnings say, the value of a client’s investment can go down as well as up, and there is typically some risk involved.
So, to boost the chance of your clients investing wisely, here are seven common mistakes to avoid.
1. Not having a plan
As financial planners, conversations with clients often don’t begin with valuations of investments or pensions. They start with questions about their family, their life, and what they would like to achieve in the future.
Without knowing what a client would love to do when they retire, how can we possibly know how much money they need? And without knowing how much they need, we have no idea what they need to invest now, or what level of returns they require.
It’s a cliché, but if clients fail to plan, they plan to fail. So having a clear idea of what a client is investing for is vital.
2. Investing before considering the essentials
Before any client decides to invest, there are normally a few things they should consider first:
- Do they have an emergency fund? Clients should have around three to six months’ expenses in an easy access savings account that they can use if an unexpected event – a period of ill health, redundancy, and so on – were to temporarily derail their plans.
- Does the client have any high interest debt? Repaying debt at high interest rates – credit cards and the like – might be a more sensible way for a client to use any capital they have.
- Does the client need the money in the next five years? If so, equity-based investment may not be appropriate.
Clients shouldn’t invest before they have tackled these basics.
3. Letting emotions influence decisions
The theory of “loss aversion” posits that humans feel the pain of losses twice as strongly as the pleasure of gains. So, during periods of economic uncertainty, it’s easy for a client to become concerned about the performance of their portfolio.
This can result in emotional decisions, driven by psychological bias, that can hinder a client’s progress towards their long-term goals. For example, selling shares in a falling market means a client essentially locks in a loss, removing the potential for an upturn in value as and when the market recovers.
Working with a financial planner can be particularly beneficial here. We can act as a sounding board to reassure clients and help them avoid emotional decisions that they may later regret.
4. Taking too much (or too little) risk
The aim of investing is to provide the returns that a client needs to enable them to reach their long-term goals (see point one).
If a client only needs a return of 2% a year for them to be able to retire and live their dream lifestyle without running out of money, why would they take lots of risk in an attempt to get a better return?
Investing in high-risk assets – anything from single stocks to cryptocurrency – can sometimes generate positive returns. However, it can also leave clients well out of pocket.
Conversely, being too cautious can hinder a client’s progress towards their ambitions. Higher-risk asset classes typically provide the bulk of a portfolio’s returns, so playing it safe could see a client’s wealth grow too slowly, leaving them with a shortfall later on.
5. Not diversifying enough
Simply put, one of the biggest investing mistakes a client can make is “putting all their eggs in one basket”.
Diversifying a portfolio across sectors, asset classes, and geographical areas can ensure that any downturns in one area can potentially be offset by rises elsewhere.
Here’s an example. In 2021, JP Morgan report that the MSCI Asia ex-Japan index – an index covering almost 1,200 stocks in 10 Asian countries (except Japan) – fell by 4.5%. So, if your clients had invested in just Asian stocks, it’s likely they would have suffered a loss.
However, in the same year, the S&P 500 index – 500 of the largest companies in the US – rose by 28.7%.
Had a client diversified their portfolio, it’s likely the gains in the US would have more than offset the losses in Asia.
We can help clients to build a diversified portfolio aligned with their tolerance for risk.
6. Falling for “too good to be true” offers
The latest fraud statistics from UK Finance make for sobering reading. In 2021 alone, criminals stole an eye-watering £1.3 billion through authorised and unauthorised fraud.
Investment scams offer your clients lucrative rates of return and limited or time-sensitive offers. Many of them are sophisticated, even mimicking the website or telephone number of a trusted source.
UK Finance reports that £171.7 million was lost to investment scams in 2021.
Clients should always remember that, if an offer looks too good to be true, it probably is.
The “Take Five to Stop Fraud” campaign, advises a three-step approach to help clients to avoid scams:
- Stop: take a moment to review the opportunity before parting with any money or information.
- Challenge: investigate the opportunity for any signs of fraudulent activity. Take your time, as only criminals will try to rush or panic you into making quick financial decisions.
- Protect: immediately contact your bank and the relevant authorities if you believe you’ve been a victim of fraud.
If a client has been offered an investment opportunity and they would like to know whether it is genuine, we can help.
7. Going it alone
You’ve previously read about the many benefits financial planning can provide to your clients.
We can help your clients to pay less tax, progress towards their life goals, or even just give them the reassurance that they have a trusted expert in their corner.
Remember that an International Longevity Centre study found that clients who sought professional financial advice between 2001 and 2006 had, on average, £47,706 more wealth by 2014/16 than people who had not taken advice.
So, if your client wants to invest, we can add real value.
Get in touch
If you have clients that would benefit from expert investment advice, or you’d like to find out how you can work more closely with us, please get in touch.
Email email@example.com or call us on 0345 505 3500.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.