The Biggest Mistake Advisors Make – Overpromising

Here’s an email from Beth in Kansas City:

“What do you think is the biggest mistake we as advisors make?”

Listen to the audio or read the transcript below to learn what Don thinks the biggest mistake advisors make is, and why.

In my opinion, the biggest mistake Advisors make is overpromising.

I think every time we overpromise we underperform. And I don’t mean lying, Beth, I don’t mean being deceitful. I mean simple, innocent overpromising like showing somebody a mountain chart.

Americans love to win, you know that. So when you show somebody your mountain chart, you’re setting yourself up to lose, because they want to get what you’ve shown them.

Overpromising is not necessary in our business.

First of all, your parents and grandparents educated their kids, bought houses, took vacations, retired and they did all those things on a 5% return. Somehow in the nineties, a 30-40% tailwind return became a God-given tailwind. We don’t have to do that.

If you look back since 1926, the S&P has averaged almost 11% a year  compounded. That’s like buying a 75 year-old, 11% CD. Can you improve on that? No.

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So I think if you ask clients, their goals are pretty modest.

In most cases all they want to do is beat the bank. I can tell you, years ago, I was involved in a study, where we talked to the top clients of top Advisors. You may have heard me mention this elsewhere in the learning center; it’s really an interesting study.

The top Advisors we picked were a  select group of people, maybe $500,000 GDC or  higher. And the top clients had  at least $250,000 liquidity in their account.  These are big people.

By definition, successful clients are older clients because older people have all the money. So we went to the Advisors and said – “Would your clients invest for aggressive long-term capital growth?”

And the Advisors said, “No.” When asked why not they replied, “My clients are older, well-heeled, they don’t need aggressive long-term capital growth. They are into preservation of capital.”

So we went back to these older, well-heeled clients and said – “Would you invest for aggressive long-term capital growth?” They said “yes!”

So we went back to the advisors and said – Surprise! They will.

What is aggressive long-term capital growth?

The consensus among the Advisors in this particular firm, keep in mind this was back in the 1990’s, was that a 25% per year return was considered aggressive. So we went back to the clients and asked them, “what do you consider aggressive?” We were shocked when the clients told us 8% was aggressive! Keep in mind the Advisors had said 25% would be considered aggressive!

When clients were asked why they thought 8% was aggressive they said, “It’s easy – it’s twice CD rates.”

So  I think  the biggest mistake we can make is overpromising.

Again – every time you overpromise, you underperform.

* This AskDON episode first appeared on Don Connelly 24/7. If you like it and want access to more podcasts like this one, consider becoming a premium member of the learning center – a 30-day trial offer available.

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