Here's a question: How much have you thought about "risk" lately?
Over the past several months, there's been a lot of talk about a variety of risks: a U.S. equity market that keeps going up, political turmoil in the White House, Brexit and other problems in Europe, the threat of war in Asia. So much so that I'm sure a lot of investors are wondering whether now is the time to sell.
I understand how appealing such a move might seem. But the fact is, there are very few investors (professional or otherwise) enlightened enough to know exactly when the market will "top out." And those who sell in an effort to manage risk often end up regretting it, as the market goes on to make new gains.
Throughout my career, I've noticed dealing with risk is a key point of difference between high-net-worth (HNW) investors and those of more modest means. Simply put, the wealthy understand that taking emotion and timing out of the risk-management process is the single most important determinant of long-term investment success.
To some extent, this is because HNW investors already have "enough" – they no longer need to take on the same amount of risk as those who are still building wealth. And yes, wealthy investors also use hedge funds, private equity and alternative assets much more than the "average" investor, and this tends to smooth out portfolio volatility.
But it's also a question of mindset. Most wealthy investors view risk through the lens of their financial goals. They tend to know why they want to make money (such as for retirement, for the next generation, or for a charitable gift), and that informs their risk tolerance and portfolio construction, which helps dampen their emotional response to risk.
And that's why HNW individuals place a very high value on working with professionals who "get" them when it comes to risk. They look for these four essential qualities in their advisers – and you should, too:
Ability to challenge assumptions
There's a common misconception that wealthy people seek out "yes men" who simply agree with their opinions. Not in my experience. HNW investors value professionals who challenge assumptions and push back (hard) on long-held client beliefs – someone who isn't afraid to ask pointed, difficult questions about risk.
This kind of valued, trusted, sometimes contrary second opinion is a big reason why HNW investors work with professionals in the first place.
Belief in 'road maps'
Risk is often a reactive experience: It becomes an issue only when "stuff happens." That's not the way HNW investors think about it.
Instead, they're looking for advisers who can create a "risk road map" that anticipates the "stuff" that might come up, and outlines an appropriate asset allocation. The ultimate goal is to optimize the portfolio and align it with the risk needed to achieve specific financial goals – why aim for 12-per-cent returns if 7 per cent is all you need?
A 'wise counsellor'
Financial planner, portfolio manager, coach, confidant – advisers take on many roles with their clients. But the one that matters most to HNW individuals is that of counsellor: the calm voice of reason in times of uncertainty.
The best advisers I know have an extraordinary ability to be the "cool hand" when market noise is at its peak. They talk clients through anxieties and worries, and hold clients to long-term plans when the temptation to deviate arises (such as right now).
Understands the limits
Finally, great advisers understand their clients' risk limits. They ask clients difficult questions about risk tolerance, and they probe clients constantly to understand the boundaries of their financial comfort.
Great advisers work hard to ensure the advice they're giving to clients aligns with the information they're getting from clients – both the words and the unarticulated feelings behind those words. They understand that the best way to manage risk is to never allow their client to be in a situation that feels risky.
Andrew Marsh is president and chief executive officer of independent wealth-management firm Richardson GMP Ltd.