Tips for New Investment Management Clients

Entering the realm of investment management is a scary thing for first-time investors, but with a good plan returns can even meet or exceed often lofty expectations. Now that tax time is near, it is a good spot on the calendar for new investors to expand their horizons and begin learning how portfolio management can give them an edge when attempting to gain a foothold in life.
Whether their primary goal is saving up for retirement, preparing their finances for personal goals like continued education, a down payment on a house or saving for their children’s college, the period after tax time presents a unique spot on the calendar to invest a refund or begin saving after the tax payment has been made. In the excitement new investment management clients often feeling when first starting out, there are a few important things that are crucial for prudent advisors to show new clients in order to give them an edge when entering the investment markets:
Set a Loss Limit
As soon as a security is purchased, make sure to plan with the client so that it is clearly understood at what point they will become uncomfortable holding a falling asset. For example, if the asset is purchased at 45, a prudent plan might be to sell the security if it closes below 35. Setting explicit goals beforehand makes taking action when necessary much easier.
Use the Best Tools or Products Available for Goals
Taxes, fees, and matching contributions can all take a huge toll on returns. If clients are not fully aware of these potential expenses or changes, it can lead to dissatisfaction with their investment management professional. Advisors can add value by encouraging clients to use the following accounts when situations warrant:
• 401(k) or similar retirement accounts, often available through employment
• Either a Roth or traditional IRA for any additional funds
• 529 College Savings Plans
Contributions to these accounts can have significant tax benefits, both now and in the future. Maximizing employer contributions within a 401(k) or other retirement account options can really add up. Only the client’s contributions are taxed, at current income tax-bracket levels. Even if the employer contribution is only 1% it can add up to $35,000 over 30 years for a modest annual employee contribution of $1,000, based on a 5% annual rate of return.
Some employers don’t offer retirement plans, but this is no reason to fret. Contributions to a traditional IRA has similar tax deduction benefits as a 401(k). Roth IRA contributions may not be tax-deductible, but there are considerable benefits that occur upon retirement. 401(k) and traditional IRA distributions are considered as taxable income by the IRS, whereas Roth IRA distributions are tax-free.
Market Crashes are Inevitable
For new investors, market crashes are often their biggest fear when entering the markers. There is no single strategy to avoid market crashes or losses, and new investment management clients should have a strategy in place to minimize losses during a significant downturn and to take advantage of the rebound that inevitably follows the crash.
Education is important. Losses in a crash or significant downturn happen to everyone, but the key is minimizing the impact on the client’s total investment portfolio. Investment management professionals know this, but novice investors do not.
A common trap that many new investors fall into is trying to time the market. If they plan on saving for retirement for 20 to 30 years, they can expect to see their investments rapidly lose 10% of the total value dozens of times during that period, fall by 20% roughly ten times, and quite possibly larger losses, perhaps up to 50% once or twice during the life of the portfolio.
Prudent investment management professionals facilitate proactive resiliency in their new clients instead of reflexive reaction. Prepare clients through education of market cycles and given them the tools necessary to emotionally weather the storm and they will be prepared for any turmoil within their investment purchases.
New investment management clients inevitably begin with high expectations and fear. Proper education, strategies to minimize downside risk and utilizing the benefits of the various investment account types available to investors can help make sure that the new investor of today becomes the successful veteran investor of tomorrow.