Tuesday, December 21, 2010

Two Key Words

I got my idea for this post from here: http://www.advisorperspectives.com/newsletters10/Two_Words_that_Get_Prospects_Attention.php

As I went through this article, I thought to myself: what could those words be? Since it was in an article that seemed to be focused on assets, I thought about things like rewards and return, alternatives, hedge, benchmarks, and the like.

Clients can run their business during the normal course of things. If they couldn't, they wouldn't be clients for long because they wouldn't have businesses to run for very long. Most of them are faced with risks in their business that they struggle with. Why do they struggle? Many of them are in "areas" in which they have no internal expertise. Sure, they can handle the risks related to the perhaps cyclical nature of their business. That's a core competency. It's not what keeps them up at night. For example, if cold weather is bad for their business, they know it will eventually get warmer.

But, what about compliance risks? What about benefits and compensation risks? What about accounting risks? These are not the areas where they are looking to make money. By themselves, these areas are not the key to success. But, avoiding failure in any of those areas may be a key to success. Avoiding failure may be the key to success.

So, if you are a benefits consultant or a compliance specialist, your client is not looking for a home run at the risk of striking out. They want a singles hitter who makes good contact every time. In other words, keep them out of trouble. If you are recommending anything with attendant risks, make sure they understand those risks.

  1. What is the ultimate downside?
  2. What is a likely downside?
  3. How likely are both of those occurrences?
  4. Can anything be done to mitigate those risks?
If the answers to those first two questions are unacceptable, then you better be able to answer the fourth one. If the ultimate downside is ruin, but the likelihood is near zero, it still may be worth considering how you can mitigate that risk.

Think about it. Would you take a risk that could produce a very good result, but 1 time in 1000 would put your family out on the streets? How about 1 in 100? 1 in 10? Wouldn't you like that 1 in 1000 a lot better if you could make it 1 in 10000? Your client would as well.

The next time you are about to propose a risky solution, think about this. Think about the financial crisis. Which financial services companies took huge risks? Which ones did their best to avoid those risks? And, of those two groups, which group remains standing?

OK, tell me now, which way are you going to consult?

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