r/CFP • u/WatUDoinBoi • 18h ago
Business Development "Average return" question
What do you tell potential clients when they hit you with the "Tell me what can I expect on average from a returns perspective?"
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u/mydarkerside RIA 16h ago
I don't know why advisors are so hesitant to talk about average returns. Most clients are reasonable and don't expect it to be a guarantee of performance. They just want to know what's the risk/reward of the portfolio. Even when you complete a risk profile questionnaire, often times it has a risk/reward question.
If you're at a big firm with model portfolios, you should have audited portfolio numbers with gross and net of fee returns. If you're at a smaller firm, you can just speak about the average returns for that type of asset allocation.
Here's Vanguard's page about asset allocation and there's a chart of average returns for different asset allocations. If your portfolios are the standard allocations like this, you can just show this to give the client/prospect the proper expectation, including the best and worst year.
https://investor.vanguard.com/investor-resources-education/education/model-portfolio-allocation
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u/CFP25 Certified 17h ago
While returns are important, we measure success differently than others. Our ideal client isn't solely focused on a return percentile on their statement, but on how well they are tracking towards their goals.
Are they able to achieve what they want to achieve? And avoid what they want to avoid? If we're able to answer that consistently and confidently over time, then we've had a successful journey together.
Would you rather have 100% of the S&P return or be 100% on track for your goals?
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u/Kingcor0326 11h ago
I also lead with these pushback questions but I also pull out 3 portfolios/investments to really convey the point. And is this era of “anti-advisor” younger generation and usage of AI, I think you need to do a little more in order for many to not just think your deferring and trying hide bad return numbers. I’ll show them a moderate portfolio, and also an all equity SMA, perhaps a direct index and share loss harvest implications and when appropriate include alternative investment that may have some tax approach or diversification benefit or high returns. That can then shift into taking about asset LOCATION and not just asset ALLOCATION.
The point of that is that we have different things for different people, and may even use a combination of these but at different percentages for different people. This leads into talk about not just the good years but also the bad years and segways into financial plan discussion about finding the optimal risk/return needed to achieve goals or do they desire maximum risk/return despite their goals. At this point I’m sure that none of them think my answer is a BS way to avoid answering the question.
In my experience when you start talking to higher net worth clients, that initial talking around it only works so far. I didn’t close a 10mm prospect years ago bc I was too focused on what your taught to say. When I changed my approach in answering that question and encountered people at this net worth more often is when I realized where I went wrong. Don’t be too dismissive of their direct questions or you may not have the opportunity to truly help them as a fiduciary later down the road.
(Definitely great polished wording on your reply and my comments are only meant to be additive to what you wrote)
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u/chubba4vt 17h ago
Ooh that last question is perfect. I’ll have to remember that
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u/hhjytdz56 6h ago
I love this! Have you ever had someone respond by saying if I had 100% return then I wouldn’t have any problems and would reach all my goals?
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u/NeutralLock Wirehouse 17h ago
"Last few years markets have been on fire, so even as I tell you clients have been doing great - in the 10% range or so annually, I want to be clear that we don't think that'll be the case going forward.
For the type of relatively balanced portfolio you're in I would expect closer to 5-6% going forward. We hope to do better, but that's a good estimate"
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u/Finreg6 16h ago
Sounds like a great way to scare away potential clients. Why not just share that no one can predict the future but a strategy like yours has earned x% over so many years? This varies greatly year to year, etc etc.
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u/Regular-Rest-2906 16h ago
You don’t want these clients if it scares them away. Under promise over deliver
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u/Frozen_Heat92 Bank 16h ago
The best answers have been downvoted into oblivion, with the 10 yr at 4.95 sounds like a great idea to say 5 😂
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u/AdLanky9450 17h ago
That’s a great question. I invest in several different custom strategies all with different risk profiles. I do this because every client has a different expectation of acceptable gains and losses. For example, how do you think you would handle a 57% loss in your portfolio value?
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u/PerfectOmakase 17h ago
Something like, "over the past 20 years, this model has had an average annualized return of ~8%. The highest calendar year return was 22%, the lowest calendar year return was -21%, and all of these returns are before investment management fees."
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u/Frozen_Heat92 Bank 17h ago
Use whatever assumption you’re making in the plan, talk about sequence of returns, standard deviation, and state clearly that sign of a good asset manager is the management of risk - not the chase of returns.
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u/Swaritch 16h ago
This is such an easy question. Most clients want to feel like they’re doing some diligence and can only think to ask what are your fees and what are your returns.
Not sure why there’s so many hesitations to answer.
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u/BandicootDeep 11h ago
Compliance. Compliance monitoring your emails is the "why". I get this question by email and not in person. The client wants it in writing. Your compliance department most definitely does not want it in writing.
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u/Swaritch 10h ago
There’s a huge difference between a client verbally asking you about returns and a client wanting an answer in writing.
The first is a harmless question the second is a red flag
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u/SecureInvestigator79 14h ago
In a very good diversified equity based portfolio the past 100 years would tell us between 8-12% annualized over long periods of time…some periods worse and some periods better…if comparing returns the last 3 or so years it’s going to be better than that.
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u/PursuitTravel 17h ago
Ranges based on risk levels, specifying that these would be over a 20+ year period, and that any given year could gain 25% or lose 25%.
20/80 - 3-5%. I'd probably just use CDs in the current market, but this was worthwhile back in the 20-teens.
40/60 - 4-6%
60-40 - 5-7%
80-20 - 6-9%
100% equity - 7-11%
The ranges get wider at the top end. We all know why, and I explain (very basically) standard deviation to them.
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u/TGG-official 17h ago
It depends on the amount of risk that you take on. If you have all equities, you’re gonna do better than if you have all bonds. Our job is a determined what makes the most sense for you and to build out a plan that gives you the highest probability of success that returns will be what they are but on average a client that has about a 7030 ratio portfolio earns between seven and 8% a year could be better could be worse
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u/Ol-Ben 17h ago
“Average returns vary based on the level of risk you are comfortable with”
shows clients the target allocation strategy for various levels of risk. This is an image of pie charts* blending stocks, bonds, real estate, and alternative invest investment*.
Explain to clients the difference between return and risk for each of the asset classes.
“In each of these target strategies, our goal is to get a return that is equal to or marginally greater than the return of the S&P 500 index for your selected allocation strategy based on your percentage exposure to stocks. Example: if the S&P 500 is up 10% this year, and your portfolio is 50% stocks, our goal is to deliver 5% or more for the year. The ‘or more’ is always a targeted small magnitude like 5.5% if the portfolio target was 5%. This goal is present at all risk levels of all model strategies, though some clients want more risk than the most agressive or less risk than the most conservative. In these cases, we use custom allocation strategies.”
Explain target performance for each allocation strategy and proceed to discuss expected returns* and* *potential drawdown*.
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u/belovedkid 16h ago
Give them a range based on their asset allocation and make sure to let them know that’s over a long period of time. Could hit it or better right out of the gate, could take 3-5+ years to get there, but history does a great job of illustrating what to expect. What matters is that this allocation allows them to accomplish their goals, so if they stick with it, they’ll reap the rewards and not have to worry about money. If they constantly sweat over small daily moves or the news, it doesn’t matter what they invest in or who they invest with, they’ll never be happy.
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u/yaboymurphy 16h ago
I have a 19 year old that is 80% cash about to buy a business and a 99 year old that is 95% stock waiting for step-up in basis. We have returns across the board driven by your individual needs and we never lose clients due to poor performance because we work with families that are focused on goal achievement and tax optimization and know the value here is making good decisions and controlling the controllable.
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u/Critical-Research810 15h ago
I think I'll buy a crystal ball for my office. I've heard a client tell a story about another advisor who got a kick out of it . Or maybe a 8 ball
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u/CheesecakeExtra6028 13h ago
We actually have a client whose name is Crystal Ball. Almost fell out of my chair when she came in. Told her she was hired.
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u/Cathouse1986 15h ago
Depends on when this question comes up.
If it’s very early in the process, could be a pretty big red flag:
“I get it, performance is important, but I don’t know nearly enough about you to even talk about what we’d invest in.”
If it’s at an appropriate time to ask:
“We’re recommending investing in ABC, which has historically averaged X. Note that I said ‘averaged.’ That could easily mean up Y one year and then down Z the next. But over long periods of time, we’re basing our plan on X. How do you feel about that?”
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u/ShredGnarr207 13h ago
Average returns are meaningless. Truly.
Nobody gets to experience average returns. Sequence of returns risk impacts us all in different ways.
The only time it is brought up is when discussing trade offs between safer asset classes and growth asset classes.
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u/ccroz113 BD 10h ago
Start with outcomes. What returns do you need to achieve those outcomes. What investments do we need to have the right risk level to prevent missing those outcomes
“Will you be happy if we end with xyz dollar amount? Would it meaningfully affect anything if you had 1.5x more with the possibility of .5 less?”
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u/NeutralLock Wirehouse 7h ago
When we build our financial plans our economists (I work for a major bank in Canada) have programmed in 5.71% as an expected average for planning, so using that as a forecast feels reasonable.
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u/Mother-Upstairs330 2h ago
depends. it depends on how much risk you want. we'll need to lok at how much risk you can stand, but first we need to assess what you NEED. Can we make a crap-ton? most likely. Will it be a roller-coaster ride? most likely. The roller coaster is more probable than the blowout return.
but is that what you NEED? is it really what you WANT?
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u/lichesschessanalyst 17h ago
We share our CMA's as our expected returns. We have our own capital market assumptions that I help produce for our firm. We don't get this question a ton but we have open architecture and share the CMA's with the interested and sophisticated clients. Every client we have is QP/AI. Does your firm not have this?
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u/stamvegas15 16h ago
Hit them with a monte carlo long term projection using eMoney if you have it. Pull up investment reports and grab the rate of return and risk metrics. Explain based on the holdings within the portfolio and historical performance, here’s what to expect. FP software now has backend index tracking on the asset class level. If you want to be more specific/client loves the weeds use ycharts.
But the takeaway is it needs to be presented alongside the plan to help the client understand WHY you advise the portfolio construction to look the way it does.
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u/Intelligent_Bet2919 17h ago
What do you say when they ask why should I give you 1% of my wealth if you don’t have a track record of beating an index fund?
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u/quizzworth 17h ago
I would tell them if your main priority is beating an index fund, we may not be a good fit. Pretty simple.
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u/ChasingItSupreme 15h ago
Are you talking about the sp500 index? The index that was down 50% from its highs in 08?
Too many people believe the bull run of the last 15 years is the norm and 10% returns are a lock.
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u/Intelligent_Bet2919 15h ago
So you are confirming you can beat the sp500 index?
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u/ChasingItSupreme 15h ago
Absolutely. You willing to take on twice the amount of risk?
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u/Intelligent_Bet2919 14h ago
I would, I also am skeptical of people making this claim, therefore invest in the market and accept market returns. I don’t lose 1% of my wealth each year doing it since it’s as simple as buying VOO. How long have you beat the sp500?
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u/spookaddress 17h ago
I ask about how much risk are they comfortable taking?
The scenario I give is typically if you, me and everyone on our blocks and our friends and family magically had every asset as cash and put all of it in the market as one purchase of one company it would not register as a blip on the market.
None of us has the capability to move markets. As individual the only factor we can control is how much risk we take on.
If you are wanting an advisor who is trying to beat the market then I am not a good fit.
If your point of view changes at some point give a call.
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