How Do You Educate a Client Who's New to Investing?

How Do You Educate a Client Who's New to Investing?

To guide you in educating clients new to investing, we asked financial planners and CEOs for their expert advice. From keeping investments simple and approachable to highlighting diversification benefits, here are the top four concepts these professionals ensure their clients understand.

• Keep Investments Simple and Approachable
• Emphasize Risk Tolerance Importance
• Differentiate Stocks from Companies
• Highlight Diversification Benefits

Keep Investments Simple and Approachable

When I’m introducing someone to investing, I keep it simple and approachable. I start by covering the basics—what investing is, how it works, and why it matters—using straightforward language and avoiding jargon.

I often say, “Your investments should be boring!” It’s easy to get swept up in the excitement of trendy investments, but real success comes from a steady, long-term approach. Investing isn’t about chasing the latest hot pick; it’s about consistent growth over time.

It’s also important to understand the balance between risk and return. Higher returns usually come with higher risk, so recognizing their own risk tolerance and how it fits with their goals is crucial.

And here’s a key point: Investments are just passengers on the proverbial bus of personal financial planning, not the drivers. The real driver is a comprehensive financial strategy that includes estate planning, tax planning, risk management, cash-flow planning, retirement planning, as well as investments for future goals. Diversification is also a big part of the picture—spreading investments across different assets to manage risk and create a balanced portfolio.

By focusing on these aspects, we ensure that their investments support their overall financial plan rather than taking over the wheel.

Emphasize Risk Tolerance Importance

When I guide newcomers in investing, it’s all about stripping away the complexities and making everything transparent and understandable. A crucial concept I drive home is the importance of risk tolerance—it’s not just about what you can handle, but what you need to handle to reach your financial goals efficiently and effectively.

Differentiate Stocks from Companies

Whenever meeting with a prospective client for the first time, the main thing is to recognize he or she is motivated to meet for a particular reason. Ultimately, learning his "pinch points," or areas of focus, can allow for a more meaningful conversation. A client who is unfamiliar with investing in the stock market likely has some inhibition about investing. Gauging their foundational knowledge helps set the stage for the conversation.

Typically, someone may connote the market with "gambling" or extreme risk. When explaining our investment principles, it is key to ensure they understand that we don't invest in stocks, but rather companies. I will then walk through a few of the individual companies in our portfolio and describe the nature of their business. When they recognize a company's value add to society, they can connect their product to an end use. At the time a client recognizes the difference between stocks vs. companies, they tend to become enlightened and then encouraged to invest in quality companies.

Highlight Diversification Benefits

When educating a client who is new to investing, my approach starts with understanding their goals, risk tolerance, and financial situation. I focus on simplifying complex concepts and making sure they comprehend the foundational principles of investing. My goal is to leave them with knowledge so they can make informed decisions.

One key concept I ensure they understand is the importance of diversification. Diversification involves spreading investments across various asset classes to reduce risk. I explain that by not putting all their eggs in one basket, they can protect their portfolio from significant losses and achieve more stable long-term returns. This principle is fundamental in managing risk and building a resilient investment strategy.