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Focus Sessions: Practice Management
How to Convert Client Anxiety About
Risk into Business-Building Strategies
Michael T. Carpenter
Welcome and congratulations on your decision to attend
this Focus Session on risk, risk management, and how to
convert client anxiety and concerns about risk into powerful
business-building forces.
Since risk is often seen as complex and highly quantitative, and a not very pleasant, fun, or exciting subject area,
most people prefer not to spend much time thinking about
it. However, anyone not thinking about risk does so at great
peril. Not addressing risk and how to manage it effectively
will condemn them to a life in which risk controls them
rather than they control risk. So congratulations on joining us today. Being here is a testament to your appreciation
of the importance of gaining knowledge in this increasingly
important subject area as well as of the many benefits of investing your time, attention, and energy in understanding
and managing risks better.
Count the Fs
To begin, let’s take less than a minute for a brief, fun, and
enlightening exercise. It’s called “Count the Fs.” Let me share
with you how this short-timed exercise will work. First, you’ll
need to have a pencil or pen in your hand and a piece of paper
to write on. Everyone ready?
Shortly, I’ll place a slide on the screen that has a title and
a brief three-line sentence. Once I do, you’ll have 15 seconds
to read the three-line sentence on the slide and count the
number of times the letter F appears in the sentence. Please
do not count the Fs in the title above the sentence. Only
count the Fs in the sentence itself. Once I say to stop at the
end of 15 seconds, I’ll switch the slide off and ask you to
write the number of Fs you counted on the sheet below the
sentence. Then we’ll discuss it. Everyone have your writing
instrument and paper ready?
Great. Here’s the slide. Begin. Now stop and write the
number of Fs you counted below the sentence. [visual]
Okay, we’re now ready to review the results. How many
of you counted three Fs? How many four Fs? How many
five Fs? How many six Fs? The fact that there are actually six
Fs, when so many attendees counted only three Fs, usually
shocks and surprises those who did not count all six of the Fs
that are in the sentence; they were right in front of their own
eyes but were overlooked.
This exercise is a wonderful example of how easy it is to
overlook something right in front of our own eyes. This exercise is also a very simple example of just one of our many
hardwired brain bugs, a sample of how many people can
easily overlook obvious business-building opportunities and
how many people can miss seeing risks that are right in front
of them.
That’s why, in spite of the enormous uncertainty, anxiety,
and concern about risk that exist in all parts of the world,
very few professionals see the incredible opportunity in helping people meet their needs to better understand and manage risk in a holistic, user friendly, and empowering way.
A Perfect Business-Building Initiative
Before we get into the subject, I’d like to ask your help with
a simple but very important exercise, one that will help focus
our discussion and get your mental machinery warmed up. If
you could design the “Perfect Business-Building Initiative,”
which would help you do an even better job for your clients, leapfrog ahead of your biggest competitor, attract new
Michael T. Carpenter
Carpenter is a thought leader, consultant, speaker and author of the globally published book The RiskWise Investor: How to Better Understand and Manage Risk. His Risk-Wise method can demystify risk
and reduce the likelihood and impact of painful, negative surprises for businesspeople, professionals
and investors. He started his career as a financial advisor and advanced to regional- and national-level
positions with PaineWebber. Carpenter then led national distribution teams for John Hancock Funds,
Transamerica/IDEX, MFS, and Rydex before starting his own consulting firm in 2003.
Carpenter Associates
P.O. Box 306, Concord, MA 01742
phone: +1 978.369.5711 email: mike@riskwiseinvestor.com
Order a copy of the presentation on www.mdrtpowercenter.org: MP3: MP1235 CD: C1235
Annual Meeting Proceedings | 2012
©Million Dollar Round Table
How to Convert Client Anxiety About Risk into Business-Building Strategies
business more easily, and take you to new levels of personal,
professional, and financial success, what characteristics would
such a perfect business-building initiative have?
The Perfect Business-Building Initiative would offer:
1. A totally new, different service
2.A way to meet an enormous and growing unmet
worldwide need
3.A unique competitive advantage that helps you stand
out from the competition and establishes you as
thought leader and go-to resource
4. The ability to attract increased demand for your products and services in a new way, one that neutralizes
your competition
5.Improved impact and effectiveness of your existing
sales and marketing resources
6.A long and effectively limitless shelf life
7. The ability to build client trust and confidence more
quickly and easily
8.Another source of revenue and income that enhances
your existing business
9. A proven way to become a high-net-worth client magnet
10. The ability to gain the respect and support of centers of
influence
11.Easy to implement into your practice
12. A way to have increasing uncertainty and the accelerating pace of change to help your business grow rather
than frustrate it
That’s a pretty powerful set of characteristics. Do you
think a business-building program that had those characteristics would help your business? Given the reality that there
are no perfect business-building programs, what we’ll be
reviewing over the next hour comes closer to meeting those
characteristics than any business-building initiative I’ve seen
in my many decades of financial services sales and marketing
experience.
The phenomenal opportunity I’m taking about is positioning yourself as the go-to resource in helping people everywhere meet the enormous and growing worldwide need
to better understand and more effectively manage the uncertainty and risks of our rapidly changing and increasingly less
certain world.
Slightly repositioning your business in this way will open
up a treasure trove of additional business opportunities, increase the likelihood of your clients reaching their objectives,
and help you to stand out above the competition and do a
great deal more insurance and other business as a side benefit.
Of course, to help our clients and prospective clients better understand and manage risk, we must first understand
risk and how to manage it effectively ourselves, and then we
can help our clients do it. So let’s now focus on how to understand risk better, how to manage it effectively, and finally,
how to integrate risk education and risk management planning into our business.
Understanding Risk
First, let me ask you: Is the world getting riskier, or is it getting safer? Actually the world is getting both safer and riskier
at the same time. Some risks that we’ve lived with for a long
time are getting safer because the more we’ve lived with them,
the better we understand and control them and have learned
how to minimize their negative aspects. Some examples include quality of life, life expectancy and longevity through
improvements in health care (medicine/surgery/pharmaceuticals), commercial aviation, fire protection, auto safety, and
the dangers of pollution.
However, our world is also riskier in other areas. As our
world progresses and changes, new risks, rare risks, unexpected risks, and unintended consequences appear that
we’ve never seen or dealt with before, for instance, space junk
falling from the sky, the Three Mile Island and Chernobyl
accidents, the BP oil spill, the mortgage meltdown/financial
crisis, 9/11 (terrorism), the Japanese tsunami/Fukushima nuclear disaster, computer viruses and worms, botnets, cyberwarfare, entire cell phone/computer networks that go down
without notice, paperless banking, and cloud computing.
Things that aren’t supposed to happen are happening
more and more frequently. They pop up, out of the blue,
and shock, surprise, and concern us. Because of their ferocity
and devastating effect, coupled with the fact that we didn’t
know they were risks in the first place and have no idea how
to deal with them, they generate increased anxiety, fear, and
even panic.
So the risks we face are both increasing and decreasing at
the same time.
What Causes Risk?
Another basic question about risk is, what creates, drives, or
causes it?
Rapid Change
What generates risk is any situation that begins changing rapidly. The faster and more violently it changes, the greater the
risks it generates.
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We find rapid change unpleasant and unsettling because it
increases our uncertainty, and we don’t like too much uncertainty, although we do like predictability with a little bit
of change thrown in (because otherwise things can get too
boring and uninteresting). However, we don’t like too much
change too quickly and tend to resist it.
(with the exception of the Dark Ages), and it is most likely to
continue. The only difference is that we’ve now entered into
the exponential phase of the pace of change curve.
Let me give you just a few examples of how the pace of
change is accelerating:
• China will soon be the largest English-speaking country
in the world.
• The 25 percent of India’s population with the highest IQ
is larger than the total U.S. population. (India has more
honors students than the U.S. has children.)
• The top 10 in-demand jobs in 2008 did not even exist in
2004.
• The U.S. Department of Labor estimates that today’s
learners will have 10 to 14 jobs by the age of 38.
• One of four workers has been with his or her current employer less than one year (for one of two workers, it is less
than five years).
• There are more than 36 billion searches on Google every
month. In 2006 this number was 2.7 billion. To whom
were these questions being addressed before Google?
• These are the years it took to reach a market audience of
50 million: for radio, 38 years; for TV, 13 years; for the
Internet, 4 years; for the iPod, 3 years; for Facebook, 2
years.
• A single week of The New York Times contains more information than a person was likely to come across in a
lifetime during the eighteenth century.
• By 2014 a computer will be built that exceeds the computational capability of the human brain.
• Predictions are that by 2046 a $1,000 computer will exceed the computational capabilities of the entire human
species. (What implications for changing our lives that
will have can only be imagined.)
We have breached a critical “inflection point” relative
to the pace of change and the risks it will generate. With
the increasing speed of change, our old traditional ways of
dealing with risk passively, reactively, and situationally are
ineffective and no longer work in our rapidly changing, less
certain world. To gain control over risks, we must face risks
directly, proactively, and comprehensively; otherwise, risks
will control us.
Given That Fact, What Do You Believe Is Going to Happen to the
Who’s Your Client’s Chief Risk Officer?
Pace of Change in the Future?
In the last dozen years, virtually every large enterprise in the
world has recognized the vital need to be much more proactive in managing the increasing risks associates with rapid
change. As a result they’ve created a new C-suite executive-
Is the World Really Changing That Rapidly Today?
Absolutely. We now live in the most rapidly changing period
in human history. Many people see the world as analogous to
an unguided missile, shooting off into the future with more
speed than control. Rapid change is taking place in every aspect of our lives, from technology and communications to
medicine and health care, and from social norms, what composes a family, our definition of gender and gender roles, the
role of government, the shifting of geopolitical power from
the West to the East, globalization, the rising influence of the
developing countries, accelerating globalization and the increasing interconnectedness of everyone and everything, the
food we eat and where and how we eat, to the environment,
where and how we work and retire, and even how we spend
our golden years. There isn’t a subject, discipline, field, or person that isn’t affected by rapid change.
In fact, when I was in college, one of my history professors mentioned that in ancient China one of the worst
curses you could inflict on anyone was to say, “May you live
interesting times.” That was because the normal, highly predictable lives of the people in those times changed very little
from day to day, season to season, year to year. Their lives
got interesting when there were unpleasant changes generated by famine, invasions, disease, or natural disasters that
complicated their lives.
Change is rampant today and accelerating everywhere, in
everything, and affecting everyone simultaneously. That increasing rate of change has profound implications, including
the fact that it creates increased uncertainty and volatility,
plus more and bigger risks and more and bigger opportunities hurtling toward us faster and faster. Have you noticed
that things that aren’t supposed to happen are happening
more and more frequently?
How Do We Human Beings Typically React to Rapid Change?
Will it continue to accelerate, moderate, slow down, or reverse? If the past is any guide, the pace of change will continue to accelerate. That’s what it’s done for the last 5,000 years
level position, reporting directly to the CEO, that has never
existed before. Joining the ranks of the chief operating officer,
chief financial officer, chief marketing officer, chief investment officer, and chief counsel is the new C-suite position of
CRO, or chief risk officer.
The CRO has the resources and enterprise-wide responsibility to identify and manage the risks facing the organization. Why? Because today even the best run and most successful companies could more and more easily fall victim to
risks that, should they occur, could literally decimate their
entire business and reputation. These entities know from experience that it is always much less costly and much more
effective to avoid or prevent risks from occurring, and to
minimize the impact of risks, than it is to clean up and attempt to recover after the damage has been done.
With major corporations and their worldwide departments addressing the need by staffing full-time CROs to
manage the risks faced by their organizations, who can individuals, families, professionals, and businesspeople seek out
to help them identify, prioritize, and manage all the risks
they face? Right now the answer is no one. That’s simultaneously a very big problem and a rapidly growing, enormous
need, but a wonderful, wide-open opportunity for you as
financial advisors to address.
How much of your day do you spend dealing with risk
in one form or another? Virtually every minute of every day.
Although it may not seem so right now, your background
gives you wonderful knowledge and an experienced foundation on which to build personalized, holistic, comprehensive
risk management planning into your practice. All you need
to do is become a little more familiar with the fundamentals
of risk, risk management, and risk management planning
and preparation.
Financial Professional “Risk-Wise” Quiz
As a first step in that process, and to serve as a discussion
outline, I’d like to invite each of you to test your financial
professional risk IQ. This is a brief, timed, nine-question,
self-graded quiz that will serve as your first step in building a
reputation as the trusted go-to resource for helping your client target market better understand and manage risk, reduce
the likelihood and impact of unpleasant negative surprises,
plus easily determine which risks to avoid, accept, and manage, or accept outright with no risk management. You’ll find
it a very helpful and enlightening exercise.
As we review the quiz slides, please number the nine
questions and write down your answer for each one. Plan on
spending no more than 20 seconds on each question. We’ll
then discuss each question once you’ve had the chance to
record your answer. Ready?
The Financial Professional “Risk-Wise” Quiz
Test your personal “Risk-Wise” IQ. Please write your answers below each question.
1. What is your definition of risk?
2.Risk and reward are equally balanced.
____ True_____ False
3. What is the primary objective of investment management?
4. Name the two basic approaches or schools of risk management.
and
Which one is best?
5. What are the three basic types or states of risk?
6.Where does the primary work of risk management take
place?
7.Year in and year out, which profession is consistently
ranked worldwide as the most trustworthy?
Why?
8.What is the probability of a major, gut-wrenching, surprise stock market decline of 4,000 points or more (30 percent plus) in the DJIA within the next four to six years?
9.A proven method for turning risks into inconveniences,
and even opportunities, is what?
How did you do? Do any of you feel like you got a score
of 100 percent? Did you find it easy to complete or challenging? Don’t feel bad. I began my research into risk and
risk management because I felt that as a financial professional I should know a great deal more about the subject
than I did. When I began my quest, I couldn’t easily or
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confidently answer any of those questions. However, knowing and applying the answers can help you become a more
confident, professional, and successful financial CRO and
meet the enormous and growing worldwide need of people
everywhere to better understand and manage rapid change,
uncertainty, anxiety, and concerns about risk.
Let’s review the quiz answers together.
1. What is your definition of risk?
Most people don’t think about risk very much and have to
struggle to define it. When they do articulate a definition,
they generally define risk as the loss of something; something
bad happening; falling short of an objective; or, in the investment world, as unexpected volatility, standard deviation, or a
hazard or a threat. However, those are the results or secondary or even tertiary consequences of a risk occurring, not the
risk itself. Defining risk by its consequences is analogous to
doctors treating the symptoms rather than the causes of disease. One of the first things that new medical students learn
is to use symptoms as clues in helping to identify the cause,
rather than to treat the cause. If only symptoms are treated,
the patient is never going to be cured. It’s the exact same
thing with risk.
Defining risk as “the degree to which an outcome varies
from what you expected” is empowering because we have a
great deal of control over our expectations (both good and
bad), and the more realistic our range of expectations, the
easier it is to identify and prioritize the potential risk we face
and then determine which risks we want to avoid, accept,
and manage, or accept without risk management.
Why is it important to have a well-thought-out definition of risk? Because how you define anything is the
frame through which you view it. The definition you use
can either complicate or frustrate your understanding and
how to deal with your subject, or it can be empowering
and make understanding the fundamental nature of your
subject easier.
When it comes to risk, the basic definition you use is
the critical foundation on which your entire risk management approach will be built. With a strong and solid
foundation, what you build will make your risk management job easier and more effective, serve you better, and
stand the test of time. With a weak or inferior foundation,
even the grandest, most sophisticated risk management
methodologies will not work and will lead to frustration,
disappointment, and unnecessary loss. Now, you may believe that I’m making a big deal out of something quite
minor. Just think a moment, however, about how the old,
inferior, pre-Galileo celestial mechanics’ definition of
the universe revolving around Earth would have greatly
frustrated mankind’s space exploration efforts, about how
the assumption of a flat Earth stifled global exploration
for centuries, or even the common belief for thousands of
years that humans were not meant to fly and never would.
Your basic definition determines how you look at a question and is the first step to ultimate success. The frame
through which you view your challenge can either complicate your efforts and restrict your success or empower and
facilitate your efforts. Using the right definition is, in fact,
very, very important.
Although initially the simple definition of risk being
“the degree to which an outcome varies from expectation”
may not seem particularly profound, it is outstanding when
you consider its far-reaching implications. It’s tremendously
empowering because, although we have little to no control
over the future, we alone determine our own expectations of
potential outcomes based on our knowledge, understanding,
and preparation.
• Our expectation of the possibilities is under our full control, which is not the case when we abdicate control to
totally random occurrences or use definitions that are actually the result of risk rather than the risk itself.
• The greatest impact typically comes from those risks we
don’t expect, haven’t considered, or aren’t prepared for.
• This definition encourages us to think through the full
range of possibilities, both expected and unexpected,
while recognizing how surprises happen all the time.
• We have total control over our expectations and full responsibility for them.
• More realistic expectations lead directly to better and
more effective risk decision making and risk management.
• We have the power to ignore, accept, or prepare for what
we expect.
• Finally, it gives us the flexibility to deal with both negative and positive variations from expectation.
2. Risk and reward are equally balanced. True or false?
The correct answer is both true and false because risk is under
your control. Risk and reward are equally balanced only if
all things are equal and one has no knowledge or experience
dealing with a risk. However, with knowledge, understanding, and experience with that risk, plus thorough preparation,
we each can tilt the risk/reward equation in our favor and
pursue greater rewards with less risk.
3. What is the primary objective of investment
management?
According to institutional guru, thought leader, expert consultant, member of the Board of Harvard Business School,
and author Charles Ellis, risk management is the primary objective of investment management because investing has transitioned from being a winner’s game, in which you win by
spending more time, energy, and effort to uncover opportunities, to a loser’s game, such as in golf or tennis, in which you
win by making the fewest mistakes. When you are competing
with almost limitless time, money, and people resources and
are committed to finding the best opportunities, it is easy to
get caught up in the futile effort of chasing the best returns.
As Donald Trump has said, if you focus on protecting the
downside, the upside takes care of itself. The medical profession also embraced this same objective thousands of years ago
with its commitment to “First, do no harm.”
4. Name the two basic approaches or schools of risk
management.
There are two basic approaches or schools of risk management: The quantitative method is based on the concept that
the best way to predict and gain insights on the future is to
measure and quantify relationships of the past. It is based
on probability and statistics that were developed more than
two centuries ago as a way to improve the odds of gambling.
In order to make the numbers work, several assumptions
must be made: (a) Markets are efficient; (b) investors are
rational; and (c) price changes adhere to a normal bell curve
distribution. This school of risk management works well in
mild risk environments, but does not work at all in wild risk
environments.
The other risk management method is the qualitative, or
subjective, method. It’s proved its effectiveness for thousands
of years. Its proponents maintain that the best way to manage future risks is, rather than relying solely on quantitative
relationships of the past during the most rapidly changing
period in history, to use knowledge, experience, and insights
into the ever-changing environment in making subjective
judgments about a subjective future.
Even the great mathematician and physicist Albert
Einstein said, “Not everything that counts can be counted,
and not everything that can be counted counts.”
Which one is best? Using both can be most useful, as long
as you recognize their respective strengths and weaknesses.
Given that the quantitative method works best in mild risk
environments and poorly in wild risk situations, and that
the qualitative method works well in wild risk environments,
the best alternative would be to use a combination of the
two methods. Their respective strengths and weaknesses can
then complement one another and deliver a better overall
result in both the wild and the mild risk environment we
experience in the real world.
5. What are the three basic types or states of risk?
The complex and multifaceted subject of risk can be made
much easier to understand by looking at risk the same way
that physical scientists look at matter in the universe. The
enormous variety of matter in the universe seemed very complex and confusing until we discovered that matter has three
basic forms: solids, liquids, and gasses. They are the basic
forms of matter. Just as understanding that water as ice has
very different physical properties than water as a liquid or water as a gas, but it’s still water, risk has three states, presented
below, that all behave differently:
Type 1, Mild Risk—No big surprises, low variability, normal bell curve distribution, statistically based modern finance
theory assumes only mild risk.
Type 2, Wild Risk—Irregular, unpredictable, outside the
norm, limitless, frighteningly fast, fluid from one value to the
next (see data below):
Price Changes in DJIA, 1916–2003 (88 years = 22,0000 days)
Daily Move
Bell Curve Theory
Reality
>3.4%
58 days
1,001
>4.5%
6 days
366
>7.0%
1 day every 300,00 years
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-21% (Oct. 19,1987)
1 in 10
(it should never happen)
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Source: Benoit Mandelbrot, The (Mis)behavior of Markets (New York: Basic
Books, 2004).
Type 3, Slow Risk—Slow, hard to identify, builds slowly over
time, why we need maintenance and need to put energy into
systems (order to disorder)
6. Where does the primary work of risk management take
place?
The human brain, with its limbic system and neocortex, is
programmed to fear first and think later. Our animal brain
can and often does hijack and overpower our logical, thinking brain when we feel threatened or are under stress. Erich
Maria Remarque observed this in his 1929 novel All Quiet on
the Western Front, which is about the extreme stress of soldiers
fighting during World War I:
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By the animal instinct that is awakened in us we
are led and protected. It is not conscious; it is
far quicker, much more sure, less fallible, than
consciousness.
The premier risk management system in the world is the
human brain. Our brain’s limbic system has been hardwired
over hundreds of thousands of years to be an outstanding
risk management system that also has the ability to learn
and adapt to new situations, threats, and environments. Our
risk management system is hardwired to fear first and think
second. Our emotional animal brain can easily hijack and at
least temporarily take control of our logical, thinking brain.
That’s why it’s so important to understand that the primary
work of investment risk management must take place in our
brain before it’s implemented at asset allocation and then
the portfolio level. Doing the opposite makes it much easier
for the emotional brain’s freeze-flight-fight programming to
take over and discard portfolio-level risk management at the
first sign of a perceived threat.
7. Year in and year out, which profession is consistently
ranked worldwide as the most trustworthy? Why?
Physicians. Why? The way they talk about risk with their patients. Over many years of surveys taken all over the world,
one group of professionals has consistently been ranked as
the most worthy of trust, and that is physicians. Why is it
that doctors are continually viewed as so trustworthy? They
certainly have rigorous training, accreditation standards, licensing requirements, continuing education requirements,
and strict codes of conduct and ethics, yet other professions
have those as well. Their nicely starched white coats also give
them an additional air of credibility. What is it that makes
them so much more trustworthy than other professionals?
After thinking about it for a long time, my conviction is that
doctors’ reputation for trustworthiness is the direct result of
how they talk about risk with their patients. Since trust is
the basis of financial advice, we can learn a great deal about
how to build trust from doctors. They build trust by talking
about the rewards and the risk of their recommendations in a
brutally frank, detailed, full-disclosure, and transparent way.
With the objective of helping their patients make the best
fully informed risk/reward decisions for themselves, under
a great deal of uncertainty, physicians share the potential
benefits of their professional recommendations, and the potential risks, and then leave it up to their patients to decide
how they want to proceed. Once the patient has decided on a
certain path, the doctor then respects and supports each patient’s decision. Rather than being put off by doctors’ frank
discussion of risks and side-effects, their frankness in sharing
even potentially life-threatening risks make us respect them
even more. How would you feel about a doctor who told you
that the open-heart surgery he recommended for you was a
“piece of cake” and nothing to be concerned about? You’d
likely want to run the other way and find another doctor.
As a result, my recommendation to you is talk about risk
with your clients the same way doctors talk about risk. You
are a financial professional and an expert in dealing with
many kinds of risks, financial and otherwise. You can build
credibility and trust more quickly by sharing your insights
and helping your clients make well-informed, knowledgebased risk/reward decisions built on a foundation of full disclosure and transparency. Help your clients and prospective
clients reach their financial goals, and identify, understand,
plan for, and manage the risks they’ll face along the way. By
doing so you’ll soon become so respected and trusted that
your clients will enthusiastically recommend you to their
friends, associates, and centers of influence who need help
in finding a go-to resource to help them better understand
and manage the risks of our increasingly less certain world.
8. What is the probability of a major, gut-wrenching,
surprise stock market decline of 4,000 points or more (30
percent plus) in the DJIA within the next four to six years?
The vast majority of people I speak with and ask this question
of respond with a percentage guesstimate of between 60 percent and 90 percent. Although you can spend a great deal of
time and money in an effort to analyze this question in detail,
the market track record has demonstrated over and over again
that major gut-wrenching declines occur about every four to
five years. We know they’re going to happen, but we just don’t
know when or why. So instead of worrying about the probability, do what the best risk managers do, and although no
one knows when it will happen, assume a major market collapse is virtually certain and build that assumption into your
plans. Then decide in advance what you’ll do.
You may decide to ride it out, or you may decide to hedge
your downside, move into a defensive position, reduce your
equity exposure, and raise some cash. You may also want
to consider using your dividend or interest income to build
cash in a special opportunity fund that you can use to buy
the stocks of firms you like at bargain-basement prices when
the market is oversold, thereby lowering your overall cost basis. If you were a sailor crossing the open ocean, you wouldn’t
set sail hoping not to run into a storm. Instead, plan for and
prepare to run into a storm so that when you do, you’ll be
ready. Then if you don’t hit stormy seas, it’ll be a pleasant
surprise and an even better journey. Count on it and plan for
it—don’t be afraid of it.
9. A proven method for turning risks into inconveniences,
and even opportunities, is what?
More than 150 year ago the great American thinker, writer,
and author Ralph Waldo Emerson observed that “Knowledge
is the antidote to fear.” It’s clear that the risks we’ve identified
and fully understand and are thoroughly prepared for, with
very few exceptions, can neither scare nor harm us. Identifying, understanding, and preparing for and managing risks
make it possible to convert risks that do occur from becoming potential nightmares and into only inconveniences and
even potential opportunities.
One wonderful example of this method for converting
a risk that occurs into an inconvenience is the January 15,
2009, incident known as “the miracle on the Hudson.” As
a result of the professionalism of Capt. “Sully” Sullenberger
and his crew, the engineers who designed and built Capt.
Sullenberger’s A320 Airbus, and the training of the emergency responders, a potential disaster was converted into an
inconvenience.
Now that you have completed the Risk-Wise IQ Quiz, do
you look at risk any differently? How?
Next let’s review how to put these insights and information to work in attracting more clients and doing more
business:
1.Become familiar with the Risk-Wise personal risk
management planning process, which we’ll review in
a few moments.
2. Become a student of risk and user-friendly, nontechnical risk management. Educate yourself and share what
you learn with your clients.
3. Differentiate yourself by offering holistic, comprehensive risk management planning, and ongoing reviewing and monitoring as a complement to your financial
planning, investment, insurance, and other services.
It’s very easy to get started. Just end all your client and prospect conversations and calls, even if your clients have called
you, by asking them how they feel about all the uncertainty and
risks in the world today. Then ask what plans they have in place
to manage the risks they face and how they determine which
risks they should avoid entirely, which to accept and manage,
and which to accept outright, with no risk management.
Since the vast majority of people have no risk management plan, or even any idea of how to create one, it’s a wonderful opportunity for you to ask if they’d like your help
in creating a comprehensive, holistic, and personalized RiskWise risk management plan. A personal risk management
plan can help them reduce the likelihood and the impact of
unpleasant negative surprises and convert risks that do occur from potential nightmares into inconveniences and even
potential opportunities.
With all of the uncertainty in the world today, major
corporations are installing chief risk officers to address and
manage the risks they face. Ask your client, “Who is your
personal chief risk officer?” If they don’t have one, let them
know you’d like to meet with them and apply for the job.
There’s only upside and no downside in offering such a service. Even if clients decide not to create a risk management
plan with you, every time that concerns about uncertainty
and risk raise their heads (which they surely will), those clients will be motivated to give you a call.
Now let’s circle back and review the basic steps in creating a personalized, comprehensive Risk-Wise risk management plan.
Would you each consider yourself a “master of risk management”? Most people answer, no way. Well, believe it or
not, you are. If you are a healthy adult human being, walking
around normally day to day, you are a master at managing
everyday life risks. You were born with ingrained hardwired
risk management skills that over time have been enhanced by
learning from others, including your parents. You learned a
great deal watching and learning from others. In some cases
you even learned about risk the hard way and may even still
carry scars from those painful lessons. You survived the dangerous teen years when judgment flaws may have felled some
of your peers. You passed into adulthood gradually gaining
valuable additional life risk management skills.
So you are a master of life risk management, not perfect
by any means, but very effective at managing everyday life
risks. You’ve done it so long that you’ve actually internalized
your risk management process to the point that when asked,
you, like most adults, can’t articulate the risk management
process you follow. Adults typically respond that they don’t
have a conscious process, that they just “do it.” What they
don’t realize is that they actually have a process, although
they’ve internalized it so much that it’s become automatic
and they don’t have to remember it.
The Risk-Wise risk management process is based on the
same steps we use in our very effective, natural “life-risk”
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risk management. By reconnecting with the steps in our life
risk management process and using those same proven steps
to manage other risks, we can become just as comfortable
and just as successful and confident at managing any risk as
we are at managing general life risks.
So what are the steps in the life risk management process
and user-friendly, nontechnical Risk-Wise risk management
planning and decision-making process?
Implementing Risk-Wise Personal Risk
Management Planning
Preliminary Actions
First, let your all clients and prospects know that what makes
you different is that you offer holistic, risk management planning services in addition to insurance and financial planning,
investment management, and retirement planning services.
In other words, you help people reach their financial objectives and reduce both the likelihood and the impact of all
types of nightmares and painful negative surprises along the
way. Then review the many benefits of personalized risk management planning and ask them if they’d like to have you
complete one for them.
Potential Benefits of Effective Risk Management Planning
• Better knowledge and understanding of risk, risk management, and oneself
• Practical, knowledge-based, risk/reward decision making
• Minimized negative surprises and potential missteps
• Less adverse impact when risks do materialize
• Improved likelihood of achieving investment/business/
individual goals
• Less emotional, more realistic, and confident investor/
businessperson
• Peace of mind from having a comprehensive risk management plan in place
Personalized, Comprehensive Risk Management Planning
Steps
Personal Risk Assessment
Define risk. Gain client agreement to use the empowering
definition of risk introduced earlier.
Identify risks. Identify and build a list of the risks that each
client is personally concerned about or should be concerned
about, both positive and negative. Remember to focus on the
risks themselves, not on just the results or effects of the risk
occurring. The critical step of identifying risk is made much
easier by first becoming familiar with the two major high-
est level categories of risk and then identifying the risks each
individual will face in each respective category. What are the
two major highest level categories of risk?
1. External risks (risks presented by the outside world)
• accidents
• crisis events (natural and manmade)
• economic upheavals
• Black Swan events
2.Internal risks (risks within ourselves)
• decision-making risks
• pattern finding in randomness
• misperceptions/incorrect information/assumptions
• overconfidence
• biases
• emotions hijacking logic
We’ve had a great deal of first-hand experience dealing
with external risks during the last few years. Let me take a
moment to share an example of one of the most important
yet least recognized internal risks that needs to be identified,
addressed, and managed. The “Risk Perception/Risk Reality
Gap” is where we humans perceive risks to be much greater
than they actually are, causing us to overreact or become
overconfident and make painful judgment errors.
Our human perception of risks and threats may vary
widely. We frequently perceive risks to be much greater than
reality and also perceive many risks to be much less that
what they actually are. Understanding and recognizing this
risk perception reality gap is very important when dealing
with real risks. Being familiar with these perception traps
allows us to be on guard against common misperceptions of
risk that can adversely affect our ability to make real-world
risk/reward decisions. The emotion of fear, in addition to
the brain’s system that controls it, is the most understood of
any of our emotions. As a result of extensive studies around
the world and across all cultures, genders, and ages, behavioral scientists have found there are some characteristics that
universally cause humans to see risks as much greater than
reality.
Situations with the following characteristics are universally perceived to be much greater than they actually are:
• Large-scale consequences
• Those beyond our perceived control or influence
• The new, unfamiliar, or not understood
• What is not expected or occurs suddenly
How often do these characteristics occur in the investment markets? In the investment markets we can frequently
see all four of them manifest within a 24-hour period. No
wonder even experienced investors are unnerved in such situations. Including these and the other internal risks with the
external risks you identify will make your risk management
planning process much more effective.
Understand risks. Understand your personal risk exposure/
context, plus the likelihood and potential personal impact of
each risk. What characteristics of a risk must be considered
and understood to effectively manage that risk? Most of us
have become so accomplished with our own everyday, life
risk management process that we’ve internalized it and don’t
even have to think about it anymore. Therefore, it can be
very helpful to refamiliarize ourselves with the basic factors
that anyone needs to consider in order to effectively manage
any risk:
• Exposure/context
• Likelihood
• Impact
• Resilience
Determine which risks to avoid, accept, and manage.
Prioritize risks by the potential personal impact, not their
likelihood. Which of these factors is most important?
• Exposure/context
• Likelihood
• Impact
• Resilience
Impact is by far the most important factor to consider
when evaluating and prioritizing risks. A very common trap
that many people fall victim to is focusing on, and giving
priority attention to, high likelihood risks and minimizing
or ignoring low probability/high-impact risks. The high
likelihood risks are always grabbing our attention, focus,
and risk management resources because they are so obvious.
However, the risks we should give top priority to managing and planning for are high-potential impact risks, even if
their likelihood is very low. The reason is that their impact
can be so potentially devastating, and they should never be
ignored because things that aren’t supposed to happen are
happening more and more frequently.
So don’t be trapped into thinking that just because the
likelihood of a high-impact risk is low it can be ignored.
Instead, it makes much more sense to accept or put up with
the many high likelihood, low-impact risks that pester us
almost daily.
A simple and easy way to prioritize risks. Here, in descending order, from the most important to the least, is an example
of how the various risk impact and risk likelihood combinations should be prioritized.
High-Impact Risks
9.High impact/high probability—These risks will happen and must be addressed as imminent, with immediate measures implemented to reduce their likelihood, limit their impact, and recover as fast as possible
after they occur.
8.High impact/moderate probability—Although the
likelihood of these risks is moderate, their high-potential impact requires measures to immediately reduce
their probability further, prepare to mitigate their impact when they occur, and recover from their effects as
soon as possible.
7.High impact/low probability—Irrespective of the
lower likelihood of these risks, their high-potential
negative impact requires the same level of preparation,
risk reduction, and risk mitigation as any high-impact
imminent risk. This type of risk may be an excellent
candidate for automated risk mitigation systems to
overcome inevitable assumptions that events of this
type are so rare that they won’t happen.
Moderate-Impact Risks
6.Moderate impact/high probability—These risks are
serious enough and happen frequently enough that
they must be addressed in any risk management effort. They are top-of-the-mind risks, as well, because
they occur so frequently.
5.Moderate impact/moderate probability—This level
of risk represents a transition point in which investors who will not be seriously impacted or can recover
quickly from moderate-impact risks may want to consider accepting these risks with little or no specific risk
management initiatives. Otherwise, implementing
risk management initiatives makes sense with these
types of risk.
4.Moderate impact/low probability. Any investor who
cannot easily tolerate a moderate-impact risk occurring should protect against this type of risk.
Low-Impact Risks
3.Low impact/high probability—If the impact of these
risks occurring will have no intermediate or longerterm effects on an investor, and they can recover from
the impact of these risks quickly, then there is little
reason to be concerned by them. There may, in fact,
be ways to convert their frequent occurrence into opportunities.
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2.Low impact/moderate probability—Because of their
low impact, these risks can be accepted by all but conservative, risk-averse investors. The occurrence of these
risks can also offer opportunities to more venturesome
investors.
1.Low impact/low probability—These risks are the
easiest to accept without any risk management initiatives because such initiatives provide little benefit
for the effort. They can best be dealt with by just
building their likelihood and impact into normal expectations.
Once risk has been prioritized in this way, it becomes easy
to determine which risks to avoid entirely (if possible), which
risks to accept and manage, and which risks to accept outright with no risk management.
Review Risk Reduction/Management Strategies Available
Analyze the pros, cons, effectiveness, and costs of risk management strategies appropriate for managing each risk, that
is, insurance, guarantees, diversification, hedging, and waiting to take advantage of market extremes of over- and undervaluation.
Evaluate Your Risk/Reward Trade-offs
Once our investment objectives are set, our risks identified
and prioritized, and our risk management strategies determined, it’s time to perform one final, pre-decision check:
• Do the potential rewards justify the risks?
• Are our risk management plans adequate and in place?
• Are we following the herd, doing what everyone else is
doing, and letting our emotions override our logic, or is
our logic managing our emotions?
If you can answer those questions properly, you’re good to
go to the next step.
Make Your Decision to Act or Not to Act—and then
Implement
By this stage your decision should be straightforward and
relatively easy. If for some reason it’s neither straightforward
nor easy, or if you’re uncomfortable about your options in
any way, it’s time to pause and give yourself more time or
more information. Always keep in mind that one of the
most basic rules of investing is to do only things you are
totally comfortable doing. Life is just too short and capital
too precious to make decisions that make you uncomfortable or keep you awake at night. So if you are uncomfortable for any reason, make an effort to identify what element
of your contemplated action is bothering you. Once you’ve
identified that element, consider the implication of just discarding it. If those implications are small or nonexistent,
how to proceed will be quite obvious. Should the implications be significant, it’s time to go back and consider other,
different, or creative solutions. Either way, you’re ahead because you’ve learned one more alternative that won’t work
for you in this situation.
Ongoing, Continuous Risk Monitoring and Decision
Making
Use risk decision-making checklists every time you consider
making a change to your plan, portfolio, or whatever, just to
confirm that you’re not increasing your risk or falling into a
decision-making trap inadvertently.
Once you make your decision to proceed and put your
plan into action, the new risk-monitoring phase begins. The
purpose of the monitoring phase is to regularly check on
your progress toward your planned goal and, if anything
goes awry, to make the adjustments necessary to get back
on course. In addition, it presents an opportunity to reconfirm that your circumstance and priorities are the same and
that no developments or risks have popped up that may require a reevaluation of your plan. For this phase to be effective, you must set up a regular, ongoing, formal monitoring
process where you can review what’s working, what’s not
working, and what adjustments need to be made to your
plan. It’s also important to be continuously on guard for
new potential risk and threats, as well as for older, more
comfortable risks that have evolved into new threats. It’s
also critical to create an ongoing, risk-managed, decisionmaking checklist.
Remember that the old adage “If you fail to plan, plan to
fail” has proved that its value in risk management is just as
critical as every other endeavor.
Wrap-Up and Closing
We’ve talked a lot about looking at risk in a new way and
understanding and managing it more effectively. Now let’s
compare the characteristics we identified at the beginning
of this talk about the enormous opportunity and numerous benefits of integrating holistic, personalized risk management education and planning services to your suite of
services.
The Perfect Business-Building Initiative would offer:
• A totally new and different service that has never been
offered before
• A way to meet an enormous and growing unmet worldwide need
• A unique competitive advantage that helps you stand out
above the competition and establishes you as thought
leader and go-to resource
• The ability to attract increased demand for your products
and services in a new way, one that neutralizes your competition
• Improved impact and effectiveness of your existing sales
and marketing resources
• Increasing the “stickiness” of existing business
• A long and effectively limitless shelf life
• Building client trust and confidence more easily and
quickly
• Another source of revenue and income that complements
your existing business
• A proven way to become a high-net-worth client business
magnet
• Gaining the respect and support of centers of influence
• Independence from increased uncertainty and economic/
market fluctuations
• A service that’s easy to implement into your practice
• A service that’s applauded by compliance professionals
and regulators
• Attracting positive press, PR, attention, and buzz
Adding comprehensive, holistic risk management planning and education services to your practice is an incredible
opportunity to convert the accelerating pace of worldwide
change and the growing anxieties, uncertainties, and concerns about the risk it generates into powerful businessbuilding forces and less stressful, happier clients.
Hopefully, you now look at risk and risk management
very differently, and you’re excited by the tremendous
business-building opportunity in becoming known as a
Risk-Wise advisor and helping to meet the enormous and
growing worldwide need of people everywhere, and to better understand and manage the risks of our increasingly less
certain world.
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Transcription

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