How to discuss portfolio diversification with different types of clients

By Samantha Lamas, Senior Behavioural Researcher

For financial professionals and advisors, understanding the value of portfolio diversification is taken as a given. We know a well-diversified portfolio comprising assets with different performance characteristics can lead to better risk-adjusted returns instead of relying on a single asset class.

However, when presenting a financial plan to a new client, the advisor may say something like: “We created this diversified portfolio that puts you on track to meet your goals…” and then go on to discuss another aspect of the client’s holistic plan—completely skipping over the client’s understanding of diversification in portfolio building.

For everyday investors, portfolio diversification may seem counterintuitive because it often requires adding assets that look “bad” in the short term, with benefits that only materialize over years. Others assume the concept is simple (“don’t put your eggs in one basket”) and underestimate the complexity behind selecting uncorrelated assets. Thus, an advisor speeding past a phrase like “diversified portfolio” may be committing one of the seven advisor faux pas we identified as hurting the advisor-client relationship: using financial jargon.

Moreover, spending just a little more time on concepts like portfolio diversification can help showcase your value to clients. Our research finds that investors want more than just portfolio advice: They want a coach, teacher, and a sounding board. Advisors are uniquely positioned to play these roles for investors, and that can start by tackling concepts like portfolio diversification when needed.

Now, the question is, how?

Emphasize What Portfolio Diversification Isn’t

One of the difficulties in understanding portfolio diversification is that it sounds like a familiar concept. Everyone knows the saying, “Don’t put all your eggs in one basket.” Unfortunately, this phrase cannot be applied to every situation and, when it is, it can lead to disastrous mistakes.

In our own research, we found that when presented with three exchange-traded fund options that track the S&P 500 but have different fees, many investors choose to put some assets into each option, even the most expensive option. In the real world, a decision like this could result in a portfolio with significantly higher fees and overlapping securities since each fund followed the same index.

When discussing portfolio diversification with clients, it may be worthwhile to emphasize that this diversification is not as simple as just varying your holdings. Instead, it’s about combining assets in a portfolio that tend to behave differently, in a way that still aligns with the investor’s goals and risk profile.

Reframe Talking Points to Address Client Needs

While clarity is good, it can be easy to fall into the trap of overexplaining diversification to an investor and overwhelming them with numbers and graphs. Not only is this unnecessary and probably inefficient, but it can be harmful to the advisor-client relationship—no investor wants to leave their advisor’s office feeling confused.

Instead of throwing mountains of research at a client, advisors should customize their messaging based on their understanding of the client’s values, goals, and preferences.

A simple framework that advisors can use may look like this:

1. Give a Brief Description of Portfolio Diversification

This can be a standardized section in all your conversations and should be true to how you think about this concept. As an example, this can sound like Dan Lefkovitz’s description: Diversification means the investments in your portfolio behave differently. When one asset zigs, the others zag. When developing a diversified portfolio for you, I also take into consideration your goals, time horizon, and risk preferences.

2. Explain Why It Matters to the Client

This section should be personalized to the client. Here’s where you can emphasize specific elements of portfolio diversification that can better resonate with clients based on their personal characteristics and tendencies.

To add some color to this framework and help advisors use it in practice, below are a few examples of how to reframe a portfolio diversification discussion based on common investor personas.

To the Client Who Is a Constant Worrier

Every advisor has at least one client who is in a perpetual state of worry. These clients frequently ask questions like, “How will AI impact the tech sector and my portfolio?” “Will stricter tariffs continue, and how does that impact my plan?” “Will the US dollar continue to decline, and what does that mean for me?”

These are all important questions, but they are all almost impossible to answer definitively. Instead, advisors can refer back to the powers of portfolio diversification with a focus on its ability to reduce the impact of uncertainty. When talking to these clients, advisors can emphasize that portfolio diversification is a hedge against the unknown. It is impossible to know with certainty which area of the market will suffer in the future; thus, a properly diversified portfolio guards against being overly exposed to any one area that falls out of favor, whatever that area may be.

To the Client Who Is Counting Down the Days to Retirement

Other clients may not be so worried about the day-to-day, but they may be minutely focused on their goal of retirement. For these clients, explaining portfolio diversification can be a way to increase their confidence in reaching that goal. Our research indicates that what investors value most in an advice relationship is the advisor’s ability to provide peace of mind that they are on track to reach their financial goals. In this instance, discussing portfolio diversification can be seen as an opportunity to provide that reassurance and, accordingly, emphasize your ability to provide this value.

When discussing portfolio diversification with these clients, advisors can explain how portfolio diversification allows the client to have a smoother ride as they tackle their ultimate goal. Reducing exposure to any one risk smooths out the volatility the portfolio will face while still staying on track to reach the retirement goal. That means fewer dramatic portfolio swings and fewer sleepless nights.

To the Client Who Wants to Maximize Returns

Other clients may ask why you aren’t being more aggressive in your investment picks. These are investors who are more comfortable with risk and may not see the point of prioritizing risk-adjusted returns versus just plain-old returns.

Portfolio diversification discussions can be reframed in a way that addresses their desire to pursue high-return opportunities without taking on excess risk. As Morningstar researchers put it, “Holding a diversified portfolio helps investors expand the opportunity set and ensure they do not miss out on areas that can enhance long-term returns.” While diversification isn’t designed to maximize returns, it increases the chances of capturing whatever part of the market is doing well, while limiting damage from what isn’t.

Diversification Discussions Benefit Both Sides

Diversification can be abstract, but the conversation doesn’t have to be. By avoiding jargon, correcting common misconceptions, and tailoring explanations to client motivations, advisors can make diversification intuitive and meaningful while building a stronger relationship with their client.

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