If you talk with an experienced financial advisor, they will undoubtedly be able to relay stories about current and perhaps former clients whose behaviour was detrimental to their own financial health and well-being.
Try as you might, you just can’t always get a client to change their behaviour or attitudes toward money and investing even if it may be in their best interests to do so. Managing these client relationships effectively so the client can achieve their desired financial outcomes takes not only financial knowledge in these cases but also a bit of insight into the client’s thought processes as well.
Loss Aversion vs. Investment Growth
Many investors nearing or in retirement have an aversion to losing money on their investments. And rightly so. At the same time these same investors also have a need to achieve some level of growth from their investments so as to not outlive their money in retirement.
While every client is different, one technique that has worked is to use a form of the “bucket approach” to their retirement investments. By this I mean having a certain percentage, tied to a number of years’ worth of living expenses in safe, lower volatility investments (including cash) so they won’t have to go in and sell investments in the face of a falling stock market in order to fund their basic living expenses. The actual composition and percentages will vary by client situation and will take into account retirement resources such as Social Security and pensions.
Reluctance to Sell a Losing Position
Your client bought a particular stock and it’s gone nowhere but down. Now this is not necessarily the reason to sell. Reviewing the client’s overall portfolio, their financial plan and objectives and determining if there are better alternatives to this holding should drive that decision.
Clients may respond by saying they just want to hold the position until they break-even. You can show them why other investments are a better fit for them and even how realizing the loss in a taxable account can be beneficial, but sometimes logic and numbers don’t work. Frankly if the position is relatively small compared to the size of their overall portfolio this isn’t the end of the world. If the position is a significant percentage of their portfolio then it is incumbent upon you to try to convince them to reduce the size of this holding and invest those funds elsewhere.
Reluctance to Sell “Sentimental” Holdings
Often a client will inherit investments from a spouse, a parent, or loved one. It is not uncommon for them to feel a sentimental attachment to these investments. Often they will point to long-term holdings and mention that “stock XYZ always did well for mom and dad and I want to keep it for the long haul.”
Again if the position is not a significant percentage of the client’s portfolio this may be O.K. But in the event it is and additionally if there are a number of holdings evoking similar emotional attachment then as a financial advisor, it is your duty to show the client why diversifying away from some of these holdings is a good idea. This might include extra risk from concentration in just a few holdings, a focus in a particular asset class (often large-cap domestic stocks in these instances).
Investing at the Wrong Time
Often clients only want to invest when “…it feels good…” In my experience, this means after a protracted stock market recovery which is often the worst time to invest. Conversely, clients may often panic during extreme market downturns and want to abandon their long-term investment plan. As a financial advisor, it’s your job to show them the merits of sticking to the plan you’ve developed together and how investing at the wrong times due to the natural emotions of fear and greed can hurt their chances of achieving financial success.
An Indecisive Client
Sometimes even after going through the financial planning process with a financial advisor in whom the client has confidence with, they still feel uncomfortable making the decision to go ahead with the advisor’s recommendations.
This could be caused by the client’s fear of the unknown or even their fear of going in another direction. Perhaps they have worked with a commissioned-based advisor who had them in individual stocks and high-cost proprietary mutual funds. Even though the client did poorly with this advisor, entering new uncharted territory can be unsettling.
This type of client may require a bit more hand-holding and it is incumbent upon the new advisor to understand the client’s fears and to present information to them in a way that can alleviate these fears.
The Bottom Line
Helping a client achieve their financial goals is about far more than just showing them numbers or charts. The value of hiring a financial adviser is often about the advisor’s ability to coach the client through the implementation of the planning steps and to help keep them from acting in a way that is contrary to their own best interests. This requires the advisor to understand the client’s fears and what drives them so that he or she can present information and guidance in a way that will resonate with that client.