If someone were about to step in front of an oncoming bus, you would stop them, wouldn't you? Similarly, when clients are about to shove their retirement nest egg under a bus (in the figurative sense, of course), you feel obliged to protect them from their folly.
Here is a typical example: A couple in their early 60s comes into your office as a referral from a long-term client. The couple is about to retire and asks you to review their investments and create a portfolio that meets their two most important objectives: safety and income in retirement.
These goals make a great deal of sense for them at their stage of life, and so you are happy to oblige. Moreover, what they need done is easy for you to accomplish, because you have been creating sound retirement plans and crafting solid portfolios for years.
You discuss their risk profile, lay out your program, which everyone agrees on, and the couple goes home satisfied.
Then some time passes. The market stumbles, interest rates meander, and despite delivering what you promised — safety and income — your carefully crafted plan no longer delights your new clients.
Even worse, one of their friends happens to own an energy stock that has gone up about 20% this year, while practically everything your couple owns has gone nowhere in particular and provides nothing colorful to talk about.
The couple contacts you and wants to know why they can't own more winning stocks and get higher returns. What about selling a few of the blue chips and income-producing stocks they own, or a few boring bonds, and load up on oil and gas companies?
It sounds familiar, doesn't it? And doesn't it also eerily remind you of the dot-com boom, when diversification, dividends and value were considered irrelevant?
So what do you do?
You know that giving the clients what they want could lead to retirement disaster. But if you don't do what they want, they may take their money to a compliant financial adviser who will carry out their ill-conceived wishes.
Every adviser has run into our hypothetical couple in one form or another.
Do what they suggest, and their investments may do well over the short run. But sooner or later, as in "Cinderella," the clock strikes midnight, and the beautiful coach (in this case, maybe a natural-gas company) turns back into a pumpkin.
Unfortunately, pumpkins come with lawsuits these days, and you can almost bet that your wayward clients' attorney will attempt to prove that you coerced them into buying that hot natural-gas stock when you should have kept them in the well-diversified portfolio they were in originally.
What is the best way to handle this?
From my decades as an adviser, I have found that the most important thing to remember is that in the final analysis, clients' accounts are their money. Ultimately, they are responsible for their decisions, and if they want to ignore your advice, that is their prerogative.
Therefore, if a client comes to you and wants to do something contrary to your recommendations, and thereby imperil their retirement, here is what I suggest:
• Explain the consequences of their high-risk desires. Often, people realize the wisdom of your explanation and understand that you truly do have their best interests at heart. This may convince them to stay the course and not deviate from your plan.
• If their idea is truly toxic and they can't be persuaded to change their mind, consider resigning the account and helping your client find another adviser. Yes, you will lose the business, but you will maintain peace of mind.
• If your client is still determined to have their way, and you feel you can live with their intended course of action, write a note to them explaining your advice and the reasons behind it. Ask them to sign it.
• Next, ask them to write a note to you explaining that they understand your advice and stating clearly what they want you to do for them.
• Make sure that you place the signed copies of both notes in your files and that your client has copies of both notes. If applicable, make sure your manager and your compliance department also have copies.
Every so often, clients want to veer off the course you've set for them. Sometimes you can prevent that, sometimes you can't, and sometimes you can accommodate the detour. No matter the path you take, be sure the record shows what you've done, what you recommended and how you were looking out for the bus.
Gary Wollin is a Warren E. Buffett-style investment adviser and writer based in San Francisco who has 48 years' Wall Street experience. He can be reached at garywollin.com.
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