Good financial advisors work hard to provide clients with the best, most prudent investment advice. Sometimes, though, clients are intent on making investment decisions that likely will turn out bad.
Such situations put advisors in a conundrum. On the one hand, their job is to provide solid advice to clients – not to force clients to follow their every word. But no advisor wants to see their clients push their money off a cliff, either.
“Occasionally, we do have clients who say they want to cash out because they think they can get a better return somewhere else, say with bitcoin or weed stocks,” says Timothy Szeto, division director at Investors Group Financial Services Inc. in Toronto. “We always have to remind clients of the goals they set with us.”
A ‘Monte Carlo’ analysis
One way of doing this is to apply a Monte Carlo analysis to the client’s portfolio. The name may evoke images of James Bond at the casino, but it’s actually a sophisticated forecasting model used in financial planning and project management.
“[A Monte Carlo analysis] takes random samplings of the possible range of returns from an investment and lets you look at the probability that you can reach the goals you’ve set,” Mr. Szeto explains.
This approach lets the advisor offer a more reasonable prediction of how likely clients are to make or lose money on that “sure thing” investment they’ve heard about.
“It helps us take a step back with clients when we already have a relationship with them and know what their goals are,” he says. “It’s helpful in cases in which we might want to tell them that what they’re thinking of is not the wisest move.”
Sometimes, a client’s investment idea may involve investing in a foreign country, says Elena Hanson, a cross-border tax specialist at Oakville, Ont.-based Hanson Crossborder Tax Inc. However, clients need to be reminded that “what works well in one country might be a bad idea in another country – or it might even be illegal.”
When to say ‘no’
Thus, knowing when to say no to clients is also important, says Sandra Foster, president of Headspring Consulting Inc. in Toronto.
“Part of an advisor’s responsibility is to ensure that the investments traded in the client’s accounts are suitable, not just [to] go along and execute the trade. If you execute an unsuitable trade for the client, it may appear you’ve supported an inappropriate trade,” she says. “Some advisors believe they can waive this responsibility by having their client sign a waiver that states they have been informed of the risks associated with this unsolicited investment and then place the trade,” she adds. That’s not always wise though: “Before taking this approach, consult with your compliance department.”
Kathryn Del Greco, vice-president and investment advisor at TD Wealth Private Investment Advice in Toronto, says advisors should remind clients that their investment strategy is rooted in the financial plan they prepared together.
“Does what the [client] want to do fit [within the financial plan]? We [advisors should] guide their decision back to that framework,” she says.
“If a client suddenly wants to dramatically shift the asset allocation significantly, more than tactically, [which is between five and 10 per cent] based on market fear or market greed, that’s reactionary, not strategic,” Ms. Del Greco says.
Sometimes all this common sense still doesn’t matter to some clients, says Tea Nicola, co-founder and chief executive officer of Vancouver-based robo-advisor firm WealthBar Financial Services Inc.
“During the peak of the crypto-craze in 2018, we had several conversations [with clients who wanted to] pull out of their investments [and go] into cryptocurrencies. We talked about the long-term prospects of crypto investing. We showed how it looked like a typical asset bubble,” Ms. Nicola says.
“For the investors who were absolutely dead-set on putting money into cryptos, we advised them to treat it like gambling, where you could lose absolutely everything you put into it,” she says. “We said, ‘Don’t gamble with more than five per cent of your money.’ We talked the majority of those people off the ledge.”
Ending a relationship
Dealing with clients who are determined to make wrongheaded decisions is especially problematic for newer advisors who are just starting out, says Markus Muhs, investment advisor and portfolio manager at Canaccord Genuity Wealth Management in Edmonton.
“When you’re struggling to build a business, you’ll take anyone who can fog a mirror as a client – and sometimes that includes people who don’t want to follow [your] advice,” he says. “Early on, the inclination is to go along and execute [the trade], while [putting a] memo [in] the client’s file that they were advised against this so as not to anger or lose them.”
However, Mr. Muhs advises not to be afraid to break up that relationship if it poses too much of a risk.
“If a client is making a truly bad decision and the client still won’t listen, then both the advisor and the client need to question whether the relationship should continue,” Mr. Muhs says. “It shouldn’t be difficult for the advisor to sever the relationship politely and cordially.”