Words are powerful. So much so that simple utterings can have a profound impact on generations and shape retirement in ways both good and bad. Two such challenging words that advisors hear from clients are “never” and “always.” Both expressions have found their way into many great quotes, movies and song titles, but are particularly powerful when incorporated in someone’s retirement plan. While these infinite terms are often used to protect and arm, they often result in a letdown and hold people hostage.
My first advisor experience with the term “never” came when I met a widow who was stressed over her life savings. As I reviewed her portfolio, my first thought was that the advisor who set up this portfolio was definitely behind the times. She held several companies that were at one time valuable franchises, but over the years, had succumbed to competition and changes in technology.
That’s when I discovered that her deceased husband had built the portfolio himself, based on companies he had either worked for or with which he had some affiliation. I was glad I hadn’t verbalized my initial thoughts, but knew I faced a big challenge when she told me that prior to her husband’s death, he had instructed her, “Never sell these companies.” It wasn’t his last breath or dying wish; it was simply his best investment advice before he passed away. During the 10 years since his passing, the companies saw several dividend cuts as well as slow but steady declines in share prices; meanwhile, her everyday expenses had definitely become a cause for concern.
Unfortunately, there are no financial ratios like P/Es or ROIs that can be quickly and easily applied to a sentimental valuation like this. From a purely financial perspective, the companies were absolute dogs that I would have liquidated in a heartbeat. However, the most critical component of a sentimental valuation is not what’s on paper but what’s in the client's heart and mind. In her eyes, liquidating those companies meant betraying her husband and his role in their relationship.
For advisors trying to unwind a “never” conversation, it’s important to start the process by separating an investment’s value from the client’s values. That can be done by asking questions such as, “What do you think he/she would do with these companies if he were here today?” It’s a simple way to begin disconnecting the two parties involved. Along the same lines, asking additional character-based questions can add perspective that supports the need or opportunity to make changes:
- How did (he/she) make investment and other decisions?
- How did they typically react when a company or person didn’t measure up to their end of a deal?
- When problems arose, how did they address them and find solutions?
By using the client's own words and descriptions about the deceased person, advisors can position the conversation toward solutions. “It sounds like Harold was a kind and thoughtful person who knew the value of money and people. His caring [or maybe "no nonsense"] approach really lends itself to this situation and figuring out where we go from here.” Questions like these are often helpful when husbands and fathers are no longer around, because men stereotypically assumed the role of “fixer,” and in many cases, that’s exactly what the survivor needs.
Another key to defusing a sentimental valuation is to avoid creating a protagonist/antagonist situation. Don’t turn it into a competition between the deceased’s advice and your own. By asking questions, you can find paths that satisfy the need while making beneficial changes to a portfolio that no longer does what it was originally created to do. This technique not only affirms the deceased’s advice, but it also fulfills the advisor’s responsibility for the portfolio’s current performance. In my own case, I was careful to do just that. “Your husband did the right thing,” I told her. “At the time, he picked great companies to ensure you would be taken care of in case he was no longer around. I have the same goal for my wife and kids. Neither he nor anyone that worked for these companies could have predicted where things are now, 10 years later.”
Advisors can adopt a similar line of reasoning by using the collapse of the dot.com and real estate bubbles, which most people never saw coming.
Therefore, the main point for any sentimental valuation is to acknowledge the client’s current emotions. After taking steps to affirm the situation, ease both parties’ value and responsibility, and find common ground for changing both their heart and mind. Then, and only then, does the financial stuff comes into play.
In my client’s situation, I wanted to be both empowering as well as sensitive to her situation, so we agreed to sell all but one share of each investment. By doing so, we were able to diversify her portfolio with a broader number of holdings, generate the additional income she needed, and keep the retirement promise she made to her husband. We didn’t sell all the stock in one fell swoop (in this case because they were in certificate form), but we sold a few at a time and had the remaining shares put in book entry so she could receive a statement each month as a means of tracking them. With each transfer, she grew more comfortable and felt empowered when the process was completed.