Of course, despite our efforts, sometimes clients just can’t get the idea of taking a flyer out of their heads. What should financial planners do then? I see three main approaches. You can fire the client, help them place their bet or have them bet on their own.
I work for clients. My job is to advise, not dictate. Ultimately it is their money, and they have every right to do as they please. So it is rare that I would end a relationship with clients if they wanted to speculate. But I won’t be a party to someone endangering their financial security.
Fortunately, in 30 years, I only attempted to cut ties with a client once. He wanted to load up on a stock. When I told him I couldn’t watch him unnecessarily put a lifetime of work at risk, he saw my request as a warning sign, opted not to take the big bet and remained a client.
It should come as no surprise that since he was willing to bet most of his life savings on the stock, he was still hell-bent on buying some shares. My choice was to help him or have him do it on his own.
Most planners don’t want to get mired in a speculation. It is nearly inevitable that once a client begins doing it, they will spend extra time worrying about it. That can mean lots of questions about whether it is time to get out of an investment or questions about the details of the holding that the planner wouldn’t have put the client in to start with.
For these and other reasons, I know a lot of planners whose clients open side accounts. The theory here is that the damage can be controlled by limiting how much goes into the account, and the clients can then “play” the markets any way they like. I do not care for this approach, especially when the play account is taxable.
Early in my career, I was much more open to play accounts. Unfortunately, in too many cases, the activity in them triggered taxes that mucked up our planning. I can stomach a play account in a small Roth IRA or something similar, but it still nauseates me.
After enough failures, you realize that even if there is good communication between the planner and the client, having clients play in those side accounts makes things very difficult, undermines good strategic planning and makes a short-term focus far more likely. It is a slippery slope away from the solid track record of sound financial planning and prudent long-term investing and toward gambling.
Nowadays, when clients insist on speculating, I will get the appropriate acknowledgments and sign-offs from them about the risks and then acquire what they want through our systems. I still have to manage the psychology, but at least there are no surprises when the 1099s arrive.
Regardless of how a client ends up buying whatever it is they want to buy, I always take the time to have a “results talk.” I tell them that losing money is not the worst thing that can happen. That’s bad, of course, and it can lead to more risk taking to make up for losses incurred. But what’s worse is to make a lot of money fast.
Once someone places a successful bet, they like it. They often take credit for it rather than acknowledging that luck might have played a role. When that happens, they believe they can easily do it again, and they are far more likely to seek out and place another bet. When they make the next one, it is usually with more money. Vegas is built on this dynamic, and it is another sign that speculating in financial markets is more like gambling than prudent investing.
And furthermore, it’s unnecessary for financial success. Yet some will want to do it anyway. It is interesting and potentially lucrative, but the temptations are also dangerous if not managed well. If your client is lured by rapidly rising prices and wants to buy the next big thing, take whatever approach you think best, but please call it what it is. It is speculating, even gambling. Not investing.
Dan Moisand, CFP, practices in Melbourne, Fla. You can reach him at [email protected].