Financial advisors make the case for long-term investing every day. Real estate agents do it too. You have likely heard the old saying, “You don’t wait to buy real estate. You buy real estate and wait.” We all have our comfort zones for investing. What should an advisor do when a client wants to buy something that is out the client’s risk tolerance profile and outside the advisor’s comfort zone too?

Years ago, one of my managers voiced a comment that is obvious to everyone concerned: “It’s my money.” You cannot forbid a client from making certain investments. Even if you refused, they would find another advisor or buy online. You need to follow their instructions if they want to place an order.

Here are some points you can talk about as part of the process:

1. Be protective, not adversarial. You have heard of the “Magnificent Seven” tech stocks within the NASADAQ Composite index. These household names were once new issues, some a concept “before their time.” They were out of many people’s comfort zones. Establish you are seeking to protect your client, but you think you should both learn together.

2. Are they investing privately? Maybe it’s not a listed stock they are considering. Do they want to invest in their brother-in-law’s restaurant? Are they “going in with a friend” in buying real estate? Paperwork needs to be drawn up and signed before money changes hands. If a bank will not lend to them, there is probably a reason. Get a lawyer to draw up documents, so they are protected.

3. The investment pyramid. You remember it from your training when you joined the industry. Every investor should be allowed to risk a small amount of money on highly speculative investments, but the majority of their money should be towards the base of the pyramid in safer investments.

4. How did you hear about this investment? Assuming this is a listed security, it would be good to find it’s “origin story.” They might have identified a trend in its early stages, done extensive research and decided this is the best of the bunch of companies in the field. Armed with this knowledge, you might supplement it with findings from your research department. Alternatively, they might have heard about the company from their barber. This can let you know how much background they know beforehand.

5. Have you been watching it? Some people follow a stock before buying. Others hear about an interesting idea and simply “go for it.” How much time has your client put into learning about it before they decided to commit their own money?

6. How much can you afford to lose? This is an expression you might commonly associate with casinos or horse racing. This is important because like horse racing, your client might be acting on a “hot tip.” The idea the investment might not work out is not even on their radar. This question, asked as politely as possible, reminds them there is no such investment as a “sure thing” in the equity markets.

7. What is the liquidity? Remember when real estate or oil and gas limited partnerships were popular? If not, wasn’t there was a time hedge funds were introduced to retail investors? These types of investments did not have the “T+3” liquidity expected in the stock market. If your client wanted to cash out, what is involved?

8. What must happen for this investment to work out? Warren Buffet has been known for many things including buying into businesses you understand. As their advisor, this company might be new to you. Can your client explain the sequence of events that need to happen for their investment to pay off? If they cannot answer this question, what are their reasons for buying the stock?

9. Who are their competitors? What makes this one better? This is America. When a good investment opportunity appears, plenty of other people jump on the bandwagon. As an example, the Drug Addiction Treatment Act was passed in 2000. In 2022, there were 17,353 substance abuse treatment facilities in the United States. If this stock represents an investment opportunity, there should be other businesses in this space. Does your research department have an opinion? Does your client know there is competition?

10. How will you know if it has not worked out? Everyone wants to get in on the ground floor. You hope this speculative investment works out for your client. How will they know if that is not the case? How much would the stock need to pull back before your client will reconsider their investment? It is good to set some parameters ahead of time.

11. Can you buy a mutual fund operating in this space? There are plenty of industry specific mutual funds out there. You can also find funds seeking out emerging technologies. You should be able to view their top holdings online. This might give your client representation in the industry while reducing their risk through diversification. The fund should also provide liquidity.

As the expression goes, “It’s their money.” You can help clients limit risk, although they have the final say on how their money is invested.

Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book Captivating the Wealthy Investor is available on Amazon.