If I had a dollar for every time a client approached me with a dubious investment pitch, it would cover a few coffee orders. Whether it’s the initial public offering (IPO) of an electric vehicle charging company with past-due tax liabilities, a non-traded REIT with a double-digit sales commission, or performance-chasing Amazon stock, I’ve heard quite a few ideas hawked by clients. As a financial advisor, I’m sure you have also heard your fair share of questionable investment ideas.
This begs the question:
How does one handle client requests for not-so-great investments?
Read on to learn a diplomatic approach that not only satiates your client’s need to gamble, but also keeps the bulk of your client’s assets prudently invested.
How Do I Respond to Questionable Investment Ideas?
When it comes to evaluating your client’s investment proposals, I suggest a two-tier rating scale:
· Suitable for fun money or casino money
· Not with a 10 foot pole
Where the investment falls on this scale determines your response to the client’s pitch.
Highlighting Investment Shortcomings to Clients
Let’s start with the not with a 10 foot pole category of investments. Clients propose vague investment ideas because they have a limited understanding of basic investing concepts. Examples of such include the impact of costs or the fallacy of performance chasing. Your job as their financial advisor is to highlight the critical parts they likely missed.
Shortcoming Example #1: Catching a Double-Digit Sales Commission
There was a past instance in which clients approached us with a non-traded REIT (a commissioned salesperson from an outside brokerage firm solicited them). However, the clients understood little about the product. Fortunately, it didn’t take much to educate them on this particular investment – emphasizing that it was a poor decision.
Like its peers, this particular, non-traded REIT had a double-digit sales commission. This information was easy to find as it was on the cover page of the documents the clients shared with us. Pointing out the outrageous fee was enough to convince our clients to decline the “opportunity.”
In this instance, talking the client off the ledge was simple because the amount of due diligence performed by the client was next to zero. Limited due diligence is a theme in many client investment proposals.
Shortcoming Example #2: Revealing Day-Trader Fund Mechanics
In another example, a client was bullish on oil. And “what better way to bet on oil than with a levered, intra-day fund? ” the client thought. Once it was explained that this fund was for day-traders, and that this fund's internal mechanics don’t provide a levered investment return over extended periods, the client was no longer interested.
In most cases, such information is easily obtained by reading the first few sentences of the fund prospectus, the fund’s web page, or the fund fact sheet. Once again, the crisis (of inane investing) was easily averted with proper client education.
Allocate Fun Money for Client’s Speculative Investments
Unfortunately, there are many instances in which talking clients out of dubious investment ideas is no small feat. This can be the case when a hawked investment may not be so clearly and egregiously the wrong move; it just may not be a great one.
How do you respond to an investment proposal for something merely mediocre? Suggest a fun money account. With a fun money account, clients can make speculative investments on their own, with stakes that won’t irrevocably impact their financial plan.
Limit Money at Risk
A while back, one of our advisors was at a social mixer, albeit not one financial professionals attended. At the start of the evening, strangers took turns introducing themselves.
Once our team member shared that he was a financial advisor, he got the question:
How much should I invest in Bitcoin?
The advisor’s answer received a chorus of laughs from the crowd:
Only as much as you can afford to lose.
Arguably hilarious, it is true. Potentially, you could limit a fun money account to the lesser of:
· 5% of a client’s liquid investable assets, or
· Whatever amount would allow the client to sleep at night with the knowledge that they had lost everything in the account
Of course, remember that you’re a financial advisor, not a broker. You’re not in the business of fielding trade orders. Clients should manage any speculative investments on their own – in their own investment account. To provide excellent customer service, offer to help your client open this account.
Fielding Poor Investment Ideas
In summary, if a client’s investment idea is quite egregious, kindly point out obvious flaws. That may be enough to get them to change their mind.
If that fails – or if it is more challenging to poke a hole in the client’s investment thesis – suggest a self-managed fun money account.
Dunham: World-Class Trust and Investment Firm
We understand that as a financial advisor, you always have your client’s best interests at heart – which can mean deterring some questionable investment ideas. Dunham is here to help.
The Dunham Funds are managed by institutional sub-advisers. The Dunham Funds allow you to provide your clients or prospects access to these institutional managers without meeting their high minimum investments. At Dunham, sub-advisers are paid based on their ability to outperform their benchmark. This may give you the ability to demonstrate a level of accountability that your competitors are not offering.
If you have any questions about how our team can help, get in touch with us today. You can call any of our regional directors or complete an online form on our contact page. We look forward to getting in touch.