It’s one thing to provide clients with good advice. It’s another thing to get them to follow that advice if short-term market fluctuations, conversations with their peers, too much CNBC watching or intra-family disputes lead them to stray from the plan you’ve carefully made.
In a webinar on Nov. 7, ThinkAdvisor.com invited me and financial behavior specialist Kol Birke of Commonwealth Financial Network to address some scenarios in which an advisor’s financial plan may be questioned directly by clients, or threatened by their action or inaction. Jamie Green, editorial director of Investment Advisor Group, moderated our conversation.
Here’s an edited version of a few of our ideas and strategies for encouraging clients to follow through on your advice. (For more scenarios and solutions, visit ThinkAdvisor.com.)
The Panicked Investor
Jamie Green: Here’s my first scenario for you. Your client, a high-powered corporate executive, has been shaken first by the sharp decline in her portfolio’s value during the recession and now by the continuing squabbles in Washington. She orders you to liquidate her equity and bond holdings and go to all cash. She’s highly paid, but not so high that she can afford to be out of the market. How do you respond?
Olivia Mellan: I would speculate that this client is in that “deer in the headlights” state where she cannot make any rational decisions. Daniel Goleman, author of “Emotional Intelligence,” calls it “amygdala hijack.” When people are in this stressed-out, panicked state, they can’t hear you and can’t take sensible action.
Listen to her fears and empathize with her. Feeling heard will lighten the emotional charge so she can listen to the rational suggestions you provide. You can also teach her that when people are in a high-stress mode, decision-making comes from their primitive survival place, which is always dysfunctional. It’s a very bad time and a bad way to make important decisions.
Kol Birke: I strongly support what Olivia suggests about having these deeper conversations. They’re like compound interest: The earlier you have them, the more they pay off down the road.
Using a bucket-based approach to retirement planning gives you a way to reframe the conversation. Your client is already holding some percent in cash—it could be 2%, 6%, whatever you’ve allocated. Given that she’s highly paid, that might be 18 months’ worth of living expenses. By breaking this out visually, showing the client that she’s got an amount set aside in cash, you can often assuage her need to go completely into cash.
If that doesn’t take care of it, remember that you’re not actually looking for action; you’re looking for inaction. The client is already invested as she should be. It may seem a little devilish, but you might try flooding her with too many options (see “Too Many Choices” sidebar). What I mean by that is to take out your calculator or your financial planning program and show her a handful of different scenarios. Talk about what she likes and doesn’t like about each one. At the end, say, “At this point we’ve talked about a variety of things. What options do you think make the most sense and why?” If you flood a client with options in this way, they may actually take no action at all, protecting them from their potentially damaging instinct to go to cash.
JG: A client couple has finally entered retirement, and you’ve carefully planned for their withdrawals. However, the couple’s spending is far higher than you planned. Their requests for special outlays—to buy a boat for themselves, then a car for a grandchild—worry you because their portfolio is shrinking faster than you planned. In addition, it’s become an administrative nightmare for your staff. What should you do?
OM: It’s important to meet with a couple together—and, if they have any bad will or power imbalance, separately as well—to revisit their goals and assess whether they’re positioned to meet them.
I sometimes ask a couple to agree on the time frame for their short-, medium- and long-term goals, then list their own personal, couples and family goals several times to see which ones they can really trust. They look at each other’s final goals and try to harmonize the two lists. If clients are spending money more quickly than you thought they would, this is a good exercise to see how aligned they are.
Also, you need to take time to bond with them and empathize with what they want to do with their money. It doesn’t help just to say, “Listen, you really can’t afford to do this.” They won’t listen to you, and if either one of them is a spender, that person will feel very rebellious. But if you really bond with what they want and see what the underlying need is—do they want to support their grandkid, for instance?—then you can try to suggest other scenarios. Could they support him in a more affordable way than buying him a car?
After sufficient listening and patience, you can brainstorm with them about what they will do if they don’t have adequate funds to meet all their goals. I would highly recommend my friend Dorian Mintzer and Roberta Taylor’s book, “The Couple’s Retirement Puzzle: 10 Must-Have Conversations for Transitioning to the Second Half of Life.”
KB: I love what Olivia said, especially in terms of digging into what clients care about. In a negotiation class I took years ago, the biggest thing that stuck with me is the difference between “interests” and “positions.” For example, a position might be “I want to pay for my kids’ college.” But there are interests driving this position, such as wanting to support the children’s future. Once you figure out what the client’s interests are, you can potentially find a new position that will work just as well or maybe even better without putting them in financial peril.
That said, in many of these situations you can get away without as much conversation by simply reframing.
Let’s say these clients have $1 million to draw income from, and they’ll need $800,000 to support their lifetime income needs. The remaining $200,000 becomes their discretionary fund. So if the wedding for their kids goes from $10,000 to $20,000, instead of them thinking, “Oh, what’s another $10,000 against $1 million?” they’re now comparing that extra $10,000 against $200,000, which is the only discretionary money they’ll have for the rest of their lives. Now they’ll be more careful.
Whether you actually create a separate account, which is what Minnesota-based financial advisor Jonathan Guyton does, or you just describe it to them as a separate pool of money, this approach tends to have a really nice impact.
It also gives them choices. If they start to run down that $200,000 too quickly, you can say, “No problem. As we’ve discussed, $800,000 should be able to provide you about $2,500 a month to cover your expenses. If you’d like to move some of that $800,000 to your discretionary fund, we can adjust the $2,500 a month down. It’s your choice.”
By framing it with this separate $200,000, as Guyton suggests, it puts the decision in the clients’ hands. “Over the course of your life you can make whatever decisions you want, whether it’s a vacation, a new car that you hadn’t planned for or whatever else. You can use your money for anything.” This tends to be a nice, practical approach to curb clients’ overspending in retirement.
Read the entire series of scenarios addressed by Olivia Mellan and Kol Birke.