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Portfolio > Portfolio Construction

Rational Gift Giving: How Advisors Can Help Clients

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Unless you’re living under a rock, there’s virtually no escaping the overwhelming marketing onslaught for the end-of-year holidays, which in some parts of the country starts even before Thanksgiving.

As the adage goes, there really is great joy in giving at this time of year and one should, said Justin Reckers, director of financial planning at Pacific Wealth Management. However, it’s also very easy to get carried away, and even those with ample means can be swayed by the season, spending far more than they should and facing dire consequences when the joy wears off, particularly if they have left their shopping till the very last minute.

“Inevitably, I get clients coming in to see me in January – people who usually don’t rack up credit card debt – saying they have put far more on their card than they should have and that they need to get a check cut from their investment portfolio to pay for this,” Reckers said. “They overspend on the holidays, and that means I have to pull the trigger on an asset I’m holding for them, which of course then becomes detrimental for their future.”

Although Christmas is almost upon us, financial advisors still have an opportunity to speak with their clients to get them to see the long-term effects that holiday overspending could have on their investment portfolio. Advisors need to appeal to the attributes of economic rationality and self-control that are in every human being, Reckers said, but get very quickly and easily overshadowed by the force and power of holiday marketing.

Marketing stokes certain human emotions, particularly as Christmas gets close, when the brain is prone to thinking, “I haven’t shopped enough,” Reckers said. This is when frenzy takes over and people are prone to spending in an irrational manner that can make their future financial situation dangerous.

“As advisors, we need to get people to veer toward self-control, to get people to realize that they are going to have these impulses that will take them over and cause them to do things they will regret in the future,” he said.

Reckers works early on to get his clients to shop in an economically rational manner, to counter the economic irrationality marketing engenders and to bring their innate behavioral trait of self-control to the fore.   

He tries to get his clients to think hard about who they feel they need to give gifts to and then to set up budgets.

“I advise people to avoid situations that could result in impulse purchases. I try to steer them away from the kind of anxiety that leads to a loss of self-control,” he said. Men, for example, have an aversion for shopping malls, he said. They can get more anxious when it takes 25 minutes to find a parking place, which then makes them more likely to buy the first thing they come across in order to make a quick getaway.

While it’s unlikely that his clients will ask him how much they should spend on Christmas gifts, Reckers nevertheless feels that it’s his duty to get them to see the long-term implications of excessive holiday gift giving and spending.

“My job is to say, ‘This is what is happening today, so if you do this, this and this, it will have this impact on your future,” he said. “I do talk to my clients about what will happen if they overspend on Christmas gifts, and the long-term effects of going over budget, taking money out of their portfolio, the tax issues this will cause and how rebalancing will impact diversification.”

The best way to steer human behavior toward economic rationality and self-control is to make holiday shopping a bigger decision in people’s minds, Reckers said, by framing it in the context of the future, and by getting people to “distance themselves from the emotion of shopping.”

“Most people can take steps back and think logically if they take the time to separate themselves from emotional causes,” Reckers said. 

For more on the psychology of gift-giving and advisors’ role, click here.


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