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An Advisor’s Role: Keeping Clients From Making Big Mistakes

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There’s an old story about a famous religious scholar who went to see a Zen master about becoming the master’s student. The scholar went on and on about the books he’d studied, and everything he knew about Buddhism, until the master interrupted him, asking if wanted some tea. Then the master set two cups on the table, and began pouring tea for the scholar; and he kept pouring, as the cup filled and tea started spilling all over the table. The surprised scholar exclaimed: “Stop! The cup is full! There’s no room for more tea!” The master replied: “So is your mind full of learning. I can’t help you unless you empty your mind to make room for teaching.”

Although he’s not a Zen master (that I know of), that story always reminds me of James Wilson, a financial planner and a former NAPFA chairman in Columbia, S.C. Years ago, James told me that he doesn’t take clients who are under 50 years of age because “younger people just aren’t ready to take advice yet. They have lots of ideas about their finances and investing, and they haven’t yet had the experiences to teach them how wrong those ideas are.” 

One of Wilson’s other gems of wisdom was that “the biggest threats to most folks’ finances are not picking the wrong mutual funds, down markets, or even the lack of a financial plan. They very the very costly life events—such as divorce, a business partnership split, a career change, a serious under-insured illness or investing in some long-shot scheme.” Wilson saw his primary role as a financial advisor to keep his clients from making these kinds of mistakes. 

I was again reminded of Mr. Wilson yesterday, as I read the results of Ameriprise Financial’s new investor survey called “Retirement Derailers,” which was conducted last February and released on May 14. The survey, conducted by Koski Research, talked to 1,000 Americans (between the ages of 50 and 70, with at least $100,000 in investable assets) about events that have “derailed” their retirement plans.

As you might expect, the major derailers came from the aftermath of the 2008-’09 Mortgage Meltdown:  low interest rates impacting the growth of retirement assets (63% of respondents), that lowered their retirement savings (55%), home equity not going to help as much as anticipated (33%) and pension plans that are not worth as much as planned or have been discontinued (23%).  But more than a few retirement portfolios were derailed by non-market-related events: supporting a grown child or grandchild (23%), bad investments (22%), job loss 18%, higher expenses due to caring for a family member 15%, medical bills not covered by insurance 11%. 

Altogether, the Ameriprise survey found that the average respondent has experienced four retirement “derailers,” which “cost them an average of $117,500.” The 55% of the respondents who have experienced at least one derailing event say the impact on their retirement plans has been extremely or somewhat serious. And 83% of those who have experienced five or more of these unexpected life events say the impact has been extremely or somewhat serious. The impact: 42% of all respondents admitted they are behind where they thought they would be.

The takeaway for financial advisors? Keep in mind that while you’re creating financial plans and designing asset allocations, what will probably derail your clients’ retirement are the things you haven’t thought of. Some of those, such as under insurance or over-reliance on home equity, are easy fixes. But others are self-inflicted: bad investments or divorce.

If the average client is looking at four “derailers” in the course of their lifetimes, the biggest service you can offer is to keep them from making these BIG mistakes. And don’t forget to think twice about taking on clients who aren’t ready to take advice.


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