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?