In a new white paper, Beekman Wealth Advisory founder Elizabeth Anderson counsels women on how not to become a “bag lady” with six common sense lessons. For those of you unfamiliar with the concept, here’s a definition:
Bag Lady Syndrome: The irrational fear of not having enough money, and, in the extreme case, of ending up destitute and homeless. According to one survey, a “startling 90% of American women said they felt financially insecure”, and nearly half responded that they suffered “tremendous fear of becoming a bag lady”, including 48% of those with annual incomes over $100,000.
In the daily business of managing a client’s portfolio, it is sometimes easy to lose sight of our clients as individuals, with fears and concerns that spill over into their financial lives. While putting client interests first is part and parcel of an advisor’s role, Elizabeth says it can be especially important when they are in the grip of high emotional distress caused by an event such as death or divorce, or even with someone who has irrational fears about becoming a bag lady.
As someone who routinely puts herself in her clients’ shoes, I asked Elizabeth to turn the tables and give advisors lessons for helping clients in these types of stressful situations. Here are her four ‘lessons’ that advisors can take to hear.
Lesson #1: Build Personal Relationships With Your Clients
Elizabeth shared a story with me about two of her clients, a brother and sister. They lost their mother, one of Elizabeth’s first clients, suddenly, in an accident. It was obviously a traumatic time for them. Elizabeth took the daughter to lunch, gave her a hug and expressed her condolences. Then they talked, not about finances, but about her Mom. “The daughter told me that I was the first person who spoke to her as a human,” says Elizabeth. “The estate lawyer was focused on estate planning matters with her, the accountant was focused on preparing the estate tax return,and other money managers were focused on transferring assets,” she added.
According to Elizabeth, after someone has been divorced, widowed or loses a parent, advisors often tend to focus on the financial aspects of the situation. When clients are feeling the pain of a real loss, just to say “I’m really sorry” or “I realize what you are going through” can be the words they most want to hear.
In general, Elizabeth counsels clients not to make any important financial decisions at times of high emotions. “When your client comes and wants to sell everything or move, counsel them to stop, take a deep breath and think it through,” she says. This approach will work if you have a relationship built on trust. By contrast, if it’s a relationship that is “sporadic or based on selling products to someone and you suddenly show concern, that sort of approach may not work.”
It all boils down to building deep relationships based on trust and relating to your clients as individuals, not portfolios.
Lesson #2: Learn to Say “No” to Your Client
In Elizabeth’s 30+ years in the business, she has seen many examples of advisors putting clients into risky investments such as junk bonds, at great risk to the principal, to attempt to generate the level of income the client wants. “If someone wants to withdraw 8% a year, advisors need to learn to say “No” and to explain the tradeoffs and implications,” says Elizabeth. She adds that you need to be honest with clients about what their portfolio will support.
She told me that even independently wealthy clients can overspend. For instance, she has been hired by parents who have adult children with a spending problem. Her role is to help heirs understand that they must fit their lifestyle to their wallet.
How do you politely say “No” or explain what spending level a portfolio can support? Elizabeth calculates a sustainable spending rate for clients. She does a break-even analysis that says if you want to be able to spend X% of the portfolio, then Y% is the target return you’ll need to earn on the top line.
For example, she went through the exercise with a family that wanted to spend 7% per year from a balanced stock–bond portfolio. What they found out was that the family would need to earn more than 19% on the stock portfolio on the top side, which is obviously not achievable on an ongoing basis after taxes and inflation. “When you can put numbers around things, such as telling clients they are likely to run out of money in seven to ten years at current spending levels, they tend to understand why they have to make different choices,” Elizabeth says.
Lesson #3: Make Sure Your Trust Has Been Earned
Elizabeth believes that if someone gets paid to sell risky products, they will sell risky products. If they get paid for leveraging a portfolio, they will leverage the portfolio. Your expertise and your business model are important factors when it comes to earning your clients’ trust.
Beekman Wealth Advisory is compensated on fixed dollar retainer fees. The firm doesn’t get paid more or less based on the specific products or strategies it proposes. She believes this approach conveys to clients that the firm has the client’s best interests at heart for the long term. Regardless of your business model she advocates being up-front and transparent about how you are compensated. This will go a long way to earning trust, she says.
“If you buy a clunker car, at worst case maybe you’ll have to buy a new car,” Elizabeth says. “But if you get bad financial advice and lose money, the consequences may be much more severe. Some people you may want to trust on a personal level—your doctor, your hairdresser, your brother-in-law–shouldn’t be your source of advice about financial matters.”
To demonstrate your know-how, advisors need investment experience. “Having CFP, CFA, or CPA credentials, beyond brokerage licenses, is helpful,” she says.
Lesson #4: Encourage Your Clients to Ask Questions
Elizabeth has been at many meetings where an advisor talks on and on, but doesn’t notice that he or she is speaking at a level investors don’t understand. She says that terms such as ‘alpha,’ or ‘beta’ or ‘upside capture’ are meaningful to advisors, but not to even high-net-worth private clients who don’t understand and don’t really care.” Advisors need to encourage clients to ask more questions. “If you have open communication with your clients, in the aftermath of a death or divorce, it can be especially important to counsel them to take more time to think further about their decision making.”
Moreover, she says that many private investors know when something is wrong. “They have a pretty good idea if they are spending too much money or that it really isn’t a good idea to quit their jobs or make large gifts,” she says. “Some of the time the most important thing you can do is listen and confirm what they already know in the back of their minds.”
At the end of the day, wealth management is a relationship-driven business. Clients don’t ever want to worry about the potential risks of becoming a bag lady. Building trust and strong communications will go a long way towards providing the peace of mind that clients need, particularly in emotionally-charged situations.
Elizabeth Anderson, CFA, is the founder of Beekman Wealth Advisory LLC, a boutique financial consultancy providing highly customized services to families and individuals. Cynthia Stephens is the Vice President of Marketing for ByAllAccounts, a leading provider of account aggregation.