Close Close

Financial Planning > College Planning

How to Handle Clients With Assets ‘on the Side’

Your article was successfully shared with the contacts you provided.

About half of advisor clients are trading or investing in a self-directed account on the side.  

This isn’t because they don’t trust your advice. It’s not because they reject your portfolio construction theory or calculations of risk tolerance.   

Clients trade on their own because they want to be connected to financial markets. Because it gives them a sense of control. Because active participation beats passive observation every time. Because it’s fun.

On the other hand, advisors tend to shy away from talking about what is going on in the self-directed account because they lack confidence and conviction and don’t want to encourage it.

“It’s imperative for advisors to understand and add value to the financial decisions made by their clients, even those having to do with held-away assets,” said Mike McDaniel, chief investment officer of Riskalyze. “The best advisors are able to articulate insights about individual stocks and sectors despite whether they directly own them or not.”

Indeed, just like every parent of teens must decide, you have two choices: Preach abstinence, ignore and hope no one gets hurt, or accept reality, educate and advise.

There are several reasons to choose to advise and educate clients who are trading on their own:

  1. Advisors that can talk openly and intelligently about clients’ interests form a deeper connection with the client. This is true whether the topic is college football or Tesla’s prospects.
  2. Understanding a client’s self-directed account gives the advisor more insight into the true finances of the client, as well as a greater understanding of the financial risk that the client has taken on outside of your AUM.
  3. It’s a competitive advantage. Robo-advisors are competing for your clients. They can balance portfolios and suggest ETF allocations with the best of them. What they cannot do is completely understand your client’s objectives, or add value to your client’s life outside of the AUM. Who would you rather have your money with – a faceless computer or someone who can pick up the phone and riff about a trade you’re considering?

Here are some do’s and don’ts of talking to clients about their self-directed accounts:

  • DO make yourself available: A simple, “Oh, by the way, anytime you want a second look at something you’re considering in your account, let me know … that’s what I’m here for,” will go a long way.
  • DON’T send unsolicited trading advice or picks: You don’t want to be in the position of defending something that didn’t occur under your processes.
  • DO stay educated and up to date: Your clients will have favorite stocks they follow. Keep a watch list of those so that you know what’s going on, both from a price and news perspective.
  • DON’T ask for access to their self-directed account: This is their separate deal — let them have it and be there if and when they need you.
  • DO offer unique value: According to industry leaders, over half of your clients are trading in a separate account. Create something for them that other advisors don’t have. Maybe it’s a set of links to educational resources or a unique set of data that they don’t have access to. Whatever it is, make it yours — a value proposition they won’t forget the next time another advisor tries to take their AUM.

Always Working in Your Client’s Best Interests

As Josh Brown, CEO of Ritholtz Wealth Management, says, “We don’t mind if a client wants to trade on the side, but having a client who is extremely active and involved with the market all day is obviously not ideal when you’re trying to keep them focused on the long-term returns that address their true goals. That said, as financial planners, we need to be aware of each client’s outside assets in order to do complete, holistic work.”

It’s that commitment to providing comprehensive fiduciary services that drives advisors to go above and beyond for their clients. Broadening your financial advice to include valuable commentary, education or even just interest in “assets on the side” will ultimately improve your clients’ investor intelligence and trust in you, their advisor. It will help you to understand your client more, add value to their financial life and develop deeper connections. Isn’t that what being a great advisor is all about?