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Portfolio > Portfolio Construction

Your Client Wants to Buy GameStop. What Do You Say?

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GameStop has this week become the investing equivalent of a flash mob. This term, coined around 2003, seems eerily accurate. In this case, your client isn’t considering break dancing. They are putting money on the table. There’s the potential for loss. What to do?

“It’s my money” is a key concept. Clients make the ultimate decision. Clearly, orders that were their idea are marked “unsolicited” as you place them. According to Forman Law Firm, the advisor has a duty to execute the order a client places with them. However, it’s fair to assume there would be discussion beforehand. Advisors need to be a sobering, stabilizing influence.

1. Some people treat investing as a game.

It’s an app on their smartphone. They can play blackjack online. This is another game. A good advisor would explain although people can have “play money” the majority of their money should be invested with a long-term plan.

2. Are you putting too much money at risk?

It’s logical the online trading accounts people use could also be considered retirement or investment accounts. This is meant to be money people are supposed to be saving. A good advisor would remind the client of their priorities.

3. Margin is even more fun.

You can make even more money using borrowed money. Yes, it’s true, but the gain (or loss) takes place from your piece of the pie. The loan amount never declines, unless you are paying it down. A good advisor explains how margin works.

4. Just click here.

Unfortunately, people agree to things they don’t understand or even read. They accept responsibility by hitting “click here to accept” terms and conditions. Why? Because they want to get to the main event. This is an obstacle to be overcome. A good advisor explains what they are signing. They hand them a copy of those papers. A further copy is sent to them.

5. Diversification.

If it’s a game, it’s like poker. You play one hand at a time. “I’m betting all my money on this stock.” A good advisor would explain the risk of concentrated positions.

6. Why will this work out?

There must be logic when you make investments. Certain things need to happen to put this company in the right place at the right time. Investors have bought companies with one foot in the grave for years, hoping they will turn around.

A good advisor explains equity shareholders are last in the pecking order when a company goes under. So why will this company not go under? Work out? Please tell me.

7. Investing vs. gambling.

You buy a PowerBall or MegaMillions ticket with the understanding that if you don’t win, your investment is lost. That’s not investing. That’s gambling.

You are OK with the loss because it’s small. You didn’t go overboard on buying tickets.

8. Sellers require buyers.

Profits need to be realized. This is a big issue with volatile stocks. You need to sell to nail down your profit. It can look good on paper, or a screen, but it can change instantly.

If an idea works out, a good advisor will suggest taking some money off the table. It’s rebalancing.

9. Time delays on price reporting.

When you get a quote online through an internet search, the fine print often says there’s a delay. You might find your market order is executed at a far different price.

Hopefully, a good advisor has a better quote and trading system through their firm. 

Here’s the bottom line. The GameStop story might work out for some people. It might not work out for others. Those on the losing end might complain “I never knew I could lose everything?” They might say “I never knew I could lose more than I invested.” Others might say “I didn’t understand the rules. No one explained them to me.” Worst of all, some might say “I thought it was just a game.”

William McChesney Martin, Federal Reserve chairman in the ’50s and ’60s, was quoted as saying, “The job of the Federal Reserve is to take away the punch bowl just as the party gets going.” Advisors often find themselves in a similar position. They need to get clients looking at the bigger picture. Clients need to consider the potential outcomes. They need to be a sobering, stabilizing influence. After a great party, people often say the next morning “What was I thinking?”


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