7 Client Portfolio Nightmares, Resolved: Advisors' Advice

Slideshow October 24, 2023 at 02:50 PM Share & Print

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Like opening a creaky door in a gloomy, abandoned mansion, peering into a client’s portfolio can be hair-raising if the investor, or a previous financial advisor, made a serious blunder.

Advisors facing such scenarios need to help their clients clear out the cobwebs and sidestep the trapdoors, lest these petrifying portfolios wind up haunting the investors for years.

We asked advisors to share the scariest client portfolio nightmares they’ve had to fix, and what they did about them. Check the gallery for seven spooky portfolio stories. Responses may be lightly edited for clarity.

Dinah Wisenberg Brin

NOT FOR REPRINT

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1. The Not-So-Safe Portfolio

A client came in with a "safe" portfolio that was 100% in perpetual preferred stock offered by major banks. Although the creditworthiness of the banks was not in question, what the client was not made aware of by their previous advisor was that similar to a long-maturity bond, perpetual preferred stock has interest rate risk. As interest rates quickly rose, these positions lost over 15% in a month.

While we don't want our clients to suffer losses, we felt the best way forward was to take the loss, and construct a portfolio that aligned with the client's goals for the future. This protected the client from additional interest rate risk going forward, and enabled a more balanced approach that considered the client's cash flow needs, risk tolerance, and risk capacity.

— Stephanie Bucko, co-founder and chief investment officer, Mana Financial Life Design

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2. The Overly Concentrated Portfolio

I recently had a client who had 75% of his portfolio in real estate and cash. Of that, about 40% was real estate and the rest was cash. Now, granted, this was a lot less scary than the person who had invested most of his retirement savings in crypto and NFTs such that he went from BTC-rich to reality in 2022, but I digress.

We had a discussion about why he was so concentrated in these two asset classes and found that he just didn’t understand how to invest in stocks, not that he was philosophically opposed to doing so.

After more conversation about his investment timeline and risk tolerance — this is money he doesn’t need for at least another 10 years — we're now actively going through and setting up a taxable account for him to invest in a diversified mix of equity and fixed income funds. But no REITs!

— Stephen Chang, managing director, Acts Financial Advisors

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3. The Portfolio Gathering Dust

My scariest client-portfolio nightmare was realizing a client's entire retirement account was never invested for years. It was sitting in cash losing value to inflation.

The client thought they were doing the right thing.

They were doing the "first" right thing by contributing to the account without knowing the "second" right thing is to invest that money.

Now they are globally diversified for the long term and doing the "third" right thing. Waiting.

— Spenser Liszt, founder and financial planner, Motif Planning

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4. The Expensive Portfolio

Transforming a client's portfolio isn't just about numbers; it's about enhancing financial well-being. I once took a portfolio burdened by high expense ratios of over 3% — put together by a commissioned advisor — which offered the client neither diversification nor superior returns, and optimized it with thoughtful asset allocation using low-cost index funds. The result? Streamlined expenses and a portfolio now working as hard as its owner.

— Sean Lovison, founder, lead advisor, Purpose Built Financial Services

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5. The Under-Diversified Portfolio

The scariest client portfolio nightmare I've encountered is a retired client's only investments were in one fund, which was an international value fund with a rather high expense ratio and a long record of subpar performance on top of that.

Luckily, we were able to remedy that into a more appropriate, better diversified option for them, but it serves as a good reminder that investments — especially retirement savings — should be monitored regularly so appropriate changes can be made when necessary.

— Carman Kubanda, financial planner, Innovative Wealth Building

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6. The Company Stock Portfolio

For me, it was finding a client who had accumulated over $750,000 in a 401(k) plan at his prior employer. He had built up substantial returns of over 1,200% but they were all in one stock, his employer. Thankfully, unlike the Enrons of past, his employer was solvent, growing and a household name.

I literally had a nightmare about what could have been for him and his family, but to my relief we were able to work with him to utilize the net unrealized appreciation tax rules for a lower tax bill than 401(k) withdrawals alone and diversify into the broader market.

— Doug “Buddy” Amis, president and CEO, Cardinal Retirement Planning Inc.

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7. The Life Insurance Portfolio

A client of mine was working with an outside insurance representative. The strategy that was marketed to my client as the best way to insulate their assets from future tax rate increases was to put them all into a whole life policy. The strategy was to liquidate $100k of their $1 million investment portfolio each year for 10 years and pay it as an annual premium to said policy.

They were told they could simply borrow from the policy anytime if they needed liquidity. They were three years into this strategy, and carrying a significant loan balance already when I walked them through their strategy and other considerations that should be taken into account.

We stopped paying premiums and used the cash value to convert to a reduced paid-up policy and shifted (focus) to the comprehensive portfolio and how we can best plan for tax advantages in their future.

— Kim Abmeyer, founder and wealth advisor, Abmeyer Wealth

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