By Matthew Sivertsen –
A recent article in the Washington Post by financial columnist, blogger and equities analyst Barry Ritholtz advised investment clients to “say ‘yes’ to the financial advisor who will tell you ‘no.’” His article points out the daily dilemma that all financial advisors face: should we do what a client wants, even when we know it is not in our client’s best interest? The answer, obviously, is no. However, it is easy to understand why the question needs to be asked in the first place.
First, a bit of background is in order. The topic of a new “fiduciary standard” rule has been in the media frequently of late. This new Department of Labor rule requires any financial adviser working with retirement accounts to avoid conflicts and act in the best interest of clients in the products they recommend.
When the rule is fully implemented in April 2017, all financial advisers who provide investment advice for retirement investors, whether it be for an employer-sponsored plan, an IRA or a health savings account, will be subject to a fiduciary standard, which requires them to put their clients’ interests first. Sounds logical enough, right? Well, not to everyone apparently. Opponents of the rule (typically, these are advisors/brokers who earn commissions on the financial products they sell) are fighting the legislation in court and filing lawsuits challenging the Labor Department’s power to impose the rule. This issue is an important one because it is our job as financial advisors to do what is in the best interest of our clients. The Planning Center is a fee-only financial planning firm and we do not earn commissions on the financial products we recommend.
We have always abided by the fiduciary standard that some elements of the financial industry seem opposed to for reasons known only to them (self-interest, perhaps?). Sometimes, in the interests of our clients, it is our duty and responsibility to say “no.” What are the sorts of things about which advisors should caution their clients? Here are some of the examples Ritholtz mentioned in his article:
* Taking on more risk than is prudent
* Buying the new “hot” thing
* Pursuing the latest media fixation
* Following the advice of pundits or talking heads
* Buying IPOs
* Allowing emotions to steer their investments
* Market timing
* Speculating in commodities
* Cherry-picking portfolio allocations
In my experience, on most of the occasions I have said to my clients “no, this is not good for you,” the issue has revolved around investment decisions. The problem often has been one pertaining to emotion. During a particularly volatile market, a client might want to sell all of their investments, seek an alternative like gold or an investment property, and decide to create something radically different from the standard investment portfolio.
When discussing risky investments with my clients, I have always said as a fiduciary, “we don’t want you to take more risk than you have to.” So I focus on their risk tolerance, their probability of success, and the fact that we want to help them reach their goals with as little risk as possible.
When clients are thinking about making large financial purchases, I like to walk through “before and after” cash-flow scenarios with them. I make sure they are aware of the impact on their finances before making the decision. That way, they can feel good about all aspects of proceeding with this purchase.
The toughest part of my job is the real-life situation when someone desperately wants something in particular. Sometimes, “that thing” is not financially feasible, but they choose to do it anyway. The best answer for my clients is to say “no.” It is not an easy thing to say since the issue is seldom one about whether they can afford to make the purchase. They can.
Nonetheless, it is important that I explain to clients how making the purchase could jeopardize their long-term financial well-being. I cannot always say no, because at the end of the day it is their money and their life and they can make decisions accordingly. BUT, I do want clients to understand the future trade-off for the choices they are making today. Anything less and I would not be acting in their best interest.
Matthew Sivertsen, CFP®, CeFT™, is a Partner/Sr. Financial Planner in the Quad Cities office of The Planning Center, a fee-only financial planning and wealth management firm. Email him at firstname.lastname@example.org.