If you talk with an experienced financial adviser they will undoubtedly be able to relay stories about current and perhaps former clients whose behavior was detrimental to their own financial health and well-being.

Try as you might you just can’t always get a client to change their behavior or attitudes toward money and investing even if it may be in their best interests to do so. Managing these client relationships effectively so the client can achieve their desired financial outcomes takes not only financial knowledge in these cases but also a bit of insight into the client’s thought processes as well.

Loss Aversion vs. Investment Growth

Many investors nearing or in retirement have an aversion to losing money on their investments. And rightly so. At the same time these same investors also have a need to achieve some level of growth from their investments so as to not outlive their money in retirement. (For more, see: Closing in on Retirement? Read These Tips.)

While every client is different one technique that has worked is to use a form of the “bucket approach” to their retirement investments. By this I mean having a certain percentage, tied to a number of years’ worth of living expenses in safe, lower volatility investments (including cash) so they won’t have to go in an sell investments in the face of a falling stock market in order to fund their basic living expenses. The actual composition and percentages will vary by client situation and will take into account retirement resources such as Social Security and pensions. (For more, see: How Advisors Can Help Clients Stomach Volatility.)

Reluctance to Sell a Losing Position

I’ve encountered this on numerous occasions but it seems more prevalent in males. You bought a particular stock and it’s gone nowhere but down. Now this is not necessarily the reason to sell. Reviewing the client’s overall portfolio, their financial plan and objectives and determining if there are better alternatives to this holding should drive that decision. (For more, see: When to Dump Portfolio Losers.)

Clients may respond by saying they just want to hold the position until they break-even. You can show them why other investments are a better fit for them and even how realizing the loss in a taxable account can be beneficial, but sometimes logic and numbers don’t work. Frankly if the position is relatively small compared to the size of their overall portfolio this isn’t the end of the world. If the position is a significant percentage of their portfolio then it is incumbent upon you to try to convince them to reduce the size of this holding and invest those funds elsewhere. (For more, see: Tax-Loss Harvesting: Reduce Investment Losses.)

Reluctance to Sell “Sentimental” Holdings

Often a client will inherit investments from a spouse, a parent, or loved one. It is not uncommon for them to feel a sentimental attachment to these investments. Often they will point to long-term holdings and mention that stock XYZ always did well for mom and dad and I want to keep it for the long haul.

Again if the position is not a significant percentage of the client’s portfolio this may be O.K. But in the event it is and additionally if there are a number of holdings evoking similar emotional attachment then as a financial adviser it is your duty to show the client why diversifying away from some of these holdings is a good idea. This might include extra risk from concentration in just a few holdings, a focus in a particular asset class (often large-cap domestic stocks in these instances). (For more, see: Trends Challenging Financial Advisors.)

Investing at the Wrong Times

Often clients only want to invest when “…it feels good…” In my experience, this means after a protracted stock market recovery which is often the worst time to invest. Conversely, clients may often panic during extreme market downturns and want to abandon their long-term investment plan. As a their financial adviser it's your job to show them the merits of sticking to the plan you’ve developed together and how investing at the wrong times due to the natural emotions of fear and greed can hurt their chances of achieving financial success.

An Indecisive Client

Sometimes even after going through the financial planning process with a financial adviser in whom the client has confidence the client feels uncomfortable making the decision to go ahead with the adviser’s recommendations.

This could be caused by the client’s fear of the unknown or even their fear of going in another direction. Perhaps they have worked with a commissioned-based adviser who had them in individual stocks and high-cost proprietary mutual funds. Even though the client did poorly with this adviser entering new uncharted territory can be unsettling. (For more, see: What Is Your Risk Tolerance?)

This type of client may require a bit more hand-holding and it is incumbent upon the new adviser to understand the client’s fears and to present information to them in a way that can alleviate these fears.

Make it Easy and Understandable

Financial advisers can help certain clients by laying out the steps the client needs to take in order to reach their goals in an easy to understand format. These might include:

  • Contribute $400 per month to my emergency fund until I have three months living expenses accumulated.
  • Contribute 7.5% of my salary to my 401(k).
  • Make an automatic monthly contribution to my IRA so that I’ve contributed the maximum by the time I file my taxes.

Once the client has completed or instituted in their routine a few of the initial tasks work with them to add and prioritize other aspects of their financial plan.

Educate Clients

Perhaps the biggest benefit that financial advisers can provide is keeping clients from acting on their own instincts. We are all motivated by greed and fear. The latter emotion caused a lot of investors to act in ways that were quite detrimental to their financial health during the financial crisis. Educating clients about the benefits of staying the course before the markets hit their next inevitable correction is essential. (For more, see: How to Be a Top Financial Advisor.)

The Bottom Line

Helping a client achieve their financial goals is about far more than just showing them numbers or charts. The value of hiring a financial adviser is often about the adviser’s ability to coach the client through the implementation of the planning steps and to help keep them from acting in a way that is contrary to their own best interests. This requires the adviser to understand the client’s fears and what drives them so that he or she can present information and guidance in a way that will resonate with that client. (For more, see: How Financial Advisors Can Help Gun-Shy Investors.)

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