Executive Summary
A recent Fidelity report showed that a significant portion of investors over 65 moved at least some of their money out of stocks between February and May in response to the turmoil created by the pandemic. The fear and anxiety over the sudden and severe economic uncertainty pushed many investors to dramatically reduce their risk. And unfortunately, once investors take risk off the table, and the market sharply rebounds… there’s no “good” time to get back in. Which in turn has left some advisors asking how they can work with clients who are still stuck sitting on a pile of cash and are now resistant to the idea of re-investing into equities now that they’ve gone up (or in some cases, are unwilling to reinvest into anything at all!?)?
In our 41st episode of Kitces and Carl, Michael Kitces and client communication expert Carl Richards discuss various ways advisors can approach the conversation when a client is resistant to the very idea of taking back on any risk, especially from a market that feels like it’s ‘gotten away’ from them, how to determine if any sudden changes are only in response to recent temporary circumstances (or are more permanent in nature), and why advisors have to be so clear about the services they provide and who they best provide them for.
As a starting point, it’s important to note that just because someone has the financial capacity to take on risk and get back into the markets, doesn’t mean that they should, or that they even need to. Because, for some, their goal all along might have been to get to a point where they don’t have to take on risk, and after working hard for decades, they can get off the “more” treadmill. After all, investing is just one of several levers that are available to help clients reach their goals… it’s just that advisors (understandably) are focused on that one lever in particular, not only given the industry’s long history of providing the investing public with access to the capital markets, but that, especially with the more recent move towards the AUM model, it’s hard for advisors to pay the bills if there’s no “A” to “M” (which means we must be cautious of our own inherent bias towards keeping clients invested!)!
Yet, for clients who do have a reason (and need) to invest to meet their goals, and yet remain extremely risk-averse, there are essentially two approaches. The first is to use a more prescriptive approach, leveraging data and logic to demonstrate the long-term value that investing presents. While that more heavy-handed approach might work for a subset of clients, more often though, the better tack is to engage clients in a co-creative process that begin with a statement of values, which help define goals, and ultimately end out in an action plan in support of those fundamental values. As a result, advisors can help clients circle back around to (or even reevaluate) their values and goals, and walk them through possible trade-offs they might have to make.
Other approaches include having a conversation around why money is important in the first place (because sometimes there’s enough cash on hand to satisfy a fundamental why, and actually defining that can help calm their nerves about letting the rest work for them), and discussing whether or not changes to their savings and investing goals are permanent (as temporary, mid-course adjustments can be managed by incrementally moving back towards the original plan).
Sometimes, though, it turns out that a client just simply does not want to assume any risk whatsoever, which ultimately means that advisors need to get comfortable with the limitations of the advice model (and least if their AUM model means they can’t work with clients who want to stay in cash!), and understand that there are some clients who may need help with planning but don’t want/need the AUM-based services that many advisors provide (and make their livings from).
At the end of the day, there isn’t a one-size-fits-all approach for every investor, but in general, the best approach for risk-averse clients is to go upstream to find the root cause of any sudden changes, review values and goals to make sure everyone is on the same page, and then have a discussion around potential trade-offs that need to be made to implement any changes. By coming to the conversation with a positive mindset, and an objective of reaching a better understanding of a client’s goals (and why they feel that being in cash is helping them achieve those goals… or not?), advisors can serve their needs to the best of their ability… even if that may lead to the ultimate realization that the client isn’t a good fit?
Authors:
***Editor's Note: Can't get enough of Kitces & Carl? Neither can we, which is why we've released it as a podcast as well! Check it out on all the usual podcast platforms, including Apple Podcasts (iTunes), Spotify, and Stitcher.
Show Notes
Kitces & Carl Podcast Transcript
Michael: Well, good morning, Carl.
Carl: Greetings, Michael. How are you?
Michael: I'm doing well. How are you?
Carl: Things are good. It's finally raining in London. I've heard that it rains here, and we just haven't seen any for like six weeks. So, it's nice.
Michael: Wow. Yeah, I was going to say, I hear it does rain in London from time to time.
Carl: That's what people have told me. Yeah, yeah.
Michael: It's got a little bit of that Seattle thing going with the rain.
Carl: Yeah. Yeah. For sure. For sure.
Michael: Well, I'm looking forward to our discussion today. I know periodically we kind of put out to Twitter, "What are you dealing with? What are some of your conversations right now? Like, what do you want to hear us talk about and do the ‘Kitces & Carl disparate views’ thing that we do sometimes? And we got this great comment from Dave of – the challenge of – how do you work with older clients sitting on a lot of cash? There was a study that had buzzed through recently from Fidelity that says, from their data, nearly a third of investors over age 65 sold all of their stocks sometime between February and May.
Carl: Wow.
Michael: Which is actually a bigger number than I've seen from some other firms out there about investors – older investors, in particular – selling. All the challenges that go with that, as Dave says, they have a lot of capacity for risk. Melanie had kind of piled onto the conversation, like, very frustrating when they've got enough money, and it doesn't matter to them because they're already set. But it does matter because they could grow, this could be used for charity, this could be used for heirs long term. They have lots of capacity for risk. But we get stuck with folks sometimes when they've got all this cash and they're reluctant to invest maybe kind of coming off of scary markets.
And so, I thought it would be a good discussion today. Not so much, though, like, what could we have done to keep them from going to cash? Right? We've talked about that in some prior episodes. Or maybe this is just a new client that's coming to the table, they sold somewhere else and now they've realized they need help and they're coming to you. Like, the client comes in, I think the presumption here, they've got a lot of money already. So, this isn't necessarily just a, ‘they have to get an investor; they have no chance of accomplishing any goals’. Like, they've got a lot of money, they've got a lot of capacity for risk, but they're not taking any. It's sitting heavily or all in cash. How do you handle this conversation? As Dave puts, like, "Interested in good ways to approach timing of how you get clients back into markets and when to invest for clients like this."
How To Approach Older Investors About Getting Back Into The Market [03:44]
Carl: Yeah, it's a really good question. There's a lot to talk about. So first, I think, at least to me, even the way that question is often asked, I don't know exactly how Dave phrased it, but often people...the question we advisors assume is, "How do I get them back in?" or, "How do I get them to invest?" Not even ‘back’, let's just forget that they sold because there's a whole...that's a whole different discussion. Let's forget that they sold. Let's just take a fact pattern: older client, plenty of capacity, a bunch of cash. "How do I get them to invest?" is how it's often phrased. And I think that's where we start, is the implication that we even should get them to invest it. Right? So just because they have the capacity for risk doesn't mean they should, that also means they don't have to.
So, I think this is one of those objections. We often get caught up in the objection, and we think like, "How do I overcome the objection?" And I think instead of overcoming the objection, we need to go upstream and say, "Well, what question didn't we ask?" Maybe it's not part of what they want to do. Maybe it has nothing to do with their values, their statement of financial purpose, or their goals. Right? Maybe their goal is like, "I really worked this hard to save this much money, so I don't have to." Well, do you know that yet? And if you think it's your job – if it's clearly stated that that's their goal – if you think it's their job to convince them otherwise, I think that's a tough situation to be in. And the question would have to be like, "Why would it be your job to convince them otherwise?" And then we get into some possible inherent conflicts. Right?
Michael: Yeah. It is an interesting framing. On the one end, I love just the point that you make. Like, what – as you say, going upstream – like, what really are the goals? As Melanie framed this, like, this is money that could be growing for charity or for heirs long term. Then when I think back to clients, like, I've had clients I've said like, "Do you want to keep growing your estate?" And like, "No, the kids are getting more than enough. They're going to be fine. I want them to grow up to be responsible adults. I don't think I should give them 'too much.'" Like, we've certainly had clients whose values were like, "Yeah, I don't actually really want to leave my kids more than this." And so, in the truest sense, more growth is not a priority for them in terms of heirs and long term. Their view is they have enough, whatever "enough" means for them. Right? Some people that's $100,000, some people that's millions, some people that's bigger numbers.
And likewise, just not all clients are charitably inclined. Like, there does come a point... The irony, I feel like we talk a lot about how it's so important to try to get clients comfortable with their wealth, comfortable with their spending, understand that there comes a point where you've got enough so you don't get stuck on the ‘more’ treadmill forever, except the irony is like, if we succeed, if you find one of those rare birds who is actually comfortable and says, "I've got enough, I'm fulfilling all of the goals that I wanted to achieve," it's like, well, funny thing, they actually might not want to invest for more growth at that point because they've got enough. They are there.
Tying The Client’s Financial Goals Back To Their Investment Strategy [07:28]
Carl: Yeah. So look, I think it'd be fun that we can talk about that thread a little bit more, but I also think we can play the...we can talk about the other thread where like maybe they do want to, maybe there's a...maybe they need to. We can talk about that need, meaning they need to take...they need a little bit more growth based on a current set of goals, or they've expressed, "I'd really like to leave a bunch to my favorite charity." They've expressed that in the past, and yet they're still sitting on cash. We can go down that path in a minute, too, because I think that's important; it will be helpful for people. But I think this one's really important first. Not investing in the equity markets does not make you stupid. It doesn't make you un-American. There's nothing wrong with it. So, it's just one of the major levers we have, like, five major levers that we have, risk and return is just one lever, right? Like, we can make all sorts of other adjustments. If you've already met all your goals, we can lower your goals. You can die earlier. You can take out a little bit less. You can delay taking money out, all those other levers. We're just hyper-focused on this one lever.
And I think it comes, largely, from our training. That like...we can be really clear here. It's fine. If you came from a model where you got paid a commission based on product placement, there's clearly that. If you got paid on AUM, there's clearly that too. And while I don't think... Go ahead.
Michael: I was going to say, when I started on the brokerage and insurance side of the industry, I was trained – my job was to get clients access to the markets and to participate in the growth engine of equities and the opportunity that presents for long-term wealth creation. I was literally trained that my job was to turn people into investors that were willing to invest in the market. And granted, like, I started in the late '90s, right into 2000, and so like the booming '80s and '90s and the peak of the tech market before it actually crashed yet. So, we were coming off 18-plus years of raging bull markets. Like, there was a lot of optimism about investment opportunities, which carried it even further.
But that model...I think it's important to acknowledge, sort of at its core, that model that I think a lot of us were trained in if we've been in this for any period of time, was built around like, your job is to get people to become investors. And if they don't, A, you've failed, and B, you ain't getting paid, because, well, back then we got paid for mutual funds. Like, I'm not getting paid for a mutual fund for a client that sits in cash. So, my economic incentive was to get them to buy a mutual fund. And my training was: you come with this great gift to the average consumer unlocking access to equities and the growth engine that will allow them to create wealth. Why would anyone not want to buy this wonderful gift thing that you're bringing to them? Your job is to bring them this gift and sell them on investing and get them to invest and then help them stay the course in the long run and all the things that go with it.
But I think it's fair to own and acknowledge, I think we're very much trained this way. This is ‘what we do’. I'm putting this in air quotes, for anyone who's watching the video version. Like, this is ‘what we do’, and this is what we're paid for. And while we're not necessarily in the brokerage world as much as we were – depending on what channel you're in when you're listening to this – so much of the industry is moving from the commission-based model into advisory models, but advisory models are still largely AUM models. You don't get the A to M unless they're ready to invest it with you. Most of us don't build AUM fees on cash. And so, we still actually, fundamentally, have this whole model built around, it's my job to get clients to invest and participate in growth, and I kind of need them to, or I'm not getting paid. Unless we're off on the next generation of fee-for-service models – hourly, monthly, all of those. If you're living in a fee-based AUM world, it's sort of built up like, it's our job and it's what we get paid for. It puts a lot of pressure to say, "Everyone's supposed to be an investor."
Carl: Yeah. Look, and I think this audience – we both know that this is a well-intentioned audience – but that stuff still plays in the background no matter what, right? And even if you're as ethical as the day is long, it still plays in the background. So, I think that the lesson, to me, is, for that thread of this is, like just first, ask why. Like, really? Is it in the best interest of the client to get them to invest? And you're right, we have language, right? Like ‘underutilized cash’ or ‘non-deployed assets’. So, all of...
Michael: Idle cash. Idle cash. Who wants ‘idle assets’?
Carl: Idle. You're such a lazy...
Michael: That sounds awful, doesn't it?
Carl: You're lazy. Yeah. So, I think we first just...that thread, to me, is all about saying, "Okay, why?" So now let's switch a little bit and say, okay, let's assume there is a why. I've heard them mention tangentially that they wanted to leave some money to the university they went to, or they want to leave some money – more money – to the kids. Or even – we can go even further down – like, the goals they've outlined need a little bit of growth. And so how do we do...?
Michael: How do you open that conversation? Right? So, let's imagine that you've got this client that, by whatever means, they're in your office, they're talking about your services, but they're in cash and they seem fairly insistent to be in cash. I'm not even going to say you're trying to get them to be investors yet. Maybe we'll get there in a moment, per Dave's original question, but as you put it, we're just going upstream now and trying to understand why. So how are you opening this conversation with them?
Carl: Yeah. So, I think, to me, there are two ways to do this. One is you become sort of defensive and slightly...and it's in the language normally when we talk about this, how do I convince them? How do I...? We can do that. And that would involve facts and figures and charts and spraying them with reason and all of that stuff. Right? And I think you can be successful in that. I know I have been in the past when I used to do it that way. I had my favorite charts, “The Worst 10 Days of the Market” and da, da, da, da, da. All those charts. “The Growth of a Dollar,” the whole thing. That's one way.
Michael: What were your favorite charts? Now I'm just curious, is there a...did you actually have a go-to?
Carl: Well, I always loved...we all used that silly, “Miss the 10 Best Days and You May As Well Be In Cash.” Everybody uses that one, and I think it's pretty compelling. The growth of assets over the long term with the one that has like the world events labeled on it. So, you see this huge mountain chart.
Michael: Oh, yeah, the like long, long term, like 100 years of market growth and all the like, here's world war...
Carl: World War II, and here's this, and here's that.
Michael: ... here are crises, here are terrible events, here are economic shocks, and you zoom out over 100 years and you still made a bajillion dollars.
Carl: Yeah. And the other one, so we don't spend too much time, the other one I really always loved was the like 10-year return, and then overlaid on it was max drawdowns. Right? So, you saw that, like, to get this, you had to deal with this. Right? And I think Nick at Dollars And Data did that great post around how you would have even fired God as your mutual fund manager. You know what I mean? Because you have these periods of underperformance. So, I always thought that was a great chart. But so you can throw those at them. And that can work. But I think better, to me, is to engage them in a co-creative process, right? Where we back up and go, "Wait, wait, wait." I always assume that if there's any objection to the advice I'm giving, I assume it's because I missed something. Because if we were on the same page, they would never object to any advice I give them because we would be on the same page. So I...
Michael: That's powerful. So, if clients are objecting, your assumption is, “I must have missed something,” because that's just a mindset piece.
Engaging Clients In The Co-Creation Process [16:19]
Carl: Yeah. Here's the way it happens. You have to get it. I was explaining this yesterday, the FPA virtual internship thing. I think you have to get it so ingrained in your head that it's just...because clearly, if they only knew the great advice, they would never object, right? And so, if you're on the same page. So, if you can get that in your head so that you're like, "Oh, no, no, no. Oh, I'm sorry." That's literally how it would come out of my mouth, "Oh, I'm sorry. I must have missed something. Can we back up a little bit?" As soon as there's an objection, I'm not like fighting about the objection, I'm just saying, "Oh, I must have missed something. Let's go back." So, you go back and you just revisit the plan. "When we first met, you told me this, this, and this. Is that still true?" It sounds a lot like...you can go back and watch the episode where we broke down scary markets. It's the same process. "Is this still true?" Okay, that's like a statement of values/financial purpose. That translated into these goals. And you can even say like, "At one point, you mentioned wanting to leave some money for the kids. Is it still true?" "Yeah, that's still true." So, we get into that same place where we're there.
And then we can say, "Okay, look, there are different ways to go about this. Let's just walk through the different ways we can go about this. We can pick different goals to lower. We could delay some of those goals. We could change the way you invest money to generate a slightly higher return." Realize like, that's a different statement than "we could put some of your money in the market." Like, "We could change the way the money is invested to have the possibility of a higher return. So, we have these different levers, let's talk about which one's most comfortable for you. Because we can't have it all. Right? Like, you can have anything you want, but you certainly can't have everything you want. And so my job, really, to a large degree, is to walk you through the trade-offs that you might make. And given everything I've heard from you, I think these are the two that we should talk about. And maybe one of those is, maybe we can change the way we invest a little bit." Right?
So, if you can engage them in the co-creative process, most of the time people are...generally, our clients are really smart. And if they understand the trade-offs, they may start to say, "Geez, maybe we could put 10% of that money to work," or they may say, "I just don't want to do that." I think then that's an important discussion around, "Is this a permanent decision or is it related to maybe the experience we just had? Because if it's related to the experience we just had, it's not permanent. We're on sort of shaky ground; we've got to talk about that." Right? Because if they say it's not permanent, "No, I just want to wait till the dust settles," boom, go back and watch the episode on scary markets, right? But if they say, "No, I don't know if I ever want to," like... And again, this is sort of, in the back of your mind, you've got to think, "I've heard that before from people. And when the markets are all happy again and everybody's excited again, you're probably going to change your mind. So, let me make a really good note. Like, let's write this down. So, you're saying you would rather adjust a goal, delay a goal, die earlier." The die earlier is always a joke. It's just to lighten the mood up. But, "Adjust the goal, delay a goal, right, then take a little bit of risk. Is that what you're saying? Am I understanding you clearly? Okay, cool." No judgment, no shame, but really clear, direct communication about trade-offs. That's how I would handle it.
Michael: So, I like the angle around it. So, one of the conversations I still remember in a situation like this just 10-plus years ago, going through the financial crisis, which I feel like in some ways was even more traumatic. Like, yes, the pandemic environment has been scary, and it's scary at a personal health level, but the financial crisis was like, "We're not sure if the economic-financial system is going to exist next Tuesday" kind of thing. Like, there was even more sort of an angst around, "Where are your dollars invested and what are you doing with them? And is it safe?"
And so I was talking to someone, call him ‘Ned’, for appropriate anonymity purposes. And so, Ned was really anxious, essentially, around this, "I don't know what's going to happen with all this stuff. Like, I don't know what's going on with the whole economic system." And it led down to the road to this interesting discussion of the old infamous like, "What's important about money to you?" That conversation. And for Ned, the answer was really straightforward, like, it was security. Money was security. Ned was sort of an old, like, Jed Clampett-style, like every now and then he likes to go to the bank and ask Mr. Drysdale to open the vault so he can see his money. That makes him feel more secure. Ned was kind of anchored to that "money is security" phenomenon.
And so the question I ended out asking him was just like, "How much do you need to feel secure? Like, how much in cash do you need to feel secure?" I just said, "Is it literally all of it? Is it some of it? Is it three years' worth of spending? Like, what is it that checks the 'I feel secure' box for you?" And he had an answer, he had a number. I think it was like $300,000, which for him was a couple years' worth of spending. I was like, "Well, if we hold that, okay, if we agree we're going to hold that in cash, are we okay to start putting some of the rest back in?" And that was fine for him.
And that was how we actually got there. But it started with the ‘what's important about money to you’ conversation to get to security, to essentially get to...like, Ned needed a security blanket. And a certain pile of cash was his security blanket. But no one ever had the conversation with him. So, by default, he was holding everything in cash as his security blanket, until we just got a little bit deeper into that and realized like, "Okay, it doesn't actually need to be all of it. It does need to be some of it." And I can do all the math to show him why that was still more cash than he needed. It's going to be a drag on his long-term returns, he may finish with less wealth and on and on and on. But that was the security blanket he needed to allocate the rest. And so coming to it from that direction was a very different kind of conversation.
Carl: Yeah. I think the important part about that is that you backed up and asked the question. Right? Because we learn crazy things when we ask people questions. Because he could have said something entirely different, like, "No, I just..." I've got a friend, actually, this is true, they are a big, huge construction company, and their family bought one – their family's been involved in this construction company for probably 80-plus years – and their family bought one stock that went bankrupt, and they have it framed in the boardroom. And I asked about it and they said that's the first and last stock that X family will ever own. And I was like, "Why?" They said, "Well, because we couldn't paint the fence. We couldn't rezone it. We couldn't fix it up and re-rent it. We couldn't do anything." And so they've made a really clear decision around that. Is that okay? Absolutely. Right? So, I like that idea because then you get to put...like, whatever the goal is for Ned then you put this framework around it.
And then let's just have one more little conversation. Let's just say that it is...somebody does say, "Okay, yeah, I get it. I get it. I'm a little nervous about that, but having 40% of my money or 35% of my money in stuff that grows gives me a better chance of meeting my goals. And I just...I get it." So the question I've been asked a lot lately, and this is – we don't have to spend a lot of time here – but how do you go about doing it is really, I think, an interesting conversation. And again, we'll spend a whole session on this sometime, but remember, dollar-cost averaging...remember, systematic investing and dollar-cost averaging are two different things. Dollar-cost averaging is when you have a pool of money, and you are going to invest it over a period of time. Systematic investing is where you're saving 100 bucks a month or whatever, right? So dollar-cost averaging, let's just remember, we all know from the spreadsheets and the data, that the time to invest money is whenever you have it. So, if you determine...if you've got $1 million and 35% is supposed to be in equities, then you should put $350,000 to work tomorrow. We all know that from the data. Dollar-cost averaging is not...it's not a return tool, it's a risk tool. And it's largely a human emotional risk tool.
Michael: It's a regret minimization tool.
Carl: That's all it is. And we just need to realize that like, okay, great, we came up with the answer of $350,000, now let's pretend like we're humans for a minute. Like, you've got a nervous older client, you put $350,000 to work today and it shows up next month as $320,000...you've got a whole another discussion you're going to have to have. So just remember that.
And one of my favorite ways always is, especially if somebody is really resistant and they're saying things like, "No, it's not permanent, I just want to wait till the dust settles." My favorite way is to sort of define, have them help me define, how long it will be until the dust settles. And let's just say that they say it's going to be 10 months, then I love to use that as my dollar-cost averaging timeframe. Like, "Well, okay, well then what if we just put one-tenth to work for the next 10 months? So we'll start with $35,000. And we'll just do that every month. And we'll just check-in, but unless otherwise noted, let's just pretend like that's just going to be the plan." I found that to be really effective in terms of them feeling comfortable with it, you feeling comfortable with it managing the long-term goal of keeping this person...because it's not going to do you any good to get $350,000 invested and then 6 months from now have to pull it all out again. Right? So, I think it's okay for us to acknowledge that the data is only one tiny-teeny little piece of managing that whole situation to help the client have the greatest odds of being successful.
Michael: Well, and I think the other thing that's important to recognize, especially when you're dealing with this with, as we've set this up, like, prospective retirees, retirees, like folks in their 50s and 60s, maybe even to their 70s...this is probably not their first rodeo. Right? It's different if we're dealing with a client who's 20 or 30-something where this may be the first time they've had any level of dollars invested and experiencing a bear market and are going through it for the first time. If I have someone in their 50s, 60s, and 70s, this is the second, third, fourth, fifth time, depending on how actively investing they've been and going back how far. And so one of the questions I find is powerful to ask as well is just to sort of reflect, "This isn't the first time you've been through some market volatility. I know you were around for the financial crisis. You were around for the tech crash in 9/11. You may remember the crash of '87. If you go back far enough, you remember the crash of '73, '74. What did you do last time? I'm just wondering, you seem very anxious about what's going on in markets. I'm just wondering, like, what did you do last time, and how did that go?"
Carl: Yeah. Yeah, I love that. I used to always think like the cool thing about investing is that we always leave breadcrumbs, right? Like, we can always look back and see...behavioral breadcrumbs, right? We can always look back and see how we behaved at other times – assuming we had been invested – we can always look back and see how we behaved. And those insights can really inform how... You may have proven that you should stay way out of the kitchen. And if that is true, that there's no amount of data, knowledge, hugs, anything that's going to keep you invested, don't make the mistake of trying again. And let's be okay. Like, you can still be a valuable financial planner. You may have to change your pricing model because of it, but you can still be a valuable financial planner to somebody like that.
Are Clients Who Choose Not To Invest A Good Fit For You? [29:29]
Michael: I was going to say, it may mean either A, you need to change your pricing model, or B, just acknowledge... Look, I'm still more upbeat about the AUM model than I think a lot of people are out there, right? Just for folks who want to be invested and need...portfolio management is a part of what they're doing, just, it works. The client psychology works. The pricing model is comfortable. You've still got to deliver value, or eventually, you're going to get fired by...for a robo that'll do the same thing for a fraction of the price. There's more to it than just that. But that is a valid value proposition – a pricing model for it – but it does mean, if you get a client who doesn't want to be invested, like, you have to accept that one of the limitations of that model is, that means if they're not going to have A to M, then you have to accept that they're not going to be a client. Not try to say, "You have to be invested in order to become my client." We have to get comfortable with it. That's the model that you want to run, like, okay, but that means if you get folks that aren't comfortable with investing, it's not a matter of everyone must be convinced that the only thing to do is grow, grow, grow in the long run, because that might not actually be their goal. It has to be okay to say, "Maybe this client just isn't a fit because they don't want the particular service that I'm providing." And that's okay.
Carl: Not only okay, it's good. But I think we need to get to this point where we're like, "Good. Sounds like it's not for you. I'm super-cool with that. High fives on the way out, it's not a problem. We're going to be friends." Your business will grow so much faster when you get really clear about that because those people will respect you tremendously because you told them it wasn't a good fit. And they know exactly the kind of person that is a good fit, and they're going to be a fan. And you're going to feel better. And you're going to stand up tall. Man, we have to talk about that another time.
But that is absolutely true. Like, you're just going to run into times where it’s "What we do here." I'm thinking of like Nick Murray zealots about equities, like 100% equity, Nick Murray folks, which is great, like, it's totally fine. But those people, what I love about them is they know. And like, "This is what I do. If it doesn't fit for you, I get it. It's fine." Some of them go a little bit further than that, like we all do, like, "You're stupid." But I know. But mostly it's like, "This is what we do." That's what I love about that approach, is like, I'm not going to change it or, "Oh, I have a separate pricing model for people like that," or, "I'm going to convince you." It's like, "Look, I'm not here to convince. I will carefully and empathetically understand your situation, make my suggestions. If it doesn't fit the way we handle things, no problem. And let me suggest somebody who could help you." I think that's a really cool piece of that.
So that's a fun conversation. Hopefully, that's really helpful. To me starts, number one, go upstream. Just assume that you missed something. Go ask the questions like Michael did with Ned. Understand the situation a little better. Number two, then at that point, start to frame out. Like, we've understood values and financial purpose, we've got a sense around goals, now we have to have a discussion around trade-offs. You are infinitely qualified. That's your job. You can have that discussion around trade-offs, and you can help co-create a situation, a co-creation with the client, and then you'll do the right thing, their right thing. Not the thing that you need to be done. And if the thing...if their right thing doesn't fit into your business model, you disengage politely.
Michael: But to me, the biggest takeaway is just, as you framed it, like, if clients are objecting and pushing back, I assume I missed something about what their goals really are, what's important to them, what they're shooting for. Because if we were perfectly aligned on that, there's no reason they wouldn't be taking the suggestion. And so just coming at it with the mindset, with the positive mindset of like, "Maybe I still didn't get to the bottom of this, I need to dig a little deeper to understand the client." I think it's just...it's a very powerful mindset shift, especially when you recognize what that may lead you to at the end is, turns out this client just isn't a fit, and I wish them the best, or we'll try to find them another advisor who is.
Carl: Amen. Totally. Awesome.
Michael: Thank you, Carl.
Carl: Thanks, Michael. That was great.
As a consumer I do see the need for certified financial advisors.
But I also think the AUM model warps everything. It drives advisor prices and expectations so high that unreality sets in, to the point of entitlement. AUM – rather than advising and providing reasonable value – becomes an end in itself. And ironically has advisors in a bind now because their clients bailed out. [Raising the question of how effective that expensive advisor was to begin with].
This is a reasonable (besides expertly-written) site but even here the business concern is largely AUM – how to get it; how to grow it; how to compare it; how to restore it; how to negotiate it – and, tellingly, how to justify what you’re charging! In what other consumer-facing business is that last point so sadly relevant?
You’ve written about at least one relatively low-cost flat-fee advisor who makes good money and has to turn away clients. Other advisors called him stupid.
I think consumers who agree to any other arrangement are stupid. They’re funding an industry that primarily lives off running canned analyses, formatting reports, reading scripted advice, applying recipe methods, providing anodyne support such as “re-evaluating basic values” – and taking 2-3% of the client’s money each year. No matter the results or how much that is.
Of course value is added here and there, but at what cost? AUM pricing is, in effect, all the traffic will bear, and justified in large measure by happy talk, obfuscation, playing on fears, lack of consumer knowledge, etc.
Thanks for allowing not only open access but open comments. Your technical advice is amazing and has certainly helped me with some planning and tax questions. For investments I just buy the top-rated Fidelity Select funds and hold on long-term. That’s done far better than the high-level CFA I had.
Fact check on the Fidelity study: https://www.thinkadvisor.com/2020/06/22/report-of-retirees-fleeing-market-due-to-coronavirus-was-greatly-exaggerated/