Kitces & Carl Ep 26: Talking Clients Out Of The Bunker Portfolio

***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:

• Nick Murray
• What IS The Difference Between "Being Tactical" And "Market Timing"?

Kitces & Carl Podcast Transcript

Michael: Welcome, Carl.

Carl: Greetings, Michael. What is this episode? I think this is episode 712.

Michael: We are at a cool 25. Nice round number. We are a quarter of the way to our 100th episode.

Carl: That's exactly right. We’ll see if we make it that long.

Michael: I've got faith. People are listening to the podcast. We're getting more feedback. We're getting cool reviews on iTunes. So we are arriving.

Carl: Let me just real quickly get something off my chest. I saw some review in one of these industry magazines about your podcast! Everywhere I go, how come it's yours? It was Kitces and Carl!

Oh, now people are going to know that I feel a little bad… it’s Kitces' podcast where he interviews Carl.

Michael: That's flattering to you – you're the interviewee! You're the subject-matter expert! I'm the poorly communicating idiot who asks you all the questions to learn and glean for all of us. This is flattering to you.

Carl: I am...

Michael: You are the subject-matter expert here.

Carl: So I am actually thrilled to be a guest on your podcast. Thank you for having me.

Michael: I'm thrilled to have you as a guest on our podcast, but, sure, let's run with it. And kind of speaking of this theme of these conversations, our last episode and a couple of these that we've done around having difficult client conversations, which I think is your gift – you have been incredibly well-received by all the folks that have been listening.

The Bunker Effect – When Clients Lose Total Faith in the Economy [00:02:42]

Michael: So we did this conversation last week, or two weeks ago, around talking clients down. We've had to talk them off the ledge when they're freaking out, and we talked them back when they were overly enthusiastic; “I just heard Bitcoin is going to the moon! I heard gold is going to the moon! I want to buy these things and put a lot of money because I think I'm going to make a zillion dollars!” and pulling clients back in what you called the “overconfidence conversation”.

But we also got some recent good conversation and feedback around this alternative version of those conversations, which is the client that maybe wants to put everything in Bitcoin or everything in gold. And it's not because they think it's going to the moon, like the next hot investment.

It's because they think everything else is going to go down the tubes. Like the government is going to destroy the dollar so we have to buy Bitcoin. The economy is going to collapse. I read I have to put all my stuff in gold. It's sort of like the I'm afraid we might have to hide in the bunker with the guns and the gold.

I don't want to make light of that; we see it from clients from time to time who are really anxious about this. And to me, I guess you can correct me if I'm wrong, I think it's a different kind of conversation than just, “The market is going down, it's a bear market! I'm freaking out!” I know how to get through some of those. Let's get back to your goals, and we can pull out the charts, and, yeah, the market has pulled back, but here's how they work in the long run.

But when someone is questioning the entire foundation of the economic system and that's the conversation you've got to have now, how do you talk people back that want to be in this hunker-down-in-the-bunker kind of portfolio? How do you have those conversations?

Carl: That's super interesting. It's interesting because of how long that's been going on, and I was just thinking I feel like that's increasing. I would have to say I feel like that it’s getting brought up more often than I can remember, but it's not new, right? It feels like we've been having these kinds of conversations for a while.

Michael: I do feel like there was a change, I guess, basically since the financial crisis. I try to remember back for the first 10 years of my career in the 2000s. We'd had our bear market, we had the tech crash, we had the recession after 9/11, the market went down a bunch, but it wasn't the same kind of environment. I don't think anybody was questioning the soundness of the economic system. It was just like, jeez, the market went up for 20 years in the '80s and '90s. And that tech crash sure sucked, but people bounced back pretty fast.

Since the financial crisis, I feel like we've been blowing up the dollar and the Fed is going to bring the system down. First it was gold, then it was Bitcoin. Now it's gold and Bitcoin. Just these discussions of, I guess to the core, it’s “I'm losing faith in the economic system, so why am I investing with you?”

Carl: I think that's the right way to put it. Like “faith”, right? This whole system is the story, and it's only as good as the faith we have in the story; collectively we've all agreed that these things are going to work. What's happened since the financial crisis, and even the WeWork story recently is an interesting example of just seeing that maybe some of these stories weren't true.  I think that's coming up more and more.

So let's just dive into it a bit. Because I also find advisors themselves are often pretty prone to this; we spend a lot of time being relatively analytical and spending a lot of time digging into these things. We might be some of the few people who would be interested in reading a book about the global financial system, right? So I think this is the problem. And I think it's a problem internally. It certainly was a challenge for me. So let's talk about it a little bit.

Let's take it from the perspective of a client. A client comes in and says this kind of stuff, and they point to some really reasonable research around it. You know given the Intertubes, and the problem with confirmation bias, that I can find some people who are relatively reasonable saying, "Hey, there are some big risks here that we're not thinking about." So how do we invest, and even more broadly, how do we have the conversation with clients? How do we build businesses around it?

I believe this points to one of the fundamental challenges. In the end, we have to help people make mission-critical decisions in the face of irreducible uncertainty. We're not sure. There's a reason there's an equity premium. Stocks have always done better. There's a reason beyond short-term volatility, right? Because there's risk there. So I think, to have this conversation and to operate it as a planner, an advisor that helps people make decisions about how they invest their money, you've got to make some fundamental assumptions.

Fundamental Assumptions Around Risk and Return That Clients Must Understand (And Accept) [00:08:24]

Carl: You can rely on the weighty evidence of history for these assumptions, depending on how far you want to go back in terms of history, but certainly for the last 90 or 95 years of equity market research, we can say that based on the way the events of history have gone, I think to operate and have this conversation we're going to get to with clients, we've got to make an assumption. The declines in the equity markets are temporary, and the advance is permanent, right? That over long periods of time, and I think we'd all safely say those periods of time need to be, we sometimes think 3 or 5 years. No, they're decades.

Michael: Ten or 15 years, yup.

Carl: A decade or two. Then over reasonable periods of time, reasonably long periods of time, you can have assurance that equities are going to do better than fixed income, and fixed income may do better than cash. If you're not okay with that assumption, I don't know how to operate, you know what I mean? Anything that deviates from that assumption means you're deviating from the evidence of history, and you're now the assumer.

Michael: And is that literally how you would start framing this conversation up with a client? Like, hey, I just want to talk about some fundamental assumptions about how markets and economies work, and I just want to make sure we're on the same page about this. Because if we're not, that's the conversation we're going to have to have first. Over reasonable periods of time, equities will do better than fixed income. At some point, the economy grows, and the rising tide lifts all boats, and that fixed income does something better than cash. And that's just the fundamental reward for taking the risk of bonds and then taking the risk of stocks.

Carl: Yeah, yeah, I was framing that as just sort of an internal belief system, but yes. Actually, I'll call out the belief systems that come up, but let's shift directly to client conversation. I think the conversation has to start with some fundamental principles, making sure we're on the same page. What are those? Just the history of returns and the definition of risk. And that over long periods of time, equities are going to do better than fixed income, fixed income is going to do better than cash.

Michael: And how do you define risk in that context?

Carl: Well, I think there are two...And we've got to be really clear that we're talking about the same thing with clients, right?

Michael: Yeah.

Carl: I think most of the people that listen to your podcast and read your material will know this, but many advisors don't, right? They don't know the difference between risk and uncertainty. So in sort of our physics-envy desire, in academic circles and as practitioners, when we use the word “risk”, we are saying volatility or standard deviation.

Michael: Okay.

Carl: We're essentially saying risk is variability within known bounds, right? Uncertainty is variability with no known bounds. And there's so much to cover here, but the short version of it is I think clients, when they're using the word "risk," what they're actually thinking in their minds isn't closer to uncertainty. They're thinking, “Am I going to end up under the bridge? Is it all going to go away?” And we're thinking in this nice clean little box like it's a dial, “Oh, we'll just turn up the risk. We'll turn down the risk.”

Michael: Oh, yeah. “You don't like this much risk? No problem. I'll just dial you down to a conservative growth portfolio.”

Carl: Yeah, yeah.

Michael: And we're thinking in terms of dialing down volatility, and the client is still in the world of, “Well, if the entire economic system is going to melt down, we're going to go back to the bunker, and it’s not really helping me by being in a conservative growth portfolio, because it still all goes to zero if the system melts down”.

Carl: Right. And that is not simply in our model, right?

Michael: So that's part of why you come back to that assumptions conversation? Like, “Hey, I just want to make sure we're on the same page. Over reasonable periods of time, equities generate more return than fixed income, and fixed income generates more return than cash. Let's just make sure we're on the same page there.” Because your true bunker-level client is going to be like, “Well, I'm actually not sure.”

Carl: Yeah, and that's okay for them to say that. We just want to understand that's what they're saying.

Michael: Right, because then at least I know this is not a volatility conversation anymore. This is the entire economic system is uncertain for me, not just risky for me, it is uncertain for me, I'm not sure history is going to hold.

Framing Hypothetical Portfolios As Risk-Based ‘Bets’ To Help Clients Understand the Value of Diversification [00:13:35]

Carl: Yeah, I'm not sure history is going to hold. I don't have faith in the system. So let's just assume I knew that was where you were coming from based on the email before we scheduled this meeting. I would have said, "Hey, I just want to get on the same page and see where we disagree. So just tell me if we're on the same page here." I would outline the returns. You can pull out a chart even, the chart we all use, the mountain graph or whatever.

Now this obviously assumes that you understand the plan, you understand the goals, the values – all that stuff is already done. We don't need to do it. And so now we're just literally having this conversation, you don't have any faith in the economic system. I'm making sure we're talking about the same thing. We look at the mountain chart.

Then I say, “Okay, the second thing we have to make sure we understand is that I was talking about diversified risk, right? So, look, this portfolio of 14,000 equities under the hood – we're talking about the whole system here, not an individual company or even a single slice of a specific asset class going to zero. You're talking about the whole system. Okay, good, we're on the same page, right?”

So we cover those two. Because sometimes people are thinking, their neighbor said to them, "I invested in the stock market once," or they can even say, "Well, Rodney, I don't invest in the market. All my money went to zero. My grandfather lost all his money in the market." And they think, well, the grandfather really lost all of his money because he'd bet on whatever, XYZ stock.

Michael: Yeah. One stock, or one stock with leverage that got margin squeezed on the way down.

Carl: And they’re thinking, we're okay – we're on the same page. Great, now let's talk, right? So, to operate in the system, we've got to have these fundamental assumptions. I normally start the conversation by saying, "Listen, the way we invest money actually reminds me a lot of Winston Churchill's quote about democracy. He said, ‘Democracy is the worst form of government, except for all the others.’ And I feel a little bit like this conversation, the answers I'm going to give you, may feel unsatisfactory, right? This may feel like the worst way to invest money, except for all the others.”

Because in the end, no matter what we do, there is still risk here. I would also probably say at this point, “Hey, there's risk in having the money under your mattress; there's fire risk, there's certainly inflation, and cost-of-living risk. So we're just talking about trading risk here. If you want to go that route – under the mattress – we can talk about the most effective way to do that.”

Michael: Well, fire-insulated, apparently.

Carl: Yeah, I was thinking more like, “What do you want to do, buy laddered CDs with your $3 million?” Then we have to talk about FDIC insurance of laddered CDs, and then on top of that, inflation risk and cost of living increases. So we're just trading risks around. So let's just get a sense here.

Here's the piece we really wanted to get to, that's almost all context for this discussion, which is, “Look, if we make an assumption other than the ones we've just laid out (that these are the historical rates of return), we're using the weighty evidence of history to make these decisions, overlapped with your goals. And underneath in terms of how we invest the money, there's this weighty evidence of historical returns that we've used to build these portfolios for you. If we start adjusting those, if we're forecasting something different than historical returns, you've got to have a justification for that.”

For those of you out there that feel like you're smart enough to make those forecasts, fire away. But just know that once you become the assumer, I've always felt like you better be able to defend that assumption you made. That's a reasonable thing. I never, after looking for 10 years and being in some of the firms that throw the most resources at people, like paying them the most, and with people wearing really nice suits, and seeing that they repeatedly couldn't do it, I just gave up and said, "Look, I’ve got to rely on these weighty evidence of history. As soon as we leave the weighty evidence of history, we've got to have a justifiable position, and I don't have one. So let's just talk through this.”

This is the exact conversation I’ve probably had...it wasn't hundreds of times, because they didn't have this many people that were worried, but it was definitely dozens of times. I've had it more publicly than I have with clients lately, just maybe from people at a Q&A event or through individual emails. Let's assume for a minute that you're right. Like we have no faith in the system. First of all, you just got to acknowledge that's a big bet, right? That it’s a bet. And it comes with risk.

Michael: That's literally how you would frame it. That it's a bet.

Carl: Yeah, that it's a bet. You could say, if you want to be gentler, but I don't see any need to be gentle here. But you can say, look, that would be an assumption that we would be making there.

Michael: Okay.

Carl: Right? And, well, here's the reason. I read this book, and I heard this guy. And many of them were really well-thought-out. There are lots of books right now about the collapse of the whole system, right? So, all right, what portfolio would we build? What would be the appropriate portfolio? Step one is making sure we're on the same page in terms of assumptions. Step two is to make sure that we're going to make it a set of assumptions/a bet. Step three, know the portfolio that would work in that bet. So what would be, if that was the situation, what would be the appropriate portfolio for that bet, right?

Michael: A whole bunch of gold and maybe some Bitcoin, right? To me, that's where you get some of these clients that want to go in this direction of thinking the whole system is going to melt down. “I'm afraid the whole system's going to melt down, so I just want to put my money in gold, because I read that's the thing that will withstand the economic meltdown.”

Carl: Yeah, so I think that's right. Like gold or Bitcoin. I used to joke that it was guns and butter. If I was in a bunker, I'd want guns and butter. One of my friends used to say, he always thought it was things that...If things went really bad, you'd want stuff that you could trade with. So he always said, "cigarettes," and he's like, "Everybody else is going to have gross powdered milk, so I want cocoa, like chocolate milk mix." He's like, "I can trade cigarettes and chocolate milk mix with anybody." So, right.

So whatever you think that appropriate portfolio is, let's just say guns and butter is like a general term, guns and butter. All right. So then we say, "Okay, great, that's the portfolio we would build. Bitcoin and gold, guns and butter. And so step four would be, okay, let's just look back. What period of time, how often over the last 90 years, and if you want to go further...And I always used 87, because that's how much stock market return data we had? Where are we now? We've got to be 95, 97, 100 years.

Michael: Something like that.

Carl: Let's just say 100 years. Out of the last 100 years, what period percentage of time would that portfolio have been appropriate? Especially if you elongate that to a five-year period. Is there a five-year period? There's probably no five-year period. Maybe there's one, you know what I mean?

Michael: Mm-hmm.

Carl: Ninety-nine percent of the time, basically 100% of the time that portfolio would have been inappropriate over the last 100 years. And so then we're really stuck with, “Do we really want to gamble that history is going to change that much?” Because there are always the four words, "This time it's different."

Michael: Yeah, or just...I saw this article. I saw this video. What was it? "Aftershock" the book and video was making the rounds a few years ago. What do you do with those clients that just insist, "But I think the whole system is crashing down. I just want to go get my guns, gold, and butter."

Carl: Okay. So I think there are a couple of things that are really, really important. One is you've got to figure out where the line is between just talking somebody into this and what will make the person literally not be able to sleep, right?

Remember that your job, at least I view mine this way, is that it's just for a minute that you’re trying to separate any economic impact this decision has on you, the advisor. I know it should go without saying, but because we're all human, it doesn't, right?

So try to separate that decision out. I think if you're going to operate in this environment as a planner and advisor who gives this kind of advice, you better be pretty clear that this would be a mistake, right? To build the guns and butter portfolio would be a mistake. If you don't think that would be a mistake, that would be a whole different discussion. But that would probably be a mistake.

If it's going to kill someone, if being in the appropriate optimized portfolio is going to ruin their lives for the next 7 to 10 years because they're so worried, our ultimate job is to help somebody understand the trade-offs they're making, and that trade-off would include sleep, right? It would include stress. It doesn't just include optimum portfolio.

Michael: And so if they're that anxious, are you letting them go there? Are you helping them go there?

Carl: Really I think the art to this whole discussion is determining the dosage of those things. We joke that it's like a punch in the face versus the empathetic hug. Figuring out the dosage of those things is really hard. I can remember clients who just couldn't take it, it was just brutal for them. So we had to have really hard conversations around this.

There are all sorts of phases of that dosage, too. One of the conversations I used to have at the end, how this would wrap up. “The guns and butter portfolio, it's never been appropriate. Does that make sense to you?” So let's say somebody is on the edge, and they're still willing to be reasonable. And the way it would end up is that I always try to make them feel like it was partially their idea as well and just say, "Listen, if it's okay..."

Then we circle back to goals. “So remember, when we did this weighty evidence and history stuff, when we built the portfolio to give you the highest likelihood of meeting your goals with the lowest risk we could take – not no risk, but the lowest risk – we would rely on the weighty evidence of history. After all the stuff we talked about, have your goals changed now? Have your values changed now? Is this portfolio still the right place for you? So if it's okay with you…” (That was one of my favorite things to say. “So if it's okay with you.”) “The best advice, and I know this might still feel unsatisfactory, the best advice I can give you is just to stick with it.”

When Terminating A Client Relationship Can Be The Best Course Of Action… And How To Make A Graceful Exit [00:25:30]

Carl: And most of the time, 97% of the time, people say, "Yeah, forget I called," Or, “Yeah, good.” They understand, and thanks for the conversation. I had some clients call and say, "Hey, give me talk number three, like the talk you give."

The occasional person would say, "No, man, it's not okay with me." Or let's say they do that, and a week or two later, some bad news comes out, they call, and they're just like, "I can't take it." What do you do?

Michael: What do you do? Are you terminating this client? Are you accommodating this guy? Like, “Fine, at least let me buy you a gold ETF so you don't just actually store gold bars in your house?” Where do you go with this?

Carl: Yeah, I know. Look, if your advice to a client to help them meet their goals is making the client terribly miserable because of their own – and I'm using this word carefully – psychosis around these things. (I don't mean that terribly negatively. I just mean that they're completely hung up on this, and they can't do it.) Then you have a couple of choices. One, you can “Nick Murray” them, and say, "Hit the road. The way I take care of money doesn't work with the way you want your money taken care of, so I therefore cannot charge you anymore because you're not taking my advice. Go on.”

Michael: And it's worth doing. Part of the point in that conversation is that it amps up the pressure on the clients. Like, “Okay, so you really want to terminate this relationship? I'm going to fire you as the client if you won't follow my advice”, which is a little bit of a high-stakes conversation or relationship strategy, but it works for some people.

Carl: Yeah, I think that's a really good thing to point out. We had a friend of ours point that out recently, “If it sounds like a threat, I would never do it.” And I just never realized that even if you didn't intend it that way, it comes across sounding like a threat. I would never do it that way. I wouldn't say, "Look, either you follow my advice, or you’ve got to leave." But that's definitely what it sounds like.

But the way I say that would be, “Look, I totally understand this isn't working for you, and it sounds like you've scoped out some options, so how do I help you get the money there?” So much more like, “How do I help you?” I can remember one guy named Joel, who was the one client that I lost because of this exact thing. He was like, "I just want my money at the bank and in CDs." And I went through all of those things. And in the end, I was like, "You know what, Joel, this is probably alright, for right now..." He did this in late 2009 or something, just before things turned. And obviously, this is what I'm talking about. He regrets it.

So there's that option. The other option is to figure out a way where you say, "Okay, let's dial this return assumption (I’m pulling on a lever, if you can't see it). Let's dial this return lever way down. I'm not sure gold and Bitcoin are the right way to do this, but how about laddered treasuries?" Ah, the U.S. Government. Okay, man, we got nothing. Again, at some point, there may be. But if you say “Look, why don't we build a portfolio where we're taking huge inflation risk, but you can sleep at night, and that means we need to have some really tough discussions around your goals."

Michael: Because that's part of what it comes back to. You really want to step out from participating in the economic system and doing this all-in with gold or Bitcoin or whatever it is. Okay, I get it. You think this is what holds up if economic Armageddon happens, but where do your goals stand if economic Armageddon doesn't happen, and you just sit out normal economic growth, and you're still going?

Carl: Yeah, and I think that's another interesting point, too. I do remember having this conversation where, “Look, if the guns and butter portfolio turns out to be the right portfolio, you've got way bigger problems than having a stash of guns and butter, right?” I remember saying this. We're all moving to the hills and growing our own vegetables. I don't think your guns are going to help. Your butter isn’t going to help you all that much nor is your pile of gold. What do you do? Put it in a wheelbarrow?

So that was that side. The other side is, yeah, okay, your goals. Let's say we build the lowest-risk portfolio we possibly can. And by “risk” I mean loss of principal, not inflation (well, loss of principal not including inflation). This thing will never go down. Then you realize that means that we're going to have to change goals. If this is a temporary thing… Oh, and that's another part of the early discussion. Is this temporary or permanent? “Oh, no, no, no, I just want to wait until things settle.” Well, then that's a market-timing discussion. That's a whole other route we have to go down. We're assuming here they have said permanent.

Michael: Okay. But that’s a good thing to clarify. If you’re worried about a temporary meltdown and setback in the economy, or is the whole thing permanently broken? Because, as you know, those are different conversations. If it's temporary, it's like, “Oh, we're not having a guns-and-butter discussion. We're having a market-timing discussion.”

Carl: Totally. And we should have nailed that at the beginning. I apologize for missing that. But that's exactly right. So we're assuming they've made a permanent decision. So then we have to say, “Okay, let's build a portfolio that allows you to sleep at night.” And that portfolio looks like laddered U.S. Treasuries and CDs. If they've got a problem with that, then I don't know what to do. Because I certainly wouldn't facilitate all the way unless I believed Bitcoin and gold were good investments. I wouldn't facilitate speculation. It's going to cause me problems later. No way.

Michael: So that's your line of, “Look, I'll always accommodate you to go into government bonds and laddered CDs, we’ll have to talk about the trade-offs and the ramifications. But if you expect a permanent economic meltdown and want to go all-in, 100% in gold, preferably in gold bars in your house,” that's your little switch that this just isn't going to work. Now you're going to “Nick Murray” them?

Carl: Yeah, to me the decision would be around an asset class that I use and believe in, and I use fixed income in portfolios. We're just saying we're using them a little bit more and slightly differently than we have in the past, and that would probably be individual securities that are laddered with some form of guarantee, FDIC insurance, or backing by the full faith and credit of the U.S. Government.

And then you have to point out that, “In the case of a full economic meltdown, will the full faith and credit of the U.S. Government still apply for you, Mr./Mrs. Client? No?” I don't know what to do. I just literally don't know what to do with that point. Because if you bring on guns and butter...sorry, gold and Bitcoin, now you've got a speculative portfolio that puts you in a world of regulatory risk, and if that goes south, try explaining that to someone. Because no one really understands that stuff. It's pretty easy for a client to say, “I didn't understand what I was saying.”

And then let's say that, okay, yeah, Treasury CDs – we've covered it, cool. Let's talk about your goals now. And some clients are going to be okay. I can remember a couple of clients that we just had in 80% fixed income, 20% equity, and there were no concerns.

Michael: I think, to me, there are three interesting takeaways around this conversation in setting it up or trying to get through to the client.

Number one is just clarifying that we are on the same page about the assumptions and principles of markets. Over reasonable periods of time, equities grow more than fixed income, and fixed income yields more than cash. Are we on the same page here? Because if we're not, I need to know if we're having an economic-system-is-breaking conversation or just the I'm-nervous-about-returns conversation.

The second is this idea of whether we are talking about something temporary, or are we talking about something permanent? Because if it's permanent, we're back to the system-is-breaking conversation. If it's temporary, this is actually a market-timing conversation in disguise, so I need to do that conversation.

And then number three is about walking clients through how this plays out, how much of a bet do you want to make on this world-economic-meltdown-disaster system, recognizing that if that's the bet you make, and you make it with all or most of your money, and the world doesn't end, and the darn system just keeps chugging along and growing, are you actually going to ruin your goals in the normal scenario because you bet on the end of the world and the world didn't end?

So at least helping to walk people through the question of, “Have you really just thought about how this plays out? You want guns. Do you actually know how to shoot them? You want gold? How are you going to cut the gold to trade when you've got to hand off to someone for food in the economic Armageddon? Do you have a metal slicer? How are you going to do this?” And just try to get them to true up that realization, at least own it if they're going to do it, or maybe realize that it doesn't quite make sense what they're trying to do.

Carl: Yeah, and I think the trick to all is just figuring out how for to go with the conversation because you can very easily stop the discussion. If you don't have agreement on the fundamental assumptions around how the economic system works, you may just say, that's like having an argument about the fact that a hammer won't pound a nail, right? I'm a carpenter. You don't think a hammer will pound a nail. I can't help you build your house. And it's not because you're bad; you're just saying that for the fundamental tools I use, you have doubt about them. I understand that. It means it's not a good fit. You and I are not a good fit.

Michael: And that's where it ends. Like that sort of the penultimate Nick Murray moment, like, look, if we can't get on the same page about this stuff, we're just going to have to stop working together.

Carl: We could think of so many analogies. Like the doctor saying, look, I argue that that medicine will not work. And you're the doctor saying, "Here's the medicine. I’ve done hundreds of treatments with this.” “I don't think that medicine works.” “Okay, I can't really help you.”

Now the one change it would make, and I feel bad about saying Nick... I love the way Nick Murray handles things where he's just really clear is awesome, and it works. Great for many people. I was a little gentler, so I think it's more like, “Hey, I now clearly understand where you're coming from, Mr./Mrs. Client. I'm not saying I agree. I'm just saying I clearly understand. I understand how hard it would be to make financial decisions with that set of beliefs that you've got, but it's clearly incompatible with the work that I do, and so it's just not a good fit for us.”

So it wouldn't be like, “If you don't come around to my belief system, I'm firing you.” It'd be more like, “Look, it's just incompatible.” Because I don't know that I would want to talk, and then how far you've gone in this conversation, I don't know that I would want the relationship. And I don't mean legal risk. I just mean the stress myself. If you have another financial crisis, if you've got...

Remember, you talked them into a 60% equity portfolio that matches their goals. And they say yes, and you've got an 18-month, or heaven forbid, a three-year, a four- or five-year period, which we're already forgetting can happen. You've got to look them in the eyes when their portfolio is down, the equity markets are down 50%, so their portfolio is down 34%, or 30%. You've got to look them in the eyes, and they go, "I told you. This is what I'm talking about. I'm not sleeping." And you've got to be the one, I wouldn't want that. And I just didn't want the stress risk in my own life.

Michael: All right. So start with principles of returns. Is this a temporary or permanent problem? How much of a bet do you really want to make? And your Hail Mary passes to Nick Murray at the end.

Carl: Well, yeah, and just outline out the bunker portfolio, what percentage of time would this be good. Do we really want to make that bet? And then clearly what this does to the overall plan (and I'm moving my hands as a lever again). I think sometimes we get caught up and we got to talk people into, but there's only one lever. Because the more subtle version of this is, “I'm just uncomfortable with the level of risk.”

And they’re kind of the same principles. It's just that we're going beyond zero, right? It's okay to take a client to 40% fixed income, if that's what would help their goals and those are the trade-offs they're willing to make. We can adjust their spending. I'm going to die out there. That was a joke. Right? So we've no other levers to pull on. So, yeah, hopefully that's helpful. That's a complicated problem.

Let me just mention one thing. Internally, I've had this conversation with other financial advisors than I have with clients. And it may be the nature of the work I do now, but I think a lot of us wonder, “Can I handle the next shoe dropping?” And that was exactly the same set of conversations I would take myself through. If I no longer fundamentally believe in that system, it's pretty darn hard to be an advisor, you know?

Michael: Yeah. Well, thank you, Carl.

Carl: My pleasure.

Michael: Thank you for joining me on our podcast.

Carl: Yeah. Thank you for having me.

Michael: Absolutely.