A primary area of concern for advisers is educating their clients so that the primal urges of fear and greed – so commonplace in the markets – do not take control and override good sense. Another area of concern that seems to arise more often with clients than you might think is more difficult to characterize. It is a combination, with varying weights to its factors, of lack of attention or focus, ignorance, assumption that others will take care of everything, laziness, the presumption of being smarter than everyone else or, in the worst cases, outright stupidity.
Clients exhibit this “dunce factor” with respect to their investments and financial plans in many ways. There is the client who insists on putting thousands into Fannie Mae as the shares drop near zero – against your advice of course – and then complains when he loses on that transaction. There is the client who sings your praises when the market rises and complains bitterly about you when it falls. There is the client who entered into a handshake deal with a “trusted colleague” and now is unable to recover his investment because the deal was not in writing. There is the client who does not approve of his unemployed daughter’s apartment and so buys an expensive condo for her, without considering the tax implications or the rest of his family’s needs. And then there is the client who quits a good job to move to another community and buys an expensive new home – without a new job and without selling the old home and without enough money left to survive on let alone retire.
There is no easy cure for the dunce factor and it is going to arise with some of your clients at some point in time. Working closely with your clients to instill trust and understanding along with good two-way communications will help. If they ask your advice before engaging in these unfortunate transactions, you may be able to derail the worst ideas and provide alternative approaches to address the issues they believe they face. If a client does not ask for advice before engaging in a major financial transaction, you do not want that client. Sometimes you will be left looking at the mess they have created and trying to come up with some help or perhaps telling that client you cannot work with him any more.
Don’t laugh, clients do these things and worse and expect to bear no responsibility for their own foolishness. It happens every day and you do not want to get caught up in it.