It goes with the territory: During high-anxiety times like these, when market volatility makes even the strongest stomachs churn, you can expect to deal with more than your share of jittery clients. But nervous clients are not the only kinds of clients who make your job difficult. In fact, there are probably at least a handful of, shall we say, “challenging” people you encounter in your office, from the arm-chair expert who wants to bet on every hot stock covered by CNBC, to couples who spend half their appointment with you fighting.
Obviously, it's best to be prepared to manage all these different client types. What's at stake, of course, is more than just the chance to turn an irritating relationship into a happy one. Ultimately, it also will impact how effectively you can manage the client's portfolio. “Money is an emotional thing,” says Sarah Dale, president of Know No Bounds, a Williamsburg, Va., consulting and coaching firm specializing in financial-services professionals. “But you don't want that to get in the way of making an intelligent investment decision.” Here's a look at how to handle four common types.
THE NERVOUS NELLIES
These are clients who, deep down, would probably prefer keeping their money under a mattress — or, at least, in CDs. Often, they're children of Depression-era parents, who learned to fear the specter of a devastating downturn. Or, they're simply people who mistrust the market.
YOUR MOVE: With these clients, you need to start by winning their trust in your abilities. Once you've done that, you can slowly — very slowly — work to modify their outlook until they're willing to take some moderate chances. Consider Jeffrey Dunham, president of Dunham & Associates, a San Diego-based RIA with about $1 billion in assets. He has a standard m.o. when it comes to the truly risk averse. Initially, he keeps them in ultra-safe, conservative investments. “Year one, it's all fixed income,” he says. Then, once he feels they're comfortable with his expertise and decision-making powers, Dunham nudges them along, moving as much as 10 to 15 percent into equities. After five years or so, he generally finds he's able to convince them to put as much as 40 percent of their portfolio into stocks.
Ultimately, it's all about education. The first step in the process, as with any client, is to get a sense of how much risk they're willing to take — and that will require more than just handing them the usual forms to fill out. “Ask them, ‘How would you feel if the market went down 20 percent?’” says Randal Langdon, a branch manager with Raymond James & Associates in Atlanta. What would they want you, the advisor, to do? “Get a gauge of their reaction,” he says. Then, figure out how much they know about investing, so you can help them understand why they need to take certain steps that might make them uncomfortable.
Perhaps the most important thing you can teach them in your early discussions is how inflation will affect their portfolios if they don't take any risks. Kathleen Godfrey, who heads Godfrey Financial Associates, a Latham, N.Y., firm with about $20 million in assets, uses a handful of 19-cent stamps she discovered in a desk drawer a few years ago to illustrate this point with less-sophisticated clients. “I calmly place the stamp on the table, and explain that the biggest risk is avoiding risk,” she says. “People understand the issue differently when put in that context.”
THE HIGH-STAKES GAMBLER
These people thrive on risk-taking. REITs. Emerging markets. Junk bonds. You name it, they want it — and they want their bet to be big. But while a high tolerance for risk is okay for those with a long investing horizon and/or a comfortable cash cushion, going overboard is simply imprudent.
YOUR MOVE: Taming this type of behavior is hard, but not impossible. In these cases, timing is everything. As soon as they win big in a high-risk move, the risk-happy client may be feeling particularly good about your role as an advisor, and, therefore, may be more receptive to your suggestions. “It's those times they're more willing to listen,” says Dunham. Use these opportunities (assuming you have them) to propose some slightly more conservative investments, and try to move them into less-aggressive positions.
The key issue is how much time they have to play around with risky investments. The younger they are, the less important it is for you to step in. Jeff Fishman, president of JSF Financial, a Los Angeles firm with about $350 million in assets, for example, tends not to stand in the way of risk-happy clients if they're in their 30s or 40s, since they can probably make up for their losses down the line. With older clients, however, he generally takes a firmer stance. In some cases, when clients have insisted on going ahead with a very high-risk purchase, he's asked that they do the transaction on their own.
The other question, of course, is how much money the client can afford to lose. “If it's a person with $2 million in investable assets, I'm not going to lose sleep over it,” says John Fanning, a Portland, Me., advisor affiliated with Fusion Financial Group, an Elmsford, N.Y., company, which provides marketing, consulting and broker/dealer services to advisory firms. But with less affluent clients, Fanning, who has about $30 million in assets under management, sits down and does the math, showing the client what it might mean to the portfolio, if say, they transferred 25 percent of their assets to a risky stock. No matter what happens, make sure to document your conversations and recommendations in writing, so you can refer to them if there's a problem later on.
THE WARRING COUPLE
They're the Bickersons. They spend most of their time arguing with each other during their appointments. Perhaps one spouse is a saver and the other is a spender; one may be a risk-taker while the other is terrified of the stock market. Or they may simply have a hard time agreeing about anything. “It's challenging to say the least if a husband and wife aren't on the same page about their goals and how their money should be spent,” says Roch Tranel, president of Tranel Financial Group, a Libertyville, Ill., firm with $272 million in assets.
Your move: No matter how tense the situation may be, it's crucial to remain impartial. Tranel says he works with one couple where the wife often calls him before a joint meeting with her husband in an attempt to enlist his help in convincing the husband to buy something she wants. “She'll say, I'm trying to have the kitchen redone. Is there anything you can do?” says Tranel. Generally, Tranel won't make any commitments, always being careful not to betray a confidence. Then, during their appointment, he'll try to lay out the pros and cons of each move, always making sure not to take sides. In some cases, they'll iron out the problem during their meeting. At other times, he's been asked to leave the room, and then, after the couple has talked privately, they inform him that they'll address the matter on their own.
Usually, you can expect one spouse to take the lead in your financial discussions. For that reason, it can be particularly tricky if the less-involved member of the couple suddenly steps in — especially if it is an emotional issue. Tranel points to another couple he's seen for two years; usually the husband is the one to make the decisions. “At one meeting when we discussed stock options, his wife sat there and read a book,” he says. But, a few months ago, when Tranel called to check in, he got an unexpected earful from the wife after the market took a tumble. “I could hear her screaming in the background,” he says.
How did he handle it? Tranel suggested they check in with each other in another two months, then composed a long letter assuring the couple that their financial situation was sound and detailing specifics to underline his point. Recently, the husband emailed him back, thanking Tranel for the letter, and letting him know it helped reassure his wife.
These clients tend to fly off the handle at first sign of bad news, even when the market is good. You know the type: They read a negative story about a stock, and presto, they're on the phone screaming to you about it.
YOUR MOVE: What you don't want to do is to catch their panic or let them convince you to make a poor investment choice. “Fear is one of the prime reasons for bad decisions,” says Fanning. The best way to deal with this kind of client is to head them off with preventive action. Make sure, from the beginning, that your clients understand any potential downsides of the strategies you recommend, and what kind of volatility should be considered normal and what kind should be cause for alarm. But don't stop there. Discuss the issue at every review meeting, if necessary. Then, when you get a panic-stricken call in between meetings, refer to your previous discussions. “When you say, ‘Remember, we talked about this,’ they'll usually calm down,” says Dunham.
Especially in a down market, however, your goal is not to let them make the panicked call in the first place. Check in with them frequently over the phone and through email — whichever they like better. “Do it before they can get themselves all worked up,” says Stuart Silverman, president of Fusion Financial. Often, simply by conveying the message that you're thinking about them, you can go a long way toward diluting their panic.
No matter what the issue is, avoid the temptation to interrupt. Let them finish whatever they want to say before responding. “Advisors who talk too much get into trouble,” says Langdon. “Then they get into an argument. You have to let the client vent.”