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Helping Unrealistic Clients See (Some of) the Light

May 9, 2013

Perhaps they have been misled by less reputable financial advisors. Or they just have no clue. But some clients arrive with seriously misguided preconceptions, and advisors must be prepared to say no.

One such “dubious idea” is the belief that “a good financial advisor should get you to your goals,” writes Elizabeth Anderson, founder of Beekman Wealth Advisory, in Forbes.

Anderson mentions a couple of clients she had to deal with. One was the head of a family that wanted to diversify its portfolio — a single asset, consisting of $5 million in stock — and have it permanently support seven non-working family members. The second was a divorcee seeking to invest a sum and have it return 12% annually, because that was the amount she needed to live comfortably.

Neither goal was attainable without major risk, Anderson writes. More seasoned investors, she adds, know that the market generates what it generates, and they set reasonable goals. Clients need to be shown that securities promising a return well above market rates — such as the pre-2008 sub-prime mortgage-backed securities that carried AAA ratings — may often come with unacceptable risks, as the housing crash proved. She suggests pointing clients to a “sustainable spending rate” the investment will generate while still keeping the asset’s after-tax, after-inflation value stable, most often 3% to 4% of a portfolio’s value.

Similarly, some clients, conditioned by finance “gurus” who populate the airwaves and bookstore shelves, believe that “there are investment magicians who know how to make money in every market — you just have to find them.” Again, Anderson suggests, advisors need to make clear that big bets are just as likely to result in losses as in gains, perhaps by pointing them to George Soros, who made billions in the early 1990s betting against the British pound but also invested heavily in Lehman Brothers in 2008, just before it folded.

By Elizabeth Jensen
  • To read the Forbes article cited in this story, click here.