When good clients get bad ideas

Clients want to make money and some seem to want the easy route for that. It’s like the weight loss program with no dieting or exercise. If a client comes to you with a speculative investment idea, how should you proceed?

The quick answer is: “Not my problem. I’m not licensed to buy or sell individual stocks. Sorry. Can’t help you.” Their answer might be, “I know that. I’m selling what I have with you to buy that stock elsewhere.” You have your client’s best interests at heart, and there are other directions that conversation can go. Plus, there are plenty of reasons you may want to be involved in the discussion.

Here are a few points to consider:

1. Don’t make an enemy. You can’t forbid them. It’s their money. They might incur penalties if they surrender a policy. They might be able to withdraw a small amount of money without incurring fees. There might be tax considerations.

2. Small is better. Generally speaking, almost everyone can afford to risk a little bit of money. Many people do that anyhow when they buy lottery tickets, go to the racetrack, or play poker or the slots at a casino.  

3. What can you afford to lose? There are extremes to consider. Your client might think it’s a “sure thing.” Your concern is what if they lose it all? If they went to a casino on vacation, they would likely set a limit for the amount of money to play with. When it’s gone, they leave. Ideally, they see the logic and limit the amount they are risking.

4. Investing vs. gambling. When you send money to a professional money manager with the understanding they will make diversified investments you plan to hold until retirement, that’s investing. When you buy stock online on a hot tip and expect to cash out by the end of the week, that’s gambling.

5. Does your client know why this idea should work out? Go back decades in your mind. “I’m buying this stock called Amazon. They are going to sell books online. It will catch on because they can compete better on price vs. brick-and-mortar stores. I realize I’ll need to hold it for quite a while.” That would have been a pretty good idea. Suppose the conversation goes: “I’m buying this stock. I don’t know what they do. I don’t care. All my friends are buying it. They said we should double our money overnight. I’m not exactly sure why.” Your client needs to understand what must happen for the stock to rise.

6. What’s your exit strategy? Suppose it doesn’t work out. How will you know? What will you do? When a $200 stock declines to $100, it’s down 50%. When a $100 stock needs to climb back to $200, it needs to rise 100%. Many investors sell their winners too quickly while holding onto their losers.

These are practical questions that should get your client thinking. Be careful not to offer investment advice if you aren’t licensed to do so. You should be asking practical, sensible questions.  

Bryce Sanders is president of Perceptive Business Solutions Inc. His book, Captivating the Wealthy Investor, can be found on Amazon.

For more ideas about working with clients and investments

• Explaining volatility
• Should you be using a third-party money manager? (MDRT member exclusive)