When panic drives someone to make a self-destructive money decision, it's the financial adviser's job to protect the client from himself.
Suppose one of my clients has his heart set on using half of his retirement account to buy each of his grandchildren a new car. Or a client in a panic over falling markets wants to sell all her stocks and buy gold. What is my responsibility as their financial planner? How far should planners go to try to keep clients from making serious financial mistakes?
It’s important for planners to respect clients’ competence and ability to make their own life decisions. Client-centered planners also need to remember that the goal is to help clients get what they want, not what the planner might want or think the client should want. On the other hand, should a planner stand idly by and watch someone walk off what the planner perceives as the edge of a financial cliff?
Part of the answer to this dilemma stems from a planner’s legal obligation. Most advisers who sell financial products have no fiduciary duty and are not legally required to put their customers’ interests first. Fiduciary advisers, which include those who are fee-only, do have a legal obligation to act in their clients’ best interests.
What is the legal responsibility, then, of a fiduciary planner who believes clients are about to do themselves financial harm?
Let’s say I have a client who is about to do something that may be viewed by a court of law as “extreme” or “imprudent.” (An example would be putting all his money into one asset class like gold, cash, or penny stocks.) At the minimum, I would need to protect myself by carefully fulfilling my legal responsibilities. This would include making certain I emphasized to the client that, given the research and data available, his actions could hurt him financially. I also would want to be sure the client fully understood and took responsibility for his actions.
In terms of the broader aspect of what financial planners owe to their clients, meeting this legal obligation is not enough. In my view, fiduciary planners’ obligation to put clients’ interests first includes an ethical responsibility to do no harm. Sometimes this ethical and legal responsibility requires planners to give clients information they may not want to hear.
As we focus on the clients’ goals and help them carry out their wishes, part of our role is to make sure they have all the information they need. This gives us a responsibility to educate ourselves so the advice we offer is as sound as we can make it. We also need to do whatever we can to help clients hear and understand that advice.
Clients who are hovering on the edge of a financial cliff are typically about to act out of strong emotions such as fear. They often can’t take in financial advice until they are able to move through that fear. It only makes things worse if financial advisers shame clients, bully them, or abandon them to their fears. The challenge for planners is to help clients reach a more rational place so they can gather additional information and make decisions that will serve them well.
With the right kind of support, clients are almost always able to get past the fear that is pushing them to make imprudent decisions. Providing such support by working with clients’ emotions and beliefs about money, perhaps with the help of a financial therapist or financial coach, is well within a financial planner’s ethical responsibility. Our role is not merely to do no harm. It is also to use all the tools we have to help clients act in their own best interests.
Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.
When financial advisers switch from working on commission to charging clients directly, they can run into resistance.
Financial advisers who transition from a commission-only business to a fee-based model are often stymied about how to explain their new fees without sending existing clients packing.
Some fear clients will feel sticker shock upon hearing they need to pay fees out of pocket instead of having costs deducted from investment accounts. Advisers also worry clients may question why they’re now paying a fee equal to one percent of their assets under management, instead of a fraction of that for their load funds.
The problem is that most investors don’t understand how adviser compensation works or how it affects the services they receive, says John Anderson, a practice management consultant with SEI Advisor Network, a unit of SEI Investments in Oaks, Pa. Many investors do not know what it means for an adviser to be a fiduciary, or somebody who acts in a client’s best interests, Anderson says.
A 2011 study by Cerulli Associates, a consulting firm in Boston, showed that 31 percent of investors thought financial planning services were free and one-third didn’t know how they paid for advice. What’s more, most investors prefer to pay hidden commissions instead of account fees, according to Cerulli studies.
Some clients might push back when advisers begin asking for fees, but their concerns usually dissolve once advisers show clients the benefits.
FOCUS ON SERVICES
Morgan Smith, an adviser in Austin, explained the ethical obligation of a fiduciary to his clients when he transitioned to a fee-only practice. “I asked, ‘Would you rather work with someone whose compensation structure has nothing to do with your best interest or someone whose structure is based on your best interest and goals?'” he says.
Every client except one, a day trader, stayed on. But some asked why they would pay him if their investments declined. He told them his advice would pay off more in a down market and that “when your investments go down, I get paid less,” he says.
Sheryl Garrett, whose Garrett Planning Network includes more than 300 fee-only advisers, says clients need to understand the difference between advisers who can afford to give advice because they sold a product and advisers who are objective because they have “no skin in the game.”
Clients who are paying for advice also need to know what other problems advisers are solving in exchange for the additional compensation, says Anderson. He tells advisers to create a one-page list of their services. That may include rebalancing clients’ portfolios and analyzing their future social security benefits.
He also starts client conversations by highlighting what they’ve recently accomplished, such as filling in paperwork to name beneficiaries for IRA accounts.
Anderson and Garrett both believe in showing clients that their daily decisions have more of an impact on their finances than the investments or insurance products they buy. It’s a holistic approach that often wins over clients, they say.
Related: Find the Right Financial Planner