10 Tact­less Things I Say

“I’m not right for you” is just one of the sur­pris­ing com­ments I make to prospects or clients.

Financial Planning - - Contents - BY AL­LAN S. ROTH

“I’m not right for you” is just one of the sur­pris­ing com­ments I make to prospects or clients.

My wife points out that I can be tact­less at times and I prove her right every day.

I say tact­less things to clients all the time, but I know these truths add value and dif­fer­en­ti­ate my prac­tice. I think these things are so im­por­tant, in fact, that I typ­i­cally make sure I share them with prospec­tive clients, as well. They could work for you, too.

1) I’m charg­ing you $450 an hour to tell you I don’t know the fu­ture.

Not only that, I say it’s the sin­gle most valu­able ad­vice they will get from me. My com­ment usu­ally comes after the clients say some­thing that im­plies they know what’s go­ing to hap­pen. For in­stance, they might state they don’t want bonds or any­thing be­yond ul­tra­short-term rates be­cause rates are near an all-time low and the Fed is rais­ing them.

I then ask: Don’t you think rates would have al­ready risen if ev­ery­one knows they are go­ing up? Mar­kets are capri­cious, but they aren’t stupid. In­vestors would have al­ready priced in that cer­tain in­crease, if it were re­ally so cer­tain.

I have a phrase for in­vest­ing based on com­mon knowl­edge — fol­low­ing the herd.

Though you may not be an hourly plan­ner, con­sider telling your clients that you are charg­ing them a lot of money to tell them you don’t know the fu­ture.

2) In­vest­ing should os­cil­late be­tween bor­ing and painful.

Let’s face it; broad, ul­tralow-cost in­dex funds are down­right dull, at least most of the time. You just aren’t go­ing to get the same rush that comes from a sin­gle stock that has a 50% gain in a week or, re­ally, any rush at all. Rarely will an in­dex fund gain more than 10% in a sin­gle month, and that’s a very good thing.

Let’s face it; broad, ul­tralow-cost in­dex funds are down­right dull, at least most of the time.

But good in­vest­ing should oc­ca­sion­ally be painful. Buy­ing stocks after the plunge dur­ing the fi­nan­cial cri­sis was the most painful in­vest­ing ex­pe­ri­ence I ever had. Re­bal­anc­ing to tar­get as­set al­lo­ca­tions was like be­ing kicked in the gut three times. It’s true that ad­vi­sors as a whole tend to move to cash after the plunge.

3) Is your goal to die the rich­est per­son in the grave­yard?

When I fin­ish a client’s fi­nan­cial plan, I bring at­ten­tion to the fact that I won’t have them be­ing buried with their money. Sure, pass­ing on money to

heirs is an im­por­tant sec­ondary goal, but it isn’t the pri­mary goal.

It’s a risky world and stocks are much riskier than high-qual­ity bonds. So, as fi­nan­cial the­o­rist Wil­liam Bern­stein puts it, “when you’ve won the game, quit play­ing.” Though I don’t ad­vise a zero al­lo­ca­tion to stocks, I do re­veal that my per­sonal al­lo­ca­tion to stocks is only 45%.

4) No, you won’t have the courage to re­bal­ance after a stock plunge.

I’m not a be­liever in risk-pro­file ques­tion­naires. One rea­son is that the way we feel about risk is un­sta­ble and can ex­press it­self as be­ing fear­less in good times and scaredy-cats in bad. Yet I still ask what they would do if stocks lose 50%. It is clients who im­me­di­ately tell me they would eas­ily be able to re­bal­ance and buy more stocks that I challenge.

I found after the last plunge that clients who told me they knew it would be re­ally hard and hoped they would have the courage to stick to the plan were the ones who usu­ally did.

It was clients who told me they were sure they would stick to the plan who were the ones I spent the most time talk­ing off the ledge.

5) You are bor­row­ing money at a higher rate than you are lend­ing it out, and you aren’t go­ing to make it up with vol­ume.

For those with mort­gages, I point out that the mort­gage is the in­verse of a bond. I tell the client it’s just not smart to bor­row money at 4% only to lend it out at 3% — if they have enough liq­uid­ity to pay down the mort­gage and have an emer­gency re­serve.

For most clients, pay­ing down a mort­gage is a very tax-ad­van­taged, and some­times even tax-free, risk­less re­turn. That’s be­cause the new tax law, with a $24,000 joint stan­dard de­duc­tion and $10,000 state and lo­cal tax de­duc­tion cap, of­ten takes at least some of the mort­gage in­ter­est just to reach that stan­dard de­duc­tion. This means that some of the mort­gage in­ter­est is pro­vid­ing no tax ben­e­fit while they are pay­ing taxes on bond in­come. Other tax sit­u­a­tions (like the 3.8% in­vest­ment in­come tax) strengthen the ar­gu­ment.

6) You have a ton of cash and that is your riski­est as­set.

It’s said that if a frog is dropped into a pot of boil­ing wa­ter, it will jump right out. But if it is dropped into a pot with nice, com­fort­able room-tem­per­a­ture wa­ter that is slowly heated, it will re­main in the pot and boil to death. Sup­pos­edly, it doesn’t no­tice the slow change in its en­vi­ron­ment.

“In­vest­ing should os­cil­late be­tween bor­ing and painful,” and buy­ing stocks after a mar­ket plunge can be very painful.

When mar­kets plunge, cash feels like a com­fort­able pot. But in­fla­tion and taxes are heat­ing up the pot, vir­tu­ally guar­an­tee­ing you’ll lose quite a bit over a cou­ple of decades or more.

7) Keep it sim­ple, stupid.

The need to com­pli­cate is all too hu­man. One can have a bril­liantly low-cost tax-ef­fi­cient port­fo­lio with just a few funds. Yet pow­er­ful forces lead us to com­pli­cate port­fo­lios. We shoot for in­come, fac­tors that worked in the past and all sorts of strate­gies that typ­i­cally lead to lower to­tal re­turn. Of course, tax con­se­quences are one real con­cern that pre­vents sim­plic­ity. I tell my clients: “I’ve al­ways said in­vest­ing was sim­ple; I never said taxes were.”

8) If it feels wrong, go for it.

Whether in ac­cu­mu­la­tion mode or with­drawal mode, I tell clients to avoid any­thing that feels right and if it feels wrong, that’s a good sign they’re do­ing some­thing right.

In ac­cu­mu­la­tion mode, we typ­i­cally want to put our money in what­ever as­set class has per­formed well. But that’s the as­set class over­weighted ver­sus the tar­get, so new money must go in to what has un­der­per­formed. In with­drawal mode, we must take from the as­set class that has per­formed best. In­stincts typ­i­cally fail us in in­vest­ing, so look for signs that a move goes against our in­stincts.

9) Get real.

I tell clients and prospects to think in real terms, rather than nom­i­nal. If stocks have an ex­pected real re­turn of 5% and bonds 1%, a 50/50 port­fo­lio may have a 3% ex­pected re­turn. Of­ten, I’m point­ing out a port­fo­lio is giv­ing away half or more of the real ex­pected re­turn if you fac­tor in AUM fees, mu­tual fund ex­pense ra­tios, etc.

Another ex­am­ple is hav­ing clients tell me they miss the early 1980s when they could earn 12% on a CD or U.S. Trea­sury bond. I re­mind them that after taxes and in­fla­tion, they ac­tu­ally lost about 7% of their spending power each year. I tell them that those good old days weren’t so great after all, and fixed in­come has a much greater real yield to­day.

10) I’m not right for you.

This is the fi­nan­cial plan­ning ver­sion of “it’s not you, it’s me.” I give all po­ten­tial clients a 20-minute call where I re­view their pro­file sub­mis­sion and look at their port­fo­lio. I usu­ally get a pretty good idea as to whether we are a suit­able fit.

Tak­ing on a client who isn’t a good fit ben­e­fits no one. If the client spends time de­fend­ing their de­ci­sions, or just agrees with ev­ery­thing with no push back, it’s best to find out early.

Nope, that’s not a client of ad­vi­sor Al­lan Roth, but given his frank style, it could be.

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