How advisors rein in overly bullish clients

Wall Street lore says a shoeshine boy gave Joseph Kennedy a stock tip just prior to the great crash of 1929, and it so unnerved the future presidential patriarch that he immediately cashed out his multimillion-dollar portfolio. It was his realization that rampant speculation had gotten so out of control, so the story goes, that eventually led to the establishment of the Kennedy family fortune and ensuing political dynasty.

Apocryphal or not, the story continues to resonate on Wall Street. Whenever bulls start stampeding, speculators emerge soon after, taking retail investors along for the ride. Or for a ride, depending on whether they escape in time.

Alas, whether it's internet IPOs, collateralized mortgage bonds or meme stocks, bull markets inevitably lead to speculative excess. In fact, some strategists say you can’t have one without the other. In case you missed it, the S&P 500 is now up more than 18% year-to-date and the Dow Jones Industrial Average has risen for 11 straight days. Pretty bullish indeed.

If that’s the case, where are financial advisors seeing speculation in the current bull market? Are their clients taking “flyers” from 21^st century shoeshine boys in the form of Uber drivers or TikTok influencers? If so, what are they buying?

“The overwhelming majority of the clients we work with do very little speculative investing. As both a fiduciary and a goal-based investment financial planner, we encourage our clients to invest in such a way so as to maximize their probability for success. Our firm's mindset is that clients should make their direction match their intention so they can reach their financial destination regardless of the current market speculation,” said Terry Conner, managing director at Prime Capital Investment Advisors.

That said, some of Conner’s younger clients have inquired about crypto. In those cases, he encourages them to only invest money they can afford to lose entirely.

Brandon Dixon-James, president and wealth manager at Resilient Wealth Management, part of Osaic, says most of his clients aren't convinced the current bull market is here to stay and it’s ultimately his job to keep them even-keeled when the investment pitch gets fevered.

“While things seem positive on the front in this current bull market, I think the idea is never being too high or too low, my job is to be objective with my clients and always refer back to their goals and their appetite for risk,” he said. “At the end of the day, we can’t control the ups and downs of the market and we certainly can’t predict it, so I focus on what we can control.”   

Dixon-James won’t purchase individual securities for clients, outsourcing that responsibility to third-party money managers instead. 

“I just think they have the resources and the around-the-clock research teams that can do a much better job on a larger scale than I can with the limited time and resources I have,” he said.

Similarly, Greg Halter, director of research at the Carnegie Investment Counsel, says that if his clients want to have a brokerage account away from Carnegie to speculate, that's fine with him.

“We don't really want to know about it," Halter said. "Some clients I'm sure do buy individual stocks to speculate. I would imagine it would be the companies that are so-called penny stocks. But again, that is something that we do not encourage. They come to us for our expertise.”

Mark Matson, CEO and founder of Matson Money, says the lure to win big - presented by large tech stocks, or a new investment fad like crypto - is always going to be there for advisors' clients.

“In a volatile market like this one, where we're seeing investors following herding mentality by piling money into large-cap stocks or crypto as celebrities were endorsing it, advisors need to spend extra time coaching clients on why they should stick to their long-term strategy,” says Matson.

'FOMO' AND LEVERAGED ETFS

John Guthery, chief investment officer at FusionIQ, believes that in virtually every bull market, the fear of missing out, aka FOMO, attracts investors to — or back to — the market, and that this bull run is no different. 

Still, the advisors in Guthery’s circle have tamped down on speculation. 

“In fact, they work hard to help investors remain focused on the long-term rather than short-term trends by helping them build well diversified investment portfolios,” said Guthery, who works with financial institutions and their financial advisors on a near daily basis.

Meanwhile, Andrew Graham, founder of Jackson Square Capital, says his technical models — not his clients' gut feelings — caused him to turn up the risk in his firm’s equity strategies in early June. He buys individual stocks for his clients to increase tax efficiency as opposed to using pooled investment vehicles. He also avoids leveraged ETFs, popular speculative vehicles used by professional traders, due to their high tracking error.

“Overall, we tend to stay away from leveraged products that have multiples of upside, but also multiples of downside," Graham said. "Investors searching for yield or excessive return are often the ones holding a falling knife.”

The same goes for Conner when it comes to highly speculative leveraged ETFs.

“As a general rule, our clients avoid leveraged investments," he said. "We prefer to look at alternative investments as an opportunity for increased return potential as they have a general higher probability of success.”