Clients often become unsettled by outside information — things other people tell them or that they discover on their own. I think of my practice as being half planning and management and half education, and an important part of the education is encouraging clients to tune out the “investment noise” they hear.
“Every time I watch Jim Cramer, I get anxious.” I hear this one a lot! And there’s an obvious response: “Stop watching.” (And a common reply: “But I can’t stop!”)
Don casually mentioned at our initial meeting that he liked checking his brokerage account value.
“You log in to see how things are doing?”
“Actually, I use the phone: I call, put in my account number, and it tells me the current account value,” he said.
This sounds inefficient but I know not everyone likes computers. “So how often do you call in?”
“Pretty much every day," he said. "Well, actually, several times a day. Maybe even hourly.”
“What do you do with the information you get from calling?,” I asked.
“Oh, nothing, I just like to know.”
It happens that Don is a therapist, so I’m wondering whether he recognizes how obsessive this is. I figure now it’s my turn to play therapist a bit: “And how do you feel when you get the value?”
“I’m happy if it’s up.”
“And if it’s down?”
“Oh, I don’t really mind.”
At this point Don’s wife Alicia jumps in. “Oh yes you do, you’re upset for the rest of the day!”
“Well, perhaps you’ll find as we work together that you don’t need to be checking so much, since you already know it’s just a potential annoyance,” I said.
We’ve now worked together over five years. I don’t know whether Don checks his account values so compulsively. I do know that I don’t hear from him when markets are up or steady — but as soon as they dip, he emails me for reassurance.
Arnie is a personable client who liked emailing me out of the blue with various little complaints, mostly amounting to some version of “Why aren’t we doing better?” I would explain whatever he asked about and he always claimed to be happy, but then it was only a matter of time before the next complaint.
“We didn’t do as well as the S&P last year,” he emailed.
“Okay, no doubt that’s true. The index did very well. We have a portfolio that’s much more diversified than the S&P 500, so in any given year we expect to do worse than the best-performing component but better than the worst. Also, to reduce portfolio volatility to a level you’re comfortable with, we have a portion of your assets in fixed income, which has a lower expected return and therefore brings down total return in years when stocks are up. We’re shooting for the best return with a reasonable level of risk.”
Next time: “We aren’t getting the average annual returns you ‘predicted.’”
Of course, I never make predictions about returns. I did say that the average stock market return was around 10% a year, so we could use that as a long-term projection for the stock part of the portfolio.
That doesn’t mean I expected stocks to earn 10% every year — or in any year, for that matter. I made Arnie a little chart showing the S&P 500 annual returns for the last 20 years. The average was pretty close to my 10% but there were only a few years when the annual return was between 9.5% and 10.5%. Rather, there was a lot of bouncing around — high numbers and low numbers — that came to about 10% on average.
Often Arnie’s complaints grew out of something his brother-in-law had told him. I came to think of this as “the brother-in-law problem.” His brother-in-law often claimed to have annual returns consistently way above the S&P and advisory expenses well below what Arnie was paying me.
Some competitions can’t be won — or maybe aren’t worth trying to win. If I knew how to get better risk-adjusted returns at a lower cost, I’d be doing that with all my clients. Occasionally, a prospective client would ask if I would charge a lower fee coupled with a bonus for outperformance, suggesting that would “encourage me.” That type of fee arrangement raises regulatory issues but also has practical problems.
“When you ask me for that, you’re implicitly assuming I know how to do better for my clients but I’m holding back and not doing it because they’re not motivating me financially," I would say. "Would you want to work with an adviser who behaved that way?”
Back to Arnie and his brother-in-law. Eventually I called him in for a meeting where my partner and I pushed him pretty hard. “You have a lot of complaints about our services and your performance. You seem convinced that your brother-in-law is doing much better. Have you considered that perhaps we are not the right financial advisers for you? We like you but we don’t want you to stay with us if you’re not happy here.”
Arnie seemed surprised. “It sounds like you guys are firing me!”
“Actually, we think you are firing us — or at least you should be, if you’re as unhappy with our management as you sound. We’d like you to go home and think whether you really want to be working with us.”
At this point, we showed him (again) his performance over the time he had been with us. “We think we’re doing well for you. We could increase your expected returns, but only by increasing your risk in a bad year. We started out a bit cautiously because that’s what you wanted. If you want to change, that’s something we should discuss.”
That was three years ago. Arnie is still a client, and we haven’t heard about his brother-in-law since that meeting.
Michael Broad is a financial planner and investment advisor in Newton, Massachusetts. Got a good client story or problem you’d like to see in a future column? Email Michael Broad.
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