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Properly managing a client’s assets may not be enough to secure their financial wellness. Here are three cases where I took extraordinary measures to stop unrealistic and destructive spending.
Almost 20 years ago, against my advice a client sued her former investment manager. She had lost money in a bear market, but the case turned on the fact that the manager had not warned her about the consequences of making outsized withdrawals, chasing her account value down very quickly as the bear market proceeded. Even in a neutral market, her withdrawals would have caused her trouble at some point, which I told her lawyer might be relevant to the case.
I was called to testify. During my testimony I was asked to show where, in the Chartered Financial Analyst’s Code of Ethics, it said that charterholders should warn a client about overspending. Of course, there was no such wording.
My client lost her case.
Some years later, prospective clients I had once turned down showed up in my office. This couple had originally come to see me with about $1.1 million in an IRA. The plan was to live off this money for their entire retirement. This was looking promising, until he informed me that he needed at least $110,000 per year from the account. I politely told him I could not manage the account with any success under those circumstances. He then hired the same manager who was sued by the first client.
Here he was in my office with an account value in the $400,000 area. At that level, the manager had told him that his fee would rise and he should seek another manager. I asked him if he had ever had a discussion about spending and he replied, “No.” But he promised up one side and down the other that he would keep within a budget.
I worked with him for as long as I could. But eventually I let him go once again. Despite my warnings, he was still unable to restrain his spending. I felt clean – having shown him the consequences of his actions and helped him in every way I could. I heard later that, in his 70s, he had to go back to work.
This week, it happened again. It was a replay of the second client – same $1.1 million in IRAs, same demand for a lot – this time $120,000 per year. The only difference was that his manager is retiring. Again, I politely indicated that this scenario was not going to fit our investment process or capabilities, and that he should look elsewhere. In discussing the client with the retiring manager, it became apparent that spending had never been discussed. The manager was not even aware of how much the client was spending.
These are just a few examples from over 30 years of managing money for individual clients; I could recount at least 10 more similar stories.
We have a moral, ethical obligation to discuss spending with clients who stretch reasonable boundaries, even to scare them if we can. Allowing a client to spend down resources at a rapid rate while still charging fees is unfair and compromises our professionalism. At the very least, when a client ends up in that position, and will not change, send him or her to a cheaper solution.
In the struggle to fix these clients, I have observed a few interesting behaviors:
- Some clients do not understand that when their account value goes to zero, they cannot have income any longer. The strength of denial has them believing that there is an amorphous pot of money at our firm that we can simply pull from on their behalf.
- I have discovered that the better the account performance, the more likely the client is to believe that we are superheroes, able to surmount anything they throw at us.
- Clients believe that “their money is their money, and they are going to make decisions about it.” In other words, ignoring you becomes a matter of control to the client.
I seek to debunk the first two myths – if I can – to give a basis for further discussion. The third is insidious and may be a signal that I am about to fail, no matter how hard I try.
Here are some methods I use to discuss spending with clients:
- I use a custom-built spreadsheet that shows the client’s exact circumstances to illustrate how reducing withdrawals just a small amount can mean years in longevity to the account. I change numbers right in front of the clients, in a face-to-face meeting. I run several iterations of outcomes against various hand-constructed market scenarios, geared to stress a particular client’s situation.
- Although my firm does not consist of financial planners, we may ask for spending details so we can make suggestions such as bidding out home and auto insurance and bundling costs; auditing internet, cable and phone bills to look for unwanted services; and we vet auto decisions – lease or buy, new or used – when the client allows.
- In extreme circumstances, when I see the client running out of money soon, I ask, “What is your plan for when this happens?” Never have I heard a cogent plan for what happens after running out of money, but by turning the tables on the client, forcing them to think of solving their own problem, sometimes there is a breakthrough.
Have we ever had any success stories? Yes, the client in the first example, who sued her manager and then flushed away nearly half a million in assets in legal fees, wrote a note across her investment account checkbook: “Do Not Use.” She completely turned the corner and now has excess capital, which is a lot more fun than the opposite.
Michelle Rand is a principal with Cascade Investment Advisors, Inc., an Oregon-based fee-only registered investment advisor.
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