When good clients invest badly

Une femme d'affaire discutent avec des clients

For years now, doctors have been seeing patients who arrive at their appointments already convinced of a diagnosis that they got from the Internet. In the latest trend, thousands of teen girls are presenting themselves with rare neurological conditions that have been popularized by other teens on social media.1

Healthcare decisions - like investment decisions - are increasingly being shaped by an online “influencer” culture that too-often prizes charisma over tried-and-true wisdom.

As a financial advisor, you are now called upon more than ever to step in and prevent good clients from investing badly. Have no doubt that your expertise is required in this matter. After all, a recent Harvard study found that real doctors are still far more accurate than symptom-checker apps.2

Une femme regarde son cellulaire assise sur son divan

The danger of shortcuts

The formula for building wealth can be expressed as something like:

Saving + Compounding + Time = Wealth

Experience has shown that you need to save money on a regular basis, invest in a high-quality portfolio that can compound returns, then simply wait. One thing you’ll notice about many of the investment fads on the Internet is that they tell your clients it’s possible to take shortcuts around this formula.

Some claim that you don’t really need to save - you can just stack mortgages on top of mortgages, get some tenants, and build a real estate empire.

Others say that a quality portfolio isn’t really necessary - you can just trade meme stocks or stock options on your phone and start banking huge profits.

Yet more have promised that you don’t really need time - you can just buy the right cryptocurrency or NFT and start multiplying your capital in weeks instead of years.

The failings of these approaches are always exposed sooner or later. When stocks crash, crypto exchanges go bust, or real estate equity gets wiped out, that money is often gone for good. And for clients who put too much at risk, the results can be devastating and life altering.

How to protect your clients

People are naturally curious and we all want to do better for ourselves and our families. So there’s no sense in trying to talk clients out of experimenting with do-it-yourself investments entirely. A better option is to help them put the risk in context so they can manage it appropriately.

  • A good starting point is to make sure that clients understand just how destructive capital losses can be. For example, if you lose 80% on an investment, you’ll need to earn 500% just to get your money back. And while you wait months or years for that to happen, you will be losing valuable time, which only compounds the loss.
  • Next, it helps to visualize what those losses could mean in terms of your overall financial plan. This can shift the discussion from merely abstract to something more concrete. For example, if you know that losing $10,000 today has the potential to set your retirement back by a year, it might cool off your appetite for risk a bit.
  • Finally, with a clear picture of how losses can affect long-term financial health, you can have a better discussion about how much of a client’s net worth should be budgeted for risky or speculative investments. It could be 1%, 5% or 10%. The exact number is highly individual, but it’s a choice that is best made with eyes wide open.

Some people will get lucky on a high-flying stock. Others will succeed in real estate. You might even see someone make a fortune betting on the metaverse. In the end, you will know that you have done your job as a Financial Advisor simply by making sure that nobody charges into risky situations blindly.

At the same time, you can remind them that the most proven formula for success is still to develop a habit of consistent saving, investing in the type of high-quality portfolios that we manage here at Beneva, and then letting the power of compounding build wealth over time. In fact, it’s just what the doctor ordered.