Whether your client is enamoured of holding the shares issued by a favourite automaker, the traditional phone company or the firm Dad built from the ground up, some securities have special emotional value to a client. But, in some cases, a sentimental attachment to a company can impair your client’s ability to make sound financial decisions when the time is right to sell.
As a financial advisor, it’s important for you to understand the nature of your client’s attachment to a particular stock. Then, you can begin to show your client why it is in his or her best interests get out of that investment.
“People are very emotional about the savings they have generated over their lives,” says Andrew Pyle, senior wealth advisor with ScotiaMcLeod Inc. in Peterborough, Ont. “It’s nearly impossible to remove that emotional attachment.”
There are several reasons why a client could become overly attached to a certain investment. For example, your client could be an entrepreneur who sold his or her business to a publicly traded company in exchange for shares, or be a former executive of the company in which he or she holds stock.
“Senior executives who are there at the board table making decisions on a day-to-day basis know the strategy of that company more than any other stock out there,” says Mike George, director of tax and estate planning with Richardson GMP Ltd. in Winnipeg. “So, when they hit the general stock market, they feel as if they have a lack of control.”
Widows and widowers also struggle at times to sell their stocks due to their loyalty to the choices their deceased spouse made. Children who inherit a portfolio, George says, also can struggle to sell shares out of loyalty to their deceased parents.
Other clients may refuse to sell a stock simply because they are unwilling to realize a loss. “It’s just kind of admitting they were wrong in buying it,” says Pyle. “They would rather wait and see if it will come back.”
Clients with particularly strong feelings about specific stocks need to be reminded of their original goals, says Susan Fulford, an investment advisor with TD Wealth Private Investment Advice in Toronto. Talk with such clients about what their exit strategy was when they first purchased that security. Ask such questions as: What was the purpose of the investment? When did you originally intend to sell?
Although the decision to sell may not happen right away, Fulford says, such conversations will help your clients think more objectively about their investments. “You don’t have to get the client to make a decision in one appointment,” she says. “But certainly, after six to 12 months, I find that people will come around.”
Another way to encourage your clients to think more objectively about their investment holdings is to focus on the numbers. George and his team often show clients a financial analysis of the historical volatility of a particular stock to give a client a sense of what could happen if he or she were to hold onto the stock (while emphasizing that past performance does not necessarily repeat itself).
As well, George takes financial projections for clients to an extreme to show what would happen to their wealth if one stock’s value were to fall to zero.
Setting up a routine for trading also can take the emotion out of the decision, according to George. Often, he says, clients with a loss position in their portfolios will refuse to sell until they can make their money back, which could hurt their retirement savings. Instead, George advises, a methodical exit strategy should be set up to take the stock market pricing and emotion out of the equation.
In some cases, it’s not always about recommending that your client sell a favourite security completely. Sometimes, the issue isn’t that the client should hold a certain stock or not at all, according to Pyle, but rather that the client need sell off only a portion of the position to reduce the level of risk in the portfolio.
As an advisor, you should remember that the final decision on whether to buy or sell a stock rests with your client. Says Fulford: “Always remember: the client is driving the bus.”
Fulford recalls one case in which a client couple refused to sell a position Fulford felt was too risky, given the clients’ age and life stage. Fulford documented her conversation with those clients in which she advised against their decision and had the clients sign it. (The document protects Fulford in the event of a potential complaint accusing Fulford of recommending unsuitable investments.)
If you feel uncomfortable with a client’s persistent refusal to reconsider a particular holding, Pyle says, you might consider discussing your business relationship. If the client is adamant, perhaps he or she no longer fits with your investment process. In that case, it may be best to recommend that this client work with another advisor.
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