difference between investing and speculating — and why we choose to be investors instead of speculators — you weed out those too prone to FOMO or YOLO and to chasing what ’ s hot . Regularly reminding clients of the differences helps them remember why they chose to be investors , reject speculation and recommit to their investment policies , and it also prevents them from placing bets with their life savings .
If their overconfidence is just too much , you can explain the consequences of their being wrong . Sane people do not play Russian roulette even though there is a greater than 83 % chance they ’ ll win . The penalty for being wrong , death , is just too extreme .
From a financial standpoint , one does not want to place so big a bet on a speculation that it endangers their financial security . Those who make a wager with too much of their portfolio are possibly looking at ruin .
Once clients consider a proper limitation on the size of their bet , they tend to be more open to the idea that , if it does work out , it may not be as impactful as they had fantasized . If it isn ’ t necessary and won ’ t be life altering because they are only putting a small percentage at risk , what ’ s the point ? Entertainment ? I think they are better off in Las Vegas , where at least they know the odds and payouts . Most of the time clients realize it is just FOMO or YOLO and move on .
Of course , despite our efforts , sometimes clients just can ’ t get the idea of taking a flyer out of their heads . What should financial planners do then ? I see three main approaches . You can fire the client , help them place their bet or have them bet on their own .
I work for clients . My job is to advise , not dictate . Ultimately it is their money , and they have every right to do as they please . So it is rare that I would end a relationship with clients if they wanted to speculate . But I won ’ t be a party to someone endangering their financial security .
Fortunately , in 30 years , I only attempted to cut ties with a client once . He wanted to load up on a stock . When I told him I couldn ’ t watch him unnecessarily put a lifetime of work at risk , he saw my request as a warning sign , opted not to take the big bet and remained a client .
It should come as no surprise that since he was willing to bet most of his life savings on the stock , he was still hell-bent on buying some shares . My
once clients consider a proper limitation on the size of their bet , they tend to be more open to the idea that , if it does work out , it may not be as impactful as they had fantasized .
choice was to help him or have him do it on his own .
Most planners don ’ t want to get mired in a speculation . It is nearly inevitable that once a client begins doing it , they will spend extra time worrying about it . That can mean lots of questions about whether it is time to get out of an investment or questions about the details of the holding that the planner wouldn ’ t have put the client in to start with .
For these and other reasons , I know a lot of planners whose clients open side accounts . The theory here is that the damage can be controlled by limiting how much goes into the account , and the clients can then “ play ” the markets any way they like . I do not care for this approach , especially when the play account is taxable .
Early in my career , I was much more open to play accounts . Unfortunately , in too many cases , the activity in them triggered taxes that mucked up our planning . I can stomach a play account in a small Roth IRA or something similar , but it still nauseates me .
After enough failures , you realize that even if there is good communication between the planner and the client , having clients play in those side accounts makes things very difficult , undermines good strategic planning and makes a short-term focus far more likely . It is a slippery slope away from the solid track record of sound financial planning and prudent long-term investing and toward gambling .
Nowadays , when clients insist on speculating , I will get the appropriate acknowledgments and sign-offs from them about the risks and then acquire what they want through our systems . I still have to manage the psychology , but at least there are no surprises when the 1099s arrive .
Regardless of how a client ends up buying whatever it is they want to buy , I always take the time to have a “ results talk .” I tell them that losing money is not the worst thing that can happen . That ’ s bad , of course , and it can lead to more risk taking to make up for losses incurred . But what ’ s worse is to make a lot of money fast .
Once someone places a successful bet , they like it . They often take credit for it rather than acknowledging that luck might have played a role . When that happens , they believe they can easily do it again , and they are far more likely to seek out and place another bet . When they make the next one , it is usually with more money . Vegas is built on this dynamic , and it is another sign that speculating in financial markets is more like gambling than prudent investing .
And furthermore , it ’ s unnecessary for financial success . Yet some will want to do it anyway . It is interesting and potentially lucrative , but the temptations are also dangerous if not managed well . If your client is lured by rapidly rising prices and wants to buy the next big thing , take whatever approach you think best , but please call it what it is . It is speculating , even gambling . Not investing .
Dan MoisanD , cfP , practices in melbourne , fla . you can reach him at dan @ moisandfitzgerald . com .
56 | financial advisor magazine | July / august 2021 www . fa-mag . com