Clients from hell. We’ve all had one or two of them, and quite frankly they’re unavoidable. After signing an agreement to use your services, they suddenly change from Dr. Jekyll to Mr. Hyde. They start hatching get-rich-quick schemes they want you to approve. They forward you the latest seductive spam that they’ve received. They call you up—often. They drop by without an appointment. Once in a while, they even ask you to do something a bit shady.
The question is: What can you do with them?
Advisor Anthony Pace, CFP, CLU of Lindberg & Ripple Inc., in Windsor, Conn., has seen more than his share of difficult clients. “They come out of the woodwork every time the ‘next sure thing’ arises. In the late ’90s it was technology stocks. People took outrageous chances back then. These days, we’re seeing it with vehicles like hedge funds. Every time a complex investment gets oversimplified so the average investor can get in, people start investing too much money in a vehicle that they should avoid.”
Sometimes these clients are merely disillusioned and are receptive to the light of reason. Pace, a member of Hartford AIFA, had a client who’d met a smooth operator, effectively a loan shark. He loaned money at a high rate to bankrupt individuals for the two years that they could not get standard loans. “He had a good track record, but after investigating the matter I found out that my client would have had to invest $80,000 in a single loan, which was a large portion of her portfolio. Luckily, I talked her out of it.”
“If a new investment opportunity fits in the discipline we certainly consider it for its merits. We also apply certain filters that restrain that asset allocation.”
Argumentative and insulting
Sometimes it’s not that easy. A client may become overly insistent, bellicose, hostile, or even litigious. Pace had such a client during the bull economy of the late '90s, which was a fertile breeding ground for quixotic ideas. The client wanted to sink a large portion of his portfolio into a company called Peapod, a grocery delivery service. Pace knew that the prospective investment was risky and outside the scope of the client’s current portfolio. He told him so and the client became argumentative and insulting.
“We could not meet on middle ground,” Pace says, “so I suggested he take his investment business elsewhere.” Pace’s instincts were later vindicated, as the Peapod stock performed poorly and the company was snatched up by Stop & Shop supermarkets.
Pace believes the only true way to prevent clients from sabotaging their portfolio plans is to head them off at the pass. “After our first consultation, before I take a single dollar from a client, we agree to a course of action.” He and the client discuss goals and objectives, what kind of returns the client needs to achieve those objectives, how much risk is required to get there and whether it is consistent with the client’s risk tolerance. Then they agree on an asset-allocation policy that offers flexibility.
“If a new investment opportunity fits in the discipline,” he says, “we certainly consider it for its merits. We also apply certain filters that restrain that asset allocation: How much are we willing to invest in any one fund within the portfolio? Very rarely do we go beyond 10 percent for one investment. Of course, in mutual funds we can afford to go a little bit higher.”
But what if it doesn’t fit? For example, what asset class would that loan shark fall into? The answer can be found with in what Pace calls “Foxwoods money,” named after a local casino. “We set a certain percentage outside of the asset allocation to satisfy the gambling side of some of our clients. We then make it very clear that whatever happens to this money, we are not responsible for it. And we put that in writing.”
How has this worked out? Pace smiles. “We’ve only been fired once for not going where a client wanted us to. We find that if we set realistic expectations and build a framework upfront, they understand.”