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When I Failed as a Financial Advisor

Handling clients may be more challenging than handling clients' money.

Michael Zhuang, 09/28/2011

On March 6, 2009, about lunch time, I got a call from Mrs. C. Apparently she was in some sort of a panic; she asked me when the market would stop falling. I couldn't predict the future, but I could only tell her: Based on historical experience, when the market turns around, it will stage a huge rally, and we won't know it in advance.


I felt I was making some progress in comforting Mrs. C and convincing her to stay the course. Then, I heard a roaring voice: "Get out! Get out! Tell him to get the hell out of stocks!!!" I knew it was Mr. C in the background. Mrs. C broke down in tears on the other end of the phone call. She said, "Michael, I can't take it anymore; just get out of stocks." I meekly replied: "OK, but you should never try stocks again."

I sold all their stocks, and on the second day after that, the market started a rally that brought it almost back to the level of the pre-crisis high. I never forget Mr. and Mrs. C because they called on the day the market hit bottom. Since then, I have been thinking, what could I do differently to help folks like them, or is there anything I can do?

Mrs. C came to me because her husband was an avid stock speculator. In his 60s, he was still checking the market every day and getting in and out of stocks when he saw fit. Over the years, he blew away a good chunk of their fortune. As their retirement was in serious jeopardy, Mrs. C pinned her hope on me to help undo the damage. I put them in a 40/60 portfolio where only 40% of their assets were in stocks.

The first year went very well, and Mr. and Mrs. C came to see me just to tell me that they were comfortable in taking more risk, something like 60/40 or even 70/30 would be just fine with them. Knowing that Mr. C had been a speculator (albeit a failed one), I thought they might be right. I adjusted the portfolio to 60/40. That was in the third quarter of 2007, a few short months before things fell apart.

As the market tumbled, I kept up my communications with Mrs. C, and she seemed to be more or less sanguine and patient. The bear market lasted a lot longer than I expected. In fact, it was the longest since World War II. All along I did not talk to Mr. C, since Mrs. C said he was an introvert and did not like to talk. The next time I heard him was his roaring voice on the other end of that fateful phone call that resulted in them selling their stocks at the bottom of the bear market.

I thought long and hard about this episode, and I believe I bear some responsibility: 1) I shouldn't have conceded to their request to take more risk at the top of the market; 2) I should have tried harder to talk to Mr. C. As we know by now, investor returns lag far behind fund returns precisely because most people let their emotions call the shots. If I had communicated with him, maybe I could have calmed him down. But then again, I may be over-estimating my powers of persuasion.

It seems to me the biggest challenge of being a financial advisor is not handling clients' money, but handling the clients themselves. What do you think?

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