How advisors can deal with stock-picking clients

Sign up for the Globe Advisor weekly newsletter for professional financial advisors. For more from Globe Advisor, visit our homepage.
Maybe it’s a retired entrepreneur who calls every morning just before markets open to ask if you’re planning any trades that day. Or it could be an early-career professional who sends e-mails whenever she chats with a neighbour who seems to own nothing but winning stocks.
Most financial advisors have at least one client who reaches out frequently to ask why they don’t have Nvidia Corp.’s or Tesla Inc.’s stocks in their portfolios, or why they still own equities that have been in the red since the start of the year.
These stock-picking clients can take up a lot of time. In some cases – such as when a client insists on a position that goes against a previously agreed-upon investment approach – they might even strain the relationship.
“What we’re seeing today is a higher level of distrust caused by several factors, such as a higher cost of living. And that’s driving a lot of these stress responses,” says Stefanie Keller, chief executive officer and certified financial planner at Stellar Wealth and Tax Solutions in Winnipeg.
“People are concerned about transparency and, with some clients, that translates into a greater need to know and control what they’re holding in their portfolio.”
Bob Sewell, president, CEO and founder of Bellwether Investment Management in Oakville, Ont., says he sees this need more frequently among clients who are close to retirement.
“They start to put more thought into their investments because, at this stage of their lives, they may be concerned about whether they’re going to have enough to support their retirement,” he says.
What’s the best way for advisors to deal with such clients?
Ms. Keller says it’s important to understand what’s behind the client’s stock-picking tendencies. Are they anxious about current economic conditions? Have they started watching investment shows in which fund managers and analysts parse individual stocks? Are they sophisticated investors who used to manage their own portfolios and can’t break out of old habits – even after they’ve asked a financial advisor to take over?
The advisor’s response should then acknowledge the client’s concern.
“If you start with, ‘No, you shouldn’t be asking this,’ or ‘Don’t worry about it, trust me’ – I don’t think that’s ever worked,” Ms. Keller says. “But when you address the human element first, then you can have a conversation that isn’t driven by emotion.”
That conversation will vary from client to client. For clients fixated on certain stocks, Ms. Keller says she might talk about how these securities will typically respond to different market cycles and why they aren’t part of a client’s holdings.
“So, if their objective is income and not growth, then I’ll explain that we’re not going to have a bunch of technology stocks – that maybe their friend or brother-in-law owns – in their portfolio because they’re not going to get income from those particular holdings,” Ms. Keller says. “I also talk about tax implications, because we’re not just looking at the [stock] performance.”
Mr. Sewell says he emphasizes the importance of diversification. He also reminds clients about the risk associated with certain hot stocks.
“I ask them how much of their wealth they want to be tied up in these stocks, many of which are good companies but may be overvalued at the time,” he says.
Another method is to refer clients back to their financial plan and investment approach, says Gurtej Varn, founder of White Coat Financial, a Vancouver-based wealth advisory firm focused on medical professionals.
“It’s really important to reiterate what we had agreed on originally and to confirm that we’re going to stay on that path,” he says.
That initial agreement between client and advisor should be based on each party truly understanding what the other wants or has to offer. That’s where a comprehensive discovery process can make a difference, Mr. Varn says.
During that stage, advisors need to take the time to know what their clients hope to accomplish and how much risk they can and should take to achieve their financial plan. At the same time, clients need to understand and agree with their advisor’s investing approach.
Mr. Varn uses index funds primarily, with individual stocks accounting for only 10 to 20 per cent of client portfolios.
“My clients know this. I’m a big believer in the efficient market hypothesis, and I always joke that I would much rather be the casino than a skilled poker player who might make money now and again – as the casino still wins most of the time,” he says. “I find that analogy helps calm down a lot of clients.”
Sandeep Mishra, an associate professor of management who leads research into risk-taking, judgment and decision-making at the University of Guelph’s Lang School of Business and Economics, says it might be helpful for advisors to draw on psychological traits when determining a client’s risk profile and the most suitable investment approach.
“Some people are more prone to anger, anxiety [and] depression, and folks who are more neurotic might require more sense of control,” he explains. “So, when it comes to investing, people’s strategies sort of manifest their personalities.”
One way advisors can use psychological trait models in their practices is by adding personality assessments to their discovery process. Besides being better predictors of risk tolerance, the results of these assessments could also help advisors tailor the way they communicate with each client, Prof. Mishra says.
But even when advisors undertake thorough discoveries, changes in a client’s life can cause them to want a bigger say in their investments, Mr. Sewell says. For example, a client who’s had a financial setback – perhaps after a divorce or a failed business – may want to “catch up” by investing in higher-risk growth stocks.
Mr. Sewell says such scenarios may prompt him to re-assess a client’s risk profile. In certain cases, he may accommodate a client’s request.
“Regulators have made it harder to do that with the know-your-product requirements we now have,” he says. “But if it’s a small position, the client understands the risks associated with it and we’re not completely uncomfortable with the stock, then we’ll accommodate it. But if it’s too large a position, then we’ll just suggest that they do this through a [discount brokerage].”
For clients who are persistent stock-pickers and keen to try out their theories, Mr. Varn says they should allocate a small portion of their portfolios into a self-directed account, preferably within a tax-free savings account.
Ms. Keller says she has sometimes encouraged such clients to go fully self-directed with their investments while continuing to receive planning services. “No has ever taken us up on that option,” she says.
For more from Globe Advisor, visit our homepage.