The Investment Scientist

When I failed as a financial advisor

Posted on: September 14, 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, all I could tell her: the market will eventually turn around, and when it does, 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 hit the fan.

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 shot. 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.

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5 Responses to "When I failed as a financial advisor"

I for one have been in the exact same situation and sometimes there is nothing you can do. People freak out at the sight of blood and at portfolio downturns.
I think every advisor has a client who is the perfect inverse indicator. When they capitulate you know its the bottom and when they hound you to get much more aggressive you know you’re near a top.

You don’t need those kind of clients. Markets have always been volatile and people, as DIY note, freak out and expect you to have your chyrstal ball readily available.

Thanks for the kind words. On average, 10% of clients are like that. They are not ideal clients, but they need the most help. I take them as intellectual challenges.

You are right that they need the most help. However, as FAs, we are not the ones that need to help them. They need a psychiatrist as most of these people are unstable, forget they told you to get real aggressive and generally think we can predict the future. Its unreasonable and unfortuantely, there are better clients that need our time. Remember, we are not hostage negotiators and are not paid to constantly talk people off the ledges. As for an intellectual challenge, take up chess.


I mostly agree with you. Only 5% of my clients are like that. I don’t talk to them constantly. I will bend their will once, if they still want to get out, I will let them get out. If the market happens to go their way, they are happy and so am I. If the market happens to go against them, I will use that as a teachable moment. I have used this to cure a few speculative clients since the market goes against them more often than not.


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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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