What If Clients’ Sentimental Equity Holding Doesn’t Match Their Risk Tolerance?

Today I’d like to share with you an email I received a while ago from Mike at Edward Jones.

What is the best way for an FA to approach a client about an equity holding that has sentimental value to the client but does not fit their risk tolerance? I have a 75-year old widow with over 50% of her net worth in Disney stock. I also have a widow who inherited her husband’s IRA at another firm. She had no idea what was in it, it was with an advisor she doesn’t know. Turns out it is 60% in aggressive investments, but she still wants to keep it there. Help.

Listen to the audio or read the transcript below to learn what Don’s suggestion is on handling the situation.

I would actually answer those two questions very similarly.

In the first case, when somebody has so much money in one stock, in this case – over 50% in Disney, I would simply ask her –

Mrs. Smith, if you came to me and you had a perfectly balanced portfolio, and I told you that although this portfolio is great I want to sell over half of it and put it in one stock, what would you tell me? … Well that’s what you’re doing here.

And it’s the same with the widow with 60% of her money in aggressive investments.

If you came to me with a perfectly balanced portfolio that meets the risk tolerance that’s right for you and I suggested to sell 60% of it and put it in aggressive stocks or aggressive mutual funds, what would you tell me?

The answer is the same thing. I wouldn’t do that.

Also, as Jim Claywell at Edward Jones says, ask someone that doesn’t want to diversify, especially if it’s a woman, how many pairs of shoes she owns and why. Though their answer they will usually talk themselves into diversification.

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So, the answer to your problem, Mike, is you need to help the client talk themselves into diversification.

I’ve met a lot of widows over the course of my career. When a husband passes away and the widow inherits the portfolio, often she simply wants it the way it is because that’s the way Charlie wanted it.

Obviously she and her late husband had many discussions about where the money is going to go. So one thing I find very effective is this. Say “Look, we can change the portfolio to suit your needs and also give your heirs exactly what you and your husband decided to give them.”

Let’s make it easy.  Let’s say it’s 5 grandchildren and each grandchild was going to receive $50,000. You could sell her five $50,000 life insurance policies, with each grandchild as a beneficiary. So if something happens to her, the grandchild gets the money she and Charlie intended to give, it’s just in cash, the life insurance proceeds not in shares of XYZ stock. With what’s left over she can then change the portfolio to best suit her needs.

So I hope that helps, Mike, and please keep those questions coming in. Thank you.

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