Emotional rescue

Wealth management can be an emotional process. And many times, the more wealth there is to manage, the more intense those emotions can be.

Just because your HNW clients have substantial net worth doesn’t mean they’re immune to fear, greed, pride or other emotions that can sabotage sound wealth management decisions.

If you want to build a thriving HNW practice, you must become familiar with some of the more common scenarios where emotions can get in the way of reasoned investment analysis. But more importantly, you’ll need to step inside the HNW mind and appreciate the specific life experiences that lead to these emotions. After that, it should be easy to anticipate emotional issues before they undermine your ability to do what’s right for your clients. Here are four typical situations:

1:“Sticker shock” The scenario: The market suffers a correction, and your client’s portfolio shows a 10% paper loss. You consider the correction normal, but your client considers it a crisis. You speak to the client and it’s clear that the problem is one of perception: you view fluctuations in terms of percentages; the client views them in terms of dollars. With a $50-million portfolio, a paper loss of $5 million is more than the client can handle.

What you need to understand: Newly made HNW individuals often have difficulty becoming comfortable with their new financial circumstances. They may relate fluctuations to the past—a correction may result in a paper loss greater than their previous liquid net worth! Others, such as former business owners, may be unprepared for regular reporting on their financial health. They may not have been completely aware of their wealth prior to selling their business, for example, but now that they track it weekly or quarterly, they become anxious.

The solution: Prepare newly made HNW clients for sticker shock at the first meeting. Present the first few statements in person if possible. Establish reasonable expectations with all clients, and always discuss those expectations in percentages, not dollars. Be cautious about “talking up” gains when performance is good—this can come back to haunt you in a correction.

2: Chasing performance The scenario: Your HNW client reads an article about how well energy stocks have performed over the past month. He phones you and insists that you buy a large position in XYZ Inc., even though most analysts (including you) believe the bull run has been driven by short-term political events.

What you need to understand: Business owners and executives are used to making quick decisions. Many have developed a keen sense of intuition about opportunities, and may feel quite comfortable going with their “gut” when investing. Some may mistrust detailed investment analysis as “fence-sitting,” or believe a bad decision is better than no decision at all.

The solution: Explain the difference between business decisions and investment decisions: investment decisions require more analysis than instinct. Position yourself as a wealth protector rather than a wealth builder. Explain your investment principles frequently, and insist that the client sign on to them by agreeing to an investment policy statement. (To download load a investment policy statement that you can use with your clients, please click here.)

3: Loss of control The scenario: Your HNW client feels anxious about her portfolio. She has requested detailed financial statements and reports on her major holdings. She calls you several times a week to ask you pointed questions about your recommendations — despite the fact that the portfolio is in positive territory.

What you need to understand: Many HNW clients find it difficult to relinquish some control of their financial affairs. This is especially true of business owners, executives and highly-trained professionals. Because investment performance is largely outside of their control, these clients can feel anxious about not being able to affect change.

The solution: Establish clear responsibilities at the beginning of the relationship: you discuss big-picture decisions with the client, but day-to-day management is your responsibility. Communicate regularly but emphasize your role as a trusted partner, rather than a subordinate who simply executes orders.

4: Over-concentrated portfolio The scenario: Your HNW client recently sold his manufacturing business to a former competitor, in exchange for a large block of common stock. He wants to hang on to his stock because he’s excited about the company’s future prospects. This position represents more than 95% of his net worth.

What you need to understand: Entrepreneurs are used to keeping the vast majority of their wealth in highly concentrated positions. Many enjoy being seen as “risk takers.” Many have an intense loyalty to the industry in which they made their money, and may be reluctant to move on to other opportunities.

The solution: Emphasize the shift from wealth building to wealth preservation. Explain hedging strategies and provide back-tested examples of how they work. With particularly difficult clients, discuss “compromise” strategies such as equity monetization.

Don’t let client emotions derail the hard work you’ve done to build your practice. Watch for clients’ emotional reactions to market events and learn to address them directly. In the long run, your clients will thank you for it.

Thane Stenner is a first vice-president and investment advisor with the T. Stenner Group of CIBC Wood Gundy. The views of the author do not necessarily reflect those of CIBC World Markets Inc. This article is for information only. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of Canadian Imperial Bank of Commerce and member CIPF. thane.stenner@cibc.ca www.thestennergroup.ca

(05/10/05)