How do you tell a client she can't retire yet? How do you tell another he can't sustain his current lifestyle? Delivering bad news comes with the territory for financial advisers.
"A large amount of our time is spent counseling and supporting clients. We often become their support team for daily life decisions," said Richard Colarossi, certified financial planner and accredited investment fiduciary with Colarossi & Williams.
It's essential to deliver the bad news with hope and actions that can be taken to fix the problem, he added, recalling a recent situation. Colarossi was beginning the retirement income distribution process for a client with $5.5 million in assets, of which only $2 million were investible.
"She was living a very high lifestyle, withdrawing 10 percent per year, and I had to say to her, 'It won't work,'" he said. "She was stunned, and asked, 'What do you mean?'"
The first thing Colarossi did was reassure his client that she'd been very successful and had accumulated a wonderful portfolio but did not have the income she needed.
"She hadn't been looking at the withdrawal percentage, just the dollar amount," he said. "People do simple arithmetic, [and] she didn't understand that the equilibrium rate—what her investible assets needed to earn—was 14 percent."
Colarossi explained. "She was taken aback, questioning if I was right. But I quantified everything, and eventually she said, 'I think you have a point.'"
His immediate prescription? In the short term, live within your means, scale back, and try to sell assets such as real estate in order to get more income-producing assets.
"It's very important to look at the big picture—usually it's not all bad. You can't be dramatic. In reality, people usually know what they did," said Helen Simon, certified financial planner, retirement management analyst and CEO of Personal Business Management Services.
Simon described some common scenarios in her practice where she's had to deliver bad news:
- Spouse vs. spouse: "Often, one spouse doesn't know what the other is doing. It's usually the husband handling the investments, but he doesn't want to admit what he's doing or if he made a big mistake. So it's my job to bring it to the forefront."
- Keeping up with the Joneses: "The husband wants to give his wife everything she wants—but can't afford it. He doesn't want to admit that he doesn't make as much as people think."
- Waiting too long to save: "There are a lot of people in their 50s who decide, all of a sudden, [that they] need a financial adviser. But 15 years is not a long time—especially if you're not saving an astronomical amount of money."
- Severe market corrections: "You've got to show the client the big picture of the portfolio over time. Clients will be receptive if you prepare them the right way. You have to be somewhat [parental]: Explain to them that if they are diversified, they'll have gains that make up for those losses."
Simon added that it's "very important" to establish a strong client relationship and focus on being solutions-oriented and letting "them know we're in this together."
"Clients need an advocate—someone on their side," she said. Successful advocacy may take some persistence.
"We've actually had to write letters—not just emails—telling clients they're spending too much," said Edward Kohlhepp Sr., certified financial planner and president of Kohlhepp Investment Advisors. "Even though we warn them in meetings, they continue their excessive patterns."
Kohlhepp said some clients respect the advice, but many ignore it. "We write to them repeatedly, often yearly," he said.
Colarossi at Colarossi & Williams offered some helpful tips for handling difficult conversations:
- Most important: Don't delay the topic, hoping it will go away.
- Keep expectations realistic.
- Quantify the situation: Show clients your due diligence in case you are wrong about an aspect.
- Always leave a client with the affirmation "You'll be OK." Leave them with positive energy.
- Don't be emotional; stay cool, and don't show your own anxiety.
- Be aware of the impact of words; you have to say it like you care.
- Tell them what they need to hear, not what they want to hear.
- Engage clients. Ask: "What do you want to do about it? What are your thoughts?" It's what you don't hear that's the most valuable piece of information. If they can't answer, you didn't cut it.
Colarossi said he believes the job of financial advisers is "to give hope." Complex situations such as these make advisers better, he noted, even if delivering bad news can be difficult.
"If I tell the client what he doesn't want to hear, he might pull his account, but the client always needs to be given the bottom line—without sugar-coating," he said.