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Advisors sometimes find themselves in awkward situations. Your client calls with an unsolicited order. You must follow their instructions. It’s obvious the client doesn’t understand what they are buying. What should the advisor do?
This is a problem that often surfaces in Asia, where buying and selling stocks is often approached from a gambling perspective, like betting on racehorses. Their friend bought a stock. They talked it up. The other friends want to buy it too. If this is a transaction, like a stranger buying a quart of milk, it might be OK, but as an advisor, you are looking to develop an ongoing, long term relationship.
Nine Guidelines
Here are some steps you might take in your conversation.
- You must follow instructions. This might have been the last point, but I’m making it the first. Most accounts are nondiscretionary. If a client says they want to place an order, we need to follow instructions. It’s their money. We can’t forbid the trade or forget to place it. Imagine if you did that when a client (years ago) might have said: “Call me crazy, but I want to buy this company called Amazon. They intend to sell books online.”
- What happened? Your client who only buys three month Treasuries suddenly wants to put all their money in one stock. This is counter to their risk profile. It’s legitimate to remind them of this fact and ask for details. They might have won the lottery or come into a large amount of money.
- Ask how they heard about this investment. It’s a legitimate question. Maybe their barber told them about it. They heard from a friend of a friend. They were talking about it on a cable financial station. It gives you more information and should at least move you out of the “order taker” category.
- What does the company do? Now we are taking the previous question to the next level. You can be looking it up online as they are explaining. Does the client even know the answer?
- What has to happen for the stock to work out? Assuming they know what the company does, what must happen with the economy, or with the product for the stock to rise? You’ve heard the story with meme stocks “If everyone keeps buying and no one sells, it will keep going up and we will all get rich.”
- Inside information. It’s just possible your client might say: “A friend of a guy who works at this company is getting a takeover bid tomorrow from (name) company.” That’s inside information. The SEC does look at unusual trading before these announcements. Your Compliance manager should be brought into this conversation.
- When will you know it’s time to get out? One of the advantages financial advisors bring to the table is price targets established by a team of analysts. Their friend told them about the stock. Will they keep them updated? Unfortunately, when something doesn’t work out, friends sometimes go silent and want to pretend this didn’t happen.
- Does your spouse know? You might not use this one. It depends on several factors including how well you know the client. If the trade is taking place in a joint account, the other party is part owner of the assets. Would they withdraw a large amount of money without telling their other half/ Probably not. This might get your client thinking.
- I can’t watch it for you. This ties into marking the trade “unsolicited.” Your client might be of the opinion once they place the trade with you and revenue comes into the firm, research, updates and advice becomes your responsibility. No. You would feel responsibility for investments you suggested, but not ones they dream up. Your practice logically has core building blocks, keeping the number of investments you need to follow manageable. Imagine if 100 clients each came up with a pet stock and asked you to watch it for them.
We must follow instructions. Even through as advisors we know a lot, we don’t know everything. We can at least try asking the right questions.