Talking a client out of buying a diamond necklace or luxury yacht might seem like a thankless task. But curbing such impulses can prove to be among advisors’ most vital roles. Over time, today’s cash outlay can rack up an opportunity cost that will seriously mess up a long-term financial plan.
Chance Carson, an advisor at Intervest International in Colorado Springs, Colo., whose practice manages $515 million, detests confronting clients about their shopping habits — but he does it when he has to. “Nobody wants to be told they’re a spendthrift,” he says, “but sometimes it’s a discussion that just has to take place.”
Conversations about budgeting need not be adversarial. Experts recommend discussing spending issues at the beginning of every client engagement. That can help keep emotions in check going forward and prevent a bad decision or two from turning into an ongoing habit.
Occasionally, an advisor can get backup from a supportive family member. For example, Carson recently heard from a retired tech executive who wanted to buy a $55,000 Cadillac. In a meeting with the client and his wife, Carson showed them spending and income projections, explaining that their assets would dwindle away about five years sooner if they made such an expensive purchase now. He noticed the wife nodding her head knowingly, so he made sure she participated fully in the ensuing conversation. Ultimately, the couple struck a compromise: The client bought a used car of the same year and model, spending nearly a third less. “Some people are just naturally more prudent about expenses than others,” says Carson.
Early in the planning process, advisors should hold a client meeting dedicated exclusively to expenses, says Scott Beaudin, founder of Pathway Financial Advisors in Burlington, Vt., with $275 million in assets. During those sessions he gathers data on household expenditures, large and small. He’s careful to frame the discussion in non-judgmental language. “We don’t like to use the word ‘budget’ because it comes with too much emotional baggage,” he says. “It sounds too much like a diet.”
Airplanes and horses are two purchases that raise immediate red flags at Beaudin’s firm. “Both are expensive to maintain and can prove very difficult for clients to agree to part with,” he says. Recently, he had to confront an engineer who’d been spending $50,000 a shot on a series of upgrades to make his jets more luxurious. To cover the outlays, Beaudin figured, the client’s investment portfolio would have to consistently gain 15% a year for the rest of his life.
So Beaudin sent the engineer a formal letter explaining his family was in danger of running out of money 20 years earlier than previously projected. Although the client hasn’t decided to give up his expensive hobby, he is pursuing part-time consulting gigs. “He’s determined to keep the party alive a little longer,” says Beaudin. “But at least now he realizes that something needs to change in his spending habits.”
Showing clients they can make financial trade-offs is a critical part of a planner’s role, says Kevin Gahagan, a principal at Mosaic Financial Partners in San Francisco. A question several clients have asked him lately is whether they can afford to leave their current job for one that pays less but offers more personal satisfaction. In such cases, says Gahagan, whose firm has AUM of $620 million, he’ll go into line-item detail to demonstrate how reducing household spending could lower their salary requirement — or, conversely, how retiring early might strain their budget.
“How long clients work and how much they spend are variables that an advisor can help influence,” says Gahagan. “Inflation, interest rate movements and market returns aren’t things that can be directly controlled.”