As financial advisors, we never want to see a client run out of money, especially “on our watch” as the advisor. Which makes it especially challenging to deal with clients who appear to be spending “too much” and may be on an unsustainable spending trajectory… especially if you’ve done a comprehensive financial plan for them, and know that their current spending pattern is unsustainable. Even if it’s sometimes difficult medicine to give them – telling them that their spending and lifestyle need to change – it’s an essential value of good financial planning to deliver the sometimes-difficult message when it’s necessary to do so. Except, in some cases, it turns out that the problem isn’t actually that the client has a spending problem at all… instead, the real problem is simply that the client didn’t yet trust us enough to tell us about all their assets in the first place.
In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we explore situations where clients who have a “spending problem” actually don’t have a spending problem… they have a trust problem that leads them to be unwilling to share information about all of their assets with the advisor. A situation that may occur more and more frequently in the future, as the advisory industry continues to converge on the AUM model… and clients feel increasingly pressured to consolidate all their assets with their current advisor once the advisor “finds out” there are other assets he/she doesn’t already manage!
Learning that a client has been “hiding” assets can come as a shock for many advisors. It’s the situation where you thought you were being a good holistic financial planner, and giving them guidance about unsustainable spending, and then abruptly find out the client is terminating the relationship and consolidating all of their assets with another advisor. Which leads to three surprising and related realizations: (1) they actually had another advisor we didn’t know about, (2) they actually had other assets we didn’t know about, and (3) they weren’t actually overspending in the first place. We only thought they were overspending because they didn’t want to tell us about all of their assets for fear of being solicited about them!
And the reality is, as more and more of the advisory industry shifts to the AUM model and packages together financial planning and investment management, this problem is going to get a lot worse. When we look at the financial advisory market as a whole, about one-third of the 115 million US households are at least mass affluent, only about one-half of those have more than $100k that could be managed by a financial advisor (i.e., outside of a retirement plan), and only about one-third of those are actually delegators who are looking to hire an advisor. Which means, when you do the math, there may only be about 7 to 8 million households to divvy up among 300,000 financial advisors, resulting in about 21 clients per advisor (of which only 5 are millionaires!). Ironically, this means that if all clients did consolidate all of their assets with one advisor, many advisors would go out of business (or at least be compelled to pursue other advisor business models that can serve other types of non-AUM clientele!)!
Fortunately, in practice clients tend to split assets across multiple advisors (which keeps more advisors employed and engaged!), but clients don’t necessarily tell us, because they don’t want to be solicited to consolidate assets… which can result in a dysfunctional financial planning relationship in the process! For me, this led to the realization of the importance of being even more focused on leading with financial planning first, and to be less aggressive about insisting we “have to” be holistic and do “everything” for clients all at once. Because if clients can’t trust you to do the financial planning work first and build that relationship over time, then they may never have enough trust to consolidate their assets regardless. But if you can lead with financial planning and build that trust, then you can end up eventually winning all of their business in the long run anyway. Without clients feeling so pressured that they keep some of their assets a secret in a way that further undermines the planning relationship you’re trying to build.
The bottom line, though, is just to acknowledge that if you have a client who has a “spending problem” and is heavily overspending and just keeps ignoring your advice, it is possible they really have a spending problem, but it is also possible that they have a different problem – one where they don’t actually trust you and feel as comfortable with you as you may have thought, leading them to hide assets from you so that you don’t solicit them to consolidate. And as the industry continues to converge on the AUM model for providing both financial planning and investment management services, we’ll likely continue to see more and more clients with “spending problems” that might not actually be!