Illustrations by Michael Morgenstern

You probably know how to talk to clients about mutual funds or annuities. What about, well, ostrich farms?

Lee Clarke knew he could have told the prospect that he didn’t work with this unusual investment. Instead, the now-31-year MDRT member from the United Kingdom learned what he could (note: this happened in 1990, pre-Google), including that ostriches can thrive in warmer climates but this specific farm’s location (Belgium) was not conducive to breeding. He also noted the dubious funding structure of the investment, the inability to determine how the investment would pay off and, crucially, the underlying philosophy driving the idea.

“It’s not what they want to do,” he said, “It’s why they want to do it that really matters.”

Clearly, there are countless whys and degrees of ambition and uncertainty in the current global climate — considering an unstable market, a worldwide COVID-19-driven health crisis and the interaction between the two. It’s why we reached out to MDRT members around the world to learn more about where clients’ and investors’ heads are in these challenging times, and how advisors make sure clients don’t jump toward a risky investment just because old ideas no longer seem to be working.

The art of frustration

For Surojit Kala, CIC, FSS, the question of timeliness and urgency comes into play as well. The 10-year MDRT member from Kolkata, India, has previously had clients interested in “treasure collections” of art and antiques, investments that Kala has to remind them are illiquid and cannot be sold to just anyone.

In fact, one client with this type of collection called Kala saying that he had to sell his second home to help provide funding for urgent commitments to family members. Why was he selling the house and not his valuable possessions? Because financial trouble for people in India prevented him from finding a buyer to present a satisfying offer for his collection.

“That’s how I came to know that people need money sometimes, and investments like this cannot solve their problems for emergency situations,” Kala said. “People seem really wealthy, but they can have big financial problems while owning expensive pieces that no one wants to buy.”

Leading with logic

“As advisors, we want clients to invest on logic and not on emotion,” said Jamie McIntyre, CFP. “When people invest on emotion, they tend to make bad decisions.”

The nine-year MDRT member from Newtown, Victoria, Australia, has seen this play out in terms of curiosity and trendiness, rather than information and logic, about cryptocurrency. (The short explanation of cryptocurrency like bitcoin: It’s a digital currency traded daily on an exchange, similar to a stock.) One client in his early 40s had several younger staff members who were very excited about bitcoin, and the client was intrigued.

For McIntyre, the big issue was that this investment was not regulated and did not have a lot of information available about it, meaning less certainty and more risk.

“There was a lot of hysteria and FOMO: fear of missing out. ‘Someone’s making money and I’m not; what’s going on here?’” he said. “I think it preys on scarcity and people’s greed, of making fast bucks. With 20 years of experience and education around investing, I know that wealth is created in the long term by good, consistent, day-to-day decisions, not in the short term by luck.”

McIntyre’s client did invest a little bit in bitcoin, and the value has been level since then. But the important message the advisor shared was that these alternative investments can play a small part — say, 5% — in an investment strategy but can’t be the majority of a portfolio. 

“There is a deeper set of questions to any prospect or client of what’s really driving this decision,” he said. “For all the ones I have had deep enough conversations about it, it’s ‘Hey, I want to make a quick dollar.’ Their optimism that what happened yesterday is going to happen tomorrow is misguided.”

McIntyre noted that he has seen clients prefer more traditional investments in these uncertain times, and that, generally, younger clients are more drawn to alternative investments because they’ve had less experience with loss in the market. In fact, he has spent the last two years talking with clients about the 100-year history of the market and making sure each client has the protection of three years of necessary spending money available so as not to become overconfident in an up market.

“Talking to our clients at the moment is about this being an expected market correction,” he said. “It just so happens the coronavirus is the trigger, and right now the market’s trading more on emotion; there aren’t enough facts for the market to be settled and comfortable. Markets like facts.”

When it’s not the investment that’s suspect

Of course, markets and the people who invest in them often can be complex and challenging to define.

Morwenna M. Clarke, CFP, recalled a client who put £100,000 (about $124,000) into an investment that itself was legitimate (a company researching a serum to fight multiple sclerosis). But the advisor selling the investment was unlicensed (and, if you will, alternative themselves), taking 40% of the investment for himself.

“I always say to them, ‘Don’t ever put more money in than you’re prepared to lose and not regret losing,” said the 25-year MDRT member from Cardiff, Wales.

How do you find new ways to communicate that clients shouldn’t jump ship when the market crashes? Clarke likens investments to a house that may have depreciated but otherwise has not changed.

“Just because it’s gone down in value doesn’t mean that the rooms have gotten smaller or the neighbors have moved out or the grass doesn’t need cutting,” she said. “If you need to move, the house you buy will have gone down in value too, and you’re swapping one devalued house for another.

“In fact, when there is a massive discount in the stock market, it’s a fabulous opportunity to get in at the lowest price we’ll probably see in the next 20 years.”

Obviously, strategic moves remain crucial. Jerry Jin Chong Yeo, CFP, AEPP, a five-year MDRT member from Singapore, uses a steamed layer cake called “Kueh Lapis” to help clients understand balance in their portfolio. That has been helpful to identify low-risk investments (social security, retirement income from insurance) as needing to be the lowest, largest layers of the client’s cake, with higher-risk investments used in smaller doses toward the top.

And Yeo has seen what happens when this is not the case. Before he began working with a particular client, that person bought into the advice of a so-called “investment guru,” who delivered a seminar about a crowdfunded overseas property opportunity. Without any regulation, the guru soon disappeared, and the client lost their entire investment.

That’s why now, if a client asks Yeo about a crowdfunded investment (such as a recent company attempting to be the Amazon of peer-to-peer services like guitar lessons), the advisor helps the client first take a step back.

This is both to evaluate the risk of a company that, in some cases, is only crowdfunded because it cannot secure a bank loan, and to assess how much money the client actually has available in their pot of money set aside for investments.

“He believed that the concept of this platform would be the future and hence strongly believed this could work and deliver quick money,” Yeo said. “The only advice I gave them was, ‘This money is from the speculative pot, and it has to be money that you’re 100% OK if it’s gone.’”

A team approach to investment ideas

Yeo also sometimes involves a close network of other advisors to see if there is something that he has overlooked. That team effort has been a big win for Adam Llewellyn Morse, CFP. For the last 2½ years, the nine-year MDRT member from Melbourne, Victoria, Australia, has utilized an investment committee, which includes two people from his practice and three from outside of it with extensive knowledge of macroeconomic conditions and investment opportunities.

This group can therefore evaluate potential investments brought in by clients and generate new ideas as well, both of which can be used as effective marketing points. 

That screening process is helpful if clients come to Morse with interest in alternative investments, which come from an estimated 25% of his client base. With investments ranging from an airport in England (with a $100 million minimum!) to renewable energy, these clients, Morse said, are often seeking to diversify their portfolio, and he treats these scenarios on a case-by-case basis depending on total assets, existing investments, liquidity concerns and more.

In addition, his practice uses a managed discretionary account to change client portfolios on their behalf without their authority to make individual trades.

“During periods of volatility, we can make portfolios more defensive,” he said. “Rather than just sticking with strategy and believing it will be OK, we get on the front foot, and when the skies part, we’ll be able to go the other way and take advantage of opportunities.”

For Brendan E. McCarthy, it all goes back to goals. Whether it’s a patent portfolio, a paint company or a restaurant, the 13-year MDRT member from Woburn, Massachusetts, cross-references a client’s new idea with the short-, mid- and long-term goals. What may seem like a basic function of a financial advisor is actually an important reframing of an impulse into a broader strategy.

“Do we have the right foundation in place to protect you, and are you good with losing that money?” McCarthy will ask. “We’ll talk about the loss of that money first, and how it fits with the objectives they have.

“How do they see one, two, three, five years of income in their business, their daily expenses, their cash reserves? How flexible are their investments and what are their long-term buckets? Could that $500,000 be better placed in one of those accounts rather than this new investment?”

And, of course, always make sure you understand the motivation. Lee Clarke learned that his client was charitably minded and hoped the ostrich farm would benefit the environment and, by extension, society as a whole.

“She had a 10-to-15-year timeline. I said, ‘If you’re planning to supplement your retirement income, let’s look at what other investments there are,’” he said. “We introduced ethical investment funds which would involve investing in something having to do with the environment and eliminating any that would be harmful to the environment.

“At the end of the day, she was a single woman, recently divorced, who was looking to build a nest egg, but not an ostrich nest egg.”

Questions to ask regarding alternative investments:

• Why does the client want to make this investment?
• How does it fit into their portfolio and goals?
• What data exists about this investment?
• How is it regulated?
• What has to happen for the investment to pay off, and when and how will that happen?

McIntyre on younger people chasing loftier investments:

“My view is the way the world is designed and what most people want is financial security. Having enough money to do the things they want when they want, and those things are different for everybody. The type of person wanting to purchase cryptocurrency wants those things really quickly. They’re not generally prepared to be patient with an outcome. And that’s really more related to the younger ones. The younger ones are optimistic that, ‘Hey, if I lose it, I’ve got future time when I can solve that.’”

CONTACT

Lee Clarke lclarke@toptrak.com

Morwenna Clarke morwenna@portlandwm.com

Surojit Kala surojitkala@gmail.com

Brendan McCarthy brendan@mccarthyfinancialllc.com

Jamie McIntyre jamie@macfinancialadvice.com.au

Adam Morse adam.morse@thebluerock.com.au

Jerry Yeo jerryyeo@rocketmail.com