In “Don’t Invest for Clients—Plan for Them” (JofA, Jan.02, page 32), a sidebar, “Wealth at No Risk?,” stated that a financial planner advised a dentist in his mid-40s to invest most of the $2 million he had in his IRA in certificates of deposit. These CDs would earn 6.5% and provide all the money the dentist would need for retirement.
My first question is whether the client wanted to build a nest egg, not just for his retirement, but also to pass along to his heirs. The planner seemed to focus only on the client’s retirement needs and on the safety of his principal.
The article further stated that the client did not follow the planner’s advice and subsequently lost $1.4 million in the technology meltdown. It must be nice to pick your cases to make a point. Hindsight is always twenty-twenty.
What bothers me most is that the planner did not serve the client well. The client obviously was willing to take a lot of risk, and yet the planner tried to push him toward virtually no risk. By taking an extreme position, the planner failed to modify the client’s portfolio in any way, thus not serving the client at all.
A better response by the planner would have been to try to get the client to diversify across investment classes and within each investment class. The client might have been amenable to the idea of investing 25% to 30% in fixed income securities, including CDs. This would still leave 65% to 70% of the portfolio invested in the stock market.
As for the stocks, the planner should have worked harder to show that a concentration in one sector is risky and tried to get the client to own a more diversified portfolio. There still would have been losses in the portfolio but nothing in the magnitude of $1.4 million.
In conclusion, the client was ill-served by an ultraconservative financial planner who imposed his or her own level of risk tolerance, or lack thereof, on the client. The planner should have tried to understand the client, his risk tolerance and then work to meet his needs—including the need/desire to achieve returns above the 6.5% CD rate and have some “play” in the stock market.
Aaron L. Shackelford, CPA, CFA
Raleigh, North Carolina