How to deal with know-it-all clients

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What happens when clients have expertise in a particular industry and they want to use that knowledge to shape their portfolio?

Do they bring more focus to investing and to their relationships with their advisers, or can it lead to unnecessary micromanagement?

“Generally, it’s not a good thing,” says CFP Christopher Cordaro. “Those individuals think they have more control and more knowledge than they actually do.”

Many clients will often misjudge their knowledge about specific sectors or stocks, says Cordaro, managing partner, chief investment officer and wealth adviser at RegentAtlantic Capital in Morristown, N.J.

“Let's say it’s pharmaceuticals,” he says. “They may know certain compounds and regulatory requirements, but there are so many other factors that influence the stock price that they overestimate their ability to predict how well it's going to do.”

Even if a client has solid knowledge of particular sectors, diversification should still be the main emphasis of a portfolio.

“Most people have four or five good ideas, but they can’t get past that,” Cordaro says. “But if they're building a portfolio, they should have at least 15 positions that are equally weighted and not dominated by just one or two.”

Clients are often eager to use information from their professional lives in constructing their portfolios, says CFP Jane Newton, a colleague of Cordaro’s and also a managing partner and wealth adviser at RegentAtlantic.

“My clients who are CEOs of biotech companies or who consult with biotechs have a very specific interest in biotech, and frankly, they know more than I do about biotech,” she says. “Why wouldn't they want to act on it?”

In such cases, advisers need to make sure that they discuss and fully understand a client’s holdings in a specific area so that they can make sure that the rest of the portfolio diversifies their risk.

The issues are often most acute with clients in the financial services industry.

Not only are their investment portfolios often heavily weighted toward their own industry, but their jobs and even personal real estate are closely correlated to the fortunes of banks and the markets, Newton says.

She tries to understand client attitudes toward building a portfolio from the get-go.

“I ask my Wall Street clients, ‘Are you actually going to give us discretion to pick the right stocks and bonds for your portfolio, or are you going to be second-guessing us all along the way?’ I’ve got to know that upfront,” Newton says.

For clients interested in a do-it-yourself approach, advisers can set aside a limited part of their portfolios.

“They may want to have a pot on the side. That's their play money, and as long as they can risk it and still be OK, I'm fine with it,” Newton says.

“If it’s a $2 million client and they’re going to put a million in the pot, that may or may not be a smart move,” she says. “But if they're a $2 million client, and they want to put in a hundred grand to play with, that's fine.”

This story is part of a 30-30 series on ways to build a better portfolio.

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