Kitces amp Carl Ep 26 Talking Clients Out Of The Bunker Portfolio

2 Feb    Investing News

Clients often worry about how “the market” may be doing at any given time, which is understandable given the assets they may have invested there. However, there are times when some clients (particularly those who experienced the worst of the financial crisis a little over a decade ago)  completely lose faith in the entire economic system altogether and want to abandon their financial plan to go all-in with a  ‘bunker portfolio’, investing solely and entirely into select assets (like gold) that they feel will ‘save them’ from the risk of an overall failure of the entire economic system.

The fear that stokes the bunker portfolio goes beyond the typical concern over bear markets or periodic market volatility – it is based on a deeper fear and doubt about the entire foundation of the economic system. And for financial advisors working with such clients, the challenge is in helping them understand that, despite inevitable economic cycles, shifting their portfolio to ‘bet’ on a complete collapse of the entire economic structure is itself a low-odds, high-risk bet, such that even with the potential risk, the best course of action is generally still to stick to their financial plan and stay the course instead.

In our 26th episode of Kitces & Carl, Michael Kitces and financial advisor communication expert Carl Richards discuss how to communicate with clients with extreme distrust of the economic system as a whole, as contrasted with temporary concerns over market volatility (in which case a different conversation around market timing needs to be considered), and present strategies to help those clients from making fear-based decisions.

The first step in talking clients out of the bunker portfolio is for advisors to confirm that clients appreciate the fundamental principles around risk and return and that for more than a century, equities have fared better than fixed income, and fixed income has outperformed cash.

Even so, clients may still feel beholden to escape-hatch strategies to avoid market catastrophe. In these situations, advisors can help them understand the value of diversification by framing hypothetical out-of-market portfolios as risk-based ‘bets’ themselves, considering whether the portfolio the client is proposing would stand the test of time. And by examining the data, the advisor can simply ask (and assess) how often (if at all) the proposed portfolio would have made sense and actually been an appropriate choice. Often, this is enough to convince the client of the merits of their original plan and to stay the course.

For some clients, however, no amount of reason will persuade them that the economic system is not actually about to fail. And while an advisor’s primary role is to help clients meet their goals and to clearly understand the impact of their decisions, the advisor must also consider the overall happiness or dissatisfaction the client may experience as they follow their recommended plan in achieving their goals. Because if the client doesn’t fully agree with their advisor’s recommendation, and becomes so stressed about going along with the plan anyway, the advisor’s plan becomes exactly that – the advisor’s plan, and not the client’s plan. On the other hand, the strategy that the client does want to pursue, in opposition to their advisor’s recommendations, may not be one that the advisor, in good faith as a fiduciary of the client, can stand behind. Accordingly, in such circumstances, the advisor may simply need to acknowledge that the best course of action would be to terminate the relationship.

Ultimately, though, the key point is simply that clients who have completely lost faith in the economy need to be on the same page with their advisor around assumptions and principles of the market for the client-advisor relationship to continue on a healthy path. Because, unless the client is in agreement with the basic assumptions on which their financial plan has been built, it may not be possible to talk them through their fear-based decisions at all.

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