A Tale of Proximity





I learned a valuable lesson very early in my advisory career.  I learned that I have to be consistent and confident in order for my clients to get the most out of my services.  By consistent I mean that I must understand their situation and expectations, assess their risk tolerance, make appropriate recommendations and then implement these recommendations over time.  By confident, I mean that I have to trust my investment methodology.  An advisor must maintain objectivity in order to do this effectively.  This tale is a relationship tale about what happens when an advisor gets too close to the client.  I got too close to one of my clients.  I allowed myself to develop the same fears as my client.  This led me to lose objectivity, which led to poor decisions and ultimately to inconsistency.

I have a good friend who owns an auto repair business that I would characterize as extremely well run.  I’ve asked him his secret, and he always says that it’s consistency, customer service, integrity and managing client expectations.  He strives to make sure that every car and every client that comes into his shop gets treated with respect, that their situation is analyzed, conveyed and that they know what to expect.  When I’ve asked him to tell me about situations that have gone wrong, his answer is always the same.  He says that his failures to provide a positive outcome arise from trying to do more for a particular client than for the rest of his clients.  Like he says, “If you have a system or process that works and you alter it, then you have a new system.”  He maintains that when you step outside your boundaries, instead of a positive outcome, you in fact get the opposite result.  Thus the subtitle, Maintain Your Boundaries.

I have another good friend who is a successful surgeon.  When I visit him, he has an entire floor at a hospital devoted to his patients.  I can’t help but be impressed that his patients are coming from all over the country so that he can work his magic.  Many surgeons refuse to perform surgery on family members.  They think it might cloud their objectivity.  However, when my friend’s father needed surgery, my friend didn’t hesitate to perform the surgery himself.  His reasoning was, “I’m one of the best in the world.  Why shouldn’t my father get the best treatment possible?”  What’s most interesting about this incident wasn’t the surgery, however.  It was the recovery.  My friend’s father naturally assumed he would recover at his son’s home since they live far apart.  He was in for a surprise.  The son, the surgeon, treated his father exactly as he would any other patient.  He didn’t give him any special treatment.  His father recuperated in the same facility as all of his other patients.  I asked him why, and his answer was identical to that of my friend who repairs automobiles.  He said there was a reason that people from all over came to see him.  They came for a consistent result.  Why change a winning formula?  He felt that if there was something he could do to improve the client experience, he would already be doing it, and so it was only natural to treat his father like the rest of his patients.

I give the two examples of the auto mechanic and the surgeon to illustrate that investment advisors must do the same.  They must advise in a consistent and objective fashion.  When an advisor goes outside of his successful process, the result is often not a good one for either the advisor or the client.  Let me give you an example of something that happened to me.  As I said earlier, this was early in my career.  I avoid these situations now.

I met Sandra in late 1989.  She was 36 years old with two young children.  She was a young widow who had received a large insurance death benefit when her husband died unexpectedly.  Financially, she was right on what I call “the bubble.”  The bubble is the point at which if you manage your finances correctly, you may or may not be able to retire.  She was clearly not wealthy, but very close to it.  Advisors do this type of analysis routinely to determine if someone can retire, although it’s unusual for a 36 year old.  In her case, she felt that staying home with her young children was the right thing to do, and we proceeded along that line.

I went about my normal fact-gathering process, which in her case was longer than I expected because she had to divest a number of assets since she was selling her deceased husband’s business.  In addition, I conducted the normal investment planning.  I also had to implement estate planning because she was very concerned about the welfare of her children in the event something happened to her.  It was a complicated, emotional and time-consuming time for her and for me.  I became friends with her and got to know her children and the employees who were subsequently going to work either elsewhere or for the new owner.  After about six months, the situation was clearer and it was time to implement her investment plan.  Here is where I made my mistake.

We implemented an asset allocation of 55% stocks and 45% bonds in July 1990.  Today I know that was appropriate for her risk level and situation, so this wasn’t the problem.  The problem was that by October 1990 the stock market was down 20%.  The stock portion of her portfolio was down a similar amount and she hit full panic mode.  She wanted out of the stock market and into safety.  Today I’ve been through enough bad periods in the stock market to know that people panic, but I can reassure them.  Inexperience and proximity was my error.  The combination of my not-yet fully developed confidence and my acute awareness of her situation led me to alter her asset allocation.  Her fear became my fear.  I mistakenly reallocated her portfolio to a 25% stock and 75% bond position.  By May 1991, the stock market was back up to the July 1990 levels where we started, but Sandra’s portfolio wasn’t.  I was angry with myself for letting my fear, meaning my client’s fear, get in the way of my better judgment.  I had let her fears influence my decision-making and it cost her.  It wasn’t a fatal mistake, but was one that had to be rectified.

Fortunately, I was able to recognize and articulate the error of our ways and persuade Sandra that we needed to get back to a more sensible asset allocation.  When I explained what had happened from my point of view, I could see instant recognition in Sandra’s face.  Sandra’s children are now grown and she has found great satisfaction from a passion that turned into a profession.  The lessons we learned so many years ago are still with us to this day.    

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