My wife points out that I can be tactless at times and, admittedly, I prove her right every day.

I say tactless things to clients all the time, but I know these truths add value and differentiate my practice. I think these things are so important, in fact, that I typically make sure I share them with prospective clients, as well. They could work for you, too.

1) I’m charging you $450 an hour to tell you I don’t know the future. Not only that, I say it’s the single most valuable advice they will get from me. My comment usually comes after the client says something that implies they know what’s going to happen. For instance, they might state they don’t want bonds or anything beyond ultrashort-term rates because rates are near an all-time low and the Fed is raising them.

So then I ask: Do you really think rates would have already risen if everyone knew they would go up? Markets are capricious beasts, but they aren’t stupid. Investors would have already bid for new bonds, pricing in that certain increase, causing rates to immediately rise. Perhaps that’s why economists have such a lousy track record in forecasting the 10-year Treasury note.

While Allan Roth, founder of planning firm Wealth Logic, applauds Rob Arnott for showing the pitfalls in smart beta, he consider smart beta to be an active strategy.
"I say tactless things to clients all the time," says planner Allan Roth.

Another example: Clients may say they want higher allocations to emerging markets since those economies are growing faster. I try to inject a little bit of humor with my tactlessness, but I’ll question their assumptions that we are the only ones who know the economies of China and India are growing faster than the U.S. or Western Europe. This is why those stock markets have grown just a bit slower over time, I say. And I note that value stocks in the very long run tend to outperform growth stocks, so why wouldn’t value countries with slower-growing economies (like the U.S.) be expected to underperform growth countries?

I point out that I have a term for investing based on common knowledge — following the herd. Though you may not be an hourly planner, consider telling your clients that you are charging them a lot of money to tell them you don’t know the future.

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Let’s face it; broad ultralow-cost index funds are downright dull, at least most of the time.

2) Investing should oscillate between boring and painful. Let’s face it; broad ultralow-cost index funds are downright dull, at least most of the time. You just aren’t going to get the same rush that comes from a single stock that has a 50% gain in a week or, really, any rush at all. Rarely will such an index fund gain more than 10% in a single month, and that’s a very good thing.

But good investing should occasionally be painful. I’ve been there and can tell you that buying stocks after a plunge such as the financial crisis was, for me, the most painful investing experience I ever had. Though I’ve studied behavioral economics for years, I was surprised how little that knowledge insulated me from my emotional response. Rebalancing to target asset allocations was like being kicked in the gut three times and asking for three more. It’s true that financial advisors as a whole tend to move to cash after the plunge.

"Investing should oscillate between boring and painful" and nine other tactless things Allan Roth tells his clients.

3) Is your goal to die the richest person in the graveyard? When I finish a client’s financial plan, I make sure to bring attention to the fact that I won’t have them being buried with their money. Sure, passing on their money to heirs is an important secondary goal, but it isn’t the primary goal. It’s a risky world and stocks are much riskier than high-quality bonds. So, as financial theorist and author William Bernstein puts it, “when you’ve won the game, quit playing.” Though I don’t advise a zero allocation to stocks, I do reveal that my personal allocation to stocks is only 45%, as my need to take risk is low.

4) No, you won’t have the courage to rebalance after a stock plunge. I’m not a believer in risk-profile questionnaires. One of the reasons (and there are others) is that the way we feel about risk is unstable and can express itself as being fearless in good times and scaredy-cats in bad. Yet I still ask what they would do after stocks lost 50%. It is the clients who immediately tell me they would easily be able to rebalance and buy more stocks that I challenge.

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I’m not a believer in risk-profile questionnaires.

What I found after the last plunge was that the client who told me they knew it would be really hard, and hoped they would have the courage to stick to the plan, were the ones that usually did. It was the clients that told me they were sure they would stick to the plan who were the ones I spent the most time talking off the ledge because they hadn’t internalized what they would be feeling. So, buying more stocks was off the table. It was all I could do to convince them not to sell their stocks and that moving to cash would guarantee they would lose. In fact, advisors as a whole timed the last plunge poorly.

5) You are borrowing money at a higher rate than you are lending it out and you aren’t going to make it up with volume! For those with mortgages, I point out that the mortgage is the inverse of a bond. I tell the client it’s just not smart to borrow money at four percent only to lend it out at three percent. At least it’s dumb if they have enough liquidity to pay down the mortgage and have enough of an emergency reserve.

If the client says they don’t want to put more money into their house, I’ll mention that I’m not recommending they do a remodel or addition, and that paying down the mortgage has nothing to do with the price they ultimately sell their house for. That’s why it should only be compared to a riskless bond such as a Treasury.

In fact, I almost always assure them that it’s a very tax-advantaged, and sometimes even tax-free, riskless return. That’s because the new tax law, with a $24,000 joint standard deduction and $10,000 state and local tax deduction cap often takes at least some of the mortgage interest just to reach that standard deduction. The translation is that at least some of the mortgage interest is providing no tax benefit while they are paying taxes on bond income. Other tax situations (such as the 3.8% investment income tax) make the argument even stronger.

6) You have a ton of cash and that is your riskiest asset. I tell clients a morbid story that I hope isn’t actually true. It’s said that if a frog is dropped into a pot of boiling water, it will jump right out. But if it is dropped into a pot with nice, comfortable, room temperature water that is slowly heated, it will remain in the pot and boil to death. Supposedly, it doesn’t notice the slow change in its environment.

What the heck does this have to do with cash? Well, when markets plunge, that cash feels like the comfortable pot we want to stay in. But inflation and taxes are heating the pot up, virtually guaranteeing you’ll lose quite a bit over a couple of decades or more. I tell clients that their cash will suffer the same fate, metaphorically speaking, as the frog.

7) Keep it simple stupid. The need to complicate is all too human. One can have a brilliantly low-cost, tax-efficient portfolio with just a few funds. Yet powerful forces lead us to complicate portfolios. We shoot for income, factors that worked in the past and all sorts of strategies that typically lead to lower total return. Of course, tax consequences are one real concern that prevents simplicity. I tell my clients “I’ve always said investing was simple; I never said taxes were.”

8) If it feels wrong, go for it. Whether in accumulation mode or withdrawal mode, I tell clients avoid anything that feels right and, if it feels wrong, that’s a good sign they’re doing something right. In accumulation mode, we typically want to put our money in whatever asset class has performed well. However, that’s the asset class overweighted versus the target, so new money must go in to what has underperformed other asset classes. In withdrawal mode, we must take from the asset class that has performed the best. Instincts typically fail us in investing so look for signs that a move goes against our instincts.

9) Get real! I tell clients and prospects to think in real terms, rather than nominal. If stocks have an expected real return of 5% and bonds 1%, a 50/50 portfolio may have a 3% expected return. Often, I’m pointing out a portfolio is giving away half or more of the real expected return if you factor in AUM fees, mutual fund expense ratios, etc.

Another example is having clients tell me they miss the days of the early 1980s when they could earn 12% on a CD or U.S. Treasury bond. I (tactlessly, of course) remind them that after taxes and inflation, they actually lost about 7% of their spending power each year. I tell them that those good ol’ days weren’t so great after all, and fixed income has a much greater real yield today.

10) I’m not right for you. This is the financial planning version of “it’s not you, it’s me.” I give all potential clients a 20-minute call where I review their profile submission and look at their portfolio. Based on their responses to my initial review, I can get a pretty good idea as to whether or not we are a suitable fit. We all know that taking on a client that isn’t a good fit benefits no one. If the client spends time defending their decisions, or just seems to agree with everything with no push back, it’s best to find out early.

Allan S. Roth

Allan S. Roth

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colorado. He also writes for The Wall Street Journal and AARP The Magazine and has taught investing at three universities. Follow him on Twitter at @Dull_Investing.