Who doesn’t want success?

Bull markets and the wealth effect can create opportunities for making very bad decisions


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There is adequate anecdotal and scientific data suggesting bull markets breed foolish investor behavior. What makes this bull market a particularly interesting beast is that with each passing uptick and “new high,” the markets become more disconnected from economic fundamentals.

The media’s focus fosters the well-known symptom of the “wealth effect” that ignores nagging trends such as massive student loan debts, stagnant wage growth or the radical and disruptive transformations in the economy. We’ll save the discussions about the subprime auto loan market, historically low interest rates and deflation for another day.

While it was not hard to make boatloads of money in the continually rising markets in the 1980s and 1990s, margins of error today are much narrower. Bull markets, animal spirits and the wealth effect can all create opportunities for missteps, oversteps and broken bones.

Times like this can potentially strain the relationships between financial advisors and the clients they serve. At all levels, relationships present a challenge, which is why entire libraries could be devoted to books on how best to nurture and sustain any kind of relationship. What Mark Twain once famously observed about the nuances of communication could also be said about the fragility of relationships: “The difference between the right word and the almost right word is the difference between lightning and a lightning bug.”

Fiduciaries and stewards of client capital should articulate more about the service they actually provide their clients. Focusing on fundamentals, client goals and objectives — and, most importantly, process — is what creates great outcomes for clients and their advisors.

No prudent advisor, especially when serving as a fiduciary, would let anyone “swing for the fences” when their client’s needs are modest and their capital base equally so.

Sometimes it happens that when we are talking about lightning, clients are focused on lightning bugs. There are occasions when clients tire of a fiduciary’s critical role and responsibility to remind them of their goals and the collective strategies crafted to help achieve those goals.

These scenarios include:

 • The irresistible but costly summer vacation, the purchase of a second (or third) home or the “need” to buy an expensive toy

 • Not being realistic about how much money is really being saved in order to meet one’s future goals

 • Believing that a bull market will allow investors a quick avenue to make up for any past losses or insufficient (in their eyes) returns or planning

While a Bernie Madoff (and his pie-in-the-sky promises built on lies) return on investment seems to come around rarely, there are clients who yearn and clamor for a similar siren’s song of easy results. The conditions that allow a “Madoff type” to con millionaire investors are the same at every income level. It’s especially true when investors con themselves.

Not surprisingly, some clients may find the value of a fiduciary, as prudent goals-based stewards of their financial freedom, is not worth the compensation paid. These investors either strike out on their own, as often happens near a market top. Sometimes fiduciaries sever ties with clients who no longer “hear” their advisor or no longer want to follow prudent counsel. We have all seen rational people take irrational actions that undermine their own fiscal well-being. A one-sided conversation serves no one in the end.

We use our own internal measure of how a client interacts with us. Some clients are less concerned and even impatient about a long-term comprehensive approach to financial freedom and expect wizardry or markets to compensate for a lack of planning. And sometimes they lose interest in the quiet victories achieved while trusting a process they helped engineer.

Consider the paraphrased self-reliance wisdom of Ralph Waldo Emerson: The decline in client accountability and involvement in their own success seems more evident for those who grew up in an environment of entitlement.

Our best clients embrace patience, process, planning and accountability — a “win-win” for themselves and for us as fiduciaries.

Tom Sedoric, managing director-investments of The Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or thesedoricgroup.com. D. Casey Snyder is a financial consultant with the firm.

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