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The situation

A client calls demanding to buy the penny stock his cousin is touting.

The investment is completely unsuitable. How do you persuade him not to buy it?

You’ll likely get resistance if you simply tell him no. He’ll tell you his cousin has never been wrong and has invested a lot of money in the stock. When this happens, avoid personal attacks on the cousin.

Read: 4 tips for clients picking advisors

But show the client why this stock isn’t right for him:

Ask

Can we ensure we’re on the same page about your short- and long-term goals?

Not

Does your cousin know the markets as well as I do?

Ask

I want you to have the most suitable investments. Would you like me to explain suitability?

Not

Why do you want to buy this penny stock when I already recommended a decent blue chip?

Ask

Can I go over what my recommendations are for your play money?

Not

Do you really want to throw away your cash?

Your goal is to find the middle ground between bullying and backing down. It’s hard. But your aim is to avoid a conversation where your client feels like the loser.

Read: Stop, look, edit…send

First, understand why he’s asking to buy this stock. Brainstorm four or five answers, such as:

  • He doesn’t know why the stock’s unsuitable (so you’ll need to explain)
  • He’s panicking because of a financial emergency (so show him a safer way to fund this emergency)
  • He’s jealous other people have made money on speculative stocks (so explain that what he’s not hearing about are all the people who’ve lost money)
  • He thinks you’re just an order-taker (so reiterate the actual parameters of your relationship)

If you’ve prepared, you can answer calmly, as opposed to becoming frustrated and saying things that might alienate your client.

Then, think about your ideal outcome. It could be a discussion about suitable investments or a revised plan that accounts for unanticipated cash needs. Regardless, be clear and respectful. Say, “Picking a winner is exciting. But this one’s not right for you and I’ll explain why” (see “Three ways,” this page).

If he still won’t budge, explain he’s created a regulatory conundrum that means you must refuse to manage this investment. Suggest he open a discount-brokerage account that he manages without your input.

Or, if he can withstand some losses, open an account specifically for play money. Assign it as high-risk and set limits: if stocks move 20% higher or drop 50% lower, you sell.

If he takes either option, you’ll know he was dead set on the investment. If not, he simply wanted someone to talk him out of it.

Read: A simple way to improve communication

Originally published in Advisor's Edge

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