What to Say to Clients that Overspend
We have all had to face this difficult situation with a client. You discover that they are clearly spending well beyond their budget. They have no apparent means of replenishing their principle, but they continue to spend in spite of your advice. What do you do?
When I would visit an office in my District, I would often build this warning into my speech. “You all have one or more clients that are outspending their money. They are headed for the cliff where they will no longer be able to maintain their lifestyle, pay their bills and eventually face bankruptcy.
Who will they turn to?
Who can they blame?
Inevitably it will be you! Especially if they have a good lawyer. What will they say? ‘You should have warned me. You should have protected me from myself.’ Here is the tough part. They will often win in a board of arbitration. Potentially, there could be tremendous cost to you in terms of time, lost productivity and reputation.”
So what can you do when faced with a client that is outspending their budget and won’t listen?
- Be sure that you have all the facts. The client may be expecting a large inheritance or other windfall that will change his/her circumstances.
- Double check your original Cash Flow Analysis. Once you review all the facts, be sure the math is right. (See the Advanced Learning Library for a Cash Flow Analysis template)
- Update the Cash Flow Analysis based on current figures. This usually means that the budget you had for the client may no longer applies. The new budget is even less.
- Call the client in and share the news. It may be smart to have a witness to this conversation. Depending on the seriousness of the situation, your manager or compliance officer may make excellent witnesses. Have a clear agenda for the meeting. Present the updated analysis, your recommendations and possible solutions.
- Explain the options available: modify lifestyle and stick with the new budget. Increase income by getting a job. Increase income by taking more risk.
- Probation. Once the client has agreed to taking the appropriate action, put him/her on probation. If s/he doesn’t comply with your suggestions in the next 90 days, fire the client. Although this is difficult, it is better than a lawsuit.
This is an important topic to bring up with your clients during their semi-annual reviews. These are difficult conversations to have but of vital importance. Remember, as I’ve said before, clients are either spending too much or too little. They are never spending the right amount. Larry Wilson taught me a great lesson: our job as an advisor is to help our clients grow up and make better choices. Supernova’s 12-4-2 program does that by keeping you in regular contact with your clients to make sure that they are spending appropriately.
Suggested reading: Have You Ever Encouraged a Client to Spend More Money?