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  • zetlmaier

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One of my worst encounters with a client occurred a couple years ago.  He was a younger guy in his early 30’s with a wife and two kids, smart guy with a good job and high income. He wanted to know how to invest for the future beyond his 401k.  He wanted to know if it was better to buy a rental property or just invest in the markets through a taxable account.  We went through the planning process, and I gave him his answers, or at least I thought I did.  When I completed the plan and sent him the bill, he refused to pay.  He stated that what we did was not what he was looking for and he was disappointed with the whole experience.  I reviewed the plan and questions he had emailed in advance and thought I did a good job.  In the end I got stiffed on fees and lost out on a potential HENRY, high earner not rich yet, as a client.



What went wrong?  A number of things.  On my end I misread the situation.  I needed to listen better and pick up on subtle cues. He displayed hesitation and had no follow up questions during our meeting which is usually a bad sign.  He didn’t think he needed a financial plan to answer his question.  He wanted someone to tell him which was better, buy a rental property or invest in the markets.  Without knowing more information there is no way to answer that.  There are many people who hold themselves out as experts and steer people to the area they know best.  For example, a stockbroker is unlikely to tell you to invest in an apartment building while a life insurance agent will certainly tout the benefits of a permanent policy.  I was supposed to be working on an hourly basis with this guy so I was indifferent.  Even if he did opt to invest in the markets through me it wouldn’t have been much.


Real answers and solid advice involve require looking at cash flows and appetites for risk.  He had plenty of cash flow to make just about anything work.  I hammered the point of costs involved with owning a place and the upkeep involved in rental properties vs. investing.  Don’t get me wrong, I have nothing against rental properties, but they add a level of complexity to your life that you may or may not be ready for.  The successful landlords I know locked in properties years ago before prices skyrocketed and also have low financing on them.  Both of these things are harder to do now.  A wise friend of mine who has been successful in the real estate space said, “You’re crazy to have just one property with one income.  All it takes is one bad tenant or a major repair and you’re fucked!”  His point was that if you are going to do it you have to have multiple income streams to mitigate those unfortunate events. 


Financial markets are much easier.  Buy into a diversified portfolio, rebalance and watch your money grow—or fall in some cases.  I pointed out how people shoot themselves in the foot by selling out when markets are down and miss the subsequent run-up. But, you can still get passive income from stocks and bonds, maybe just not as much.  But you’re also not going to have the hassle of collecting rent, paying for maintenance, and you aren’t borrowing as much to get that income.  This kid couldn’t operate a power drill, so I suggested creating an investment plan and gave him a guideline of what to do.



So far I’m feeling good about things.  When running projections based on rates of return the client agreed were adequate, investing in the markets was a better way to go.  But, there were two more contributing factors: his lack of understanding of his current expenses and the value of compounding interest.  The results I showed him were in future dollars so 40 years from now he’d be worth $40million-ish.  He couldn’t wrap his head around this.  The reality is that most people in the Seattle area never would have dreamed they’d own a $1million house, especially if they paid $40k for it 40 years ago (an 8% annual rate of return.)  Now it’s common.  Using that same rate a $1 million house will be $30million in 40 years.  It may seem unrealistic, but history proves it possible.  I tried to explain it, but the damage was done.  He thought my advice was bunk. 



Another culprit was that he had no idea of what he was spending.  People hate to have a budget.  I never advocate for being strict with your spending but at least know where it goes. How many times have you thrown down a credit card and signed off on it without knowing the total?  I’ll admit I’ve done it.  When I catch myself I feel disgusted.  When it comes to investing, unless you are flush with cash, a spending plan is necessary for any financial plan.  He didn’t necessarily want a financial plan or think he needed one, but it was necessary to analyze the situation.  If you go to the doctor for a rash.  I am willing to bet that they will check your weight and blood pressure while you are there.  Are those tasks necessary?  Probably not, but they want to make sure there isn’t something lurking beneath the surface.  Maybe there is an underlying problem like massive weight fluctuation, stress, heart disease or whatever. 



In this client’s case his cash flow surplus was so high he didn’t think it mattered. I did. For me, everything comes down to cash flow.  He didn’t have any idea of what he was spending and didn’t have specifics on what he wanted to do. Planners have to do our due diligence.  Everything depends on a client’s unique situation.  I think we have distanced ourselves from real analysis. Maybe he wanted meme type advice—a quick screenshot telling him an absolute answer.  Something that shows you too can drive a Lamborghini with little effort.  I just had the discussion with clients who wondered why we weren't investing in meme stocks like Gamestop or AMC. It's just so easy! We seem to want everything explained in a meme, Reel, or a DIY video to show us just how easy something is.  Never mind that there are many other meme stocks out there you haven't heard of that will go nowhere, If my smartwatch tells me I’m okay, why should I go to the doctor?  Better yet, I'll just consult Web MD instead. The last time I did this I was convinced I had meningitis. I was just a cold combined with eczema. I definitely wasn't asking the right questions there! He wasn’t asking the right questions, and I was too stuck in my methods to make the situation better.  Lesson learned on my part.  He ended up getting free advice.  I doubt he took it though.

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