By Deborah L. Cohen
CHICAGO, Feb 21 (Reuters) - Medical marijuana. Hot initial public offerings. The Iraqi Dinar. Bitcoins.
Financial advisers often field requests for these and a wide range of other uncertain investments from clients set on placing high-risk bets.
The role advisers play in facilitating the transactions varies, but one thing is certain: they must aim to limit their clients' exposure, and their own, should a chancy investment go south.
"This is a very, very common discussion. Nobody likes being told, 'You really can't afford to lose,'" says Christopher Van Slyke, a partner with the wealth management firm, WorthPointe, which oversees about $300 million. "I literally tell them that Vegas is more fun. For the money they'll lose, at least the casinos will give them a limo and a suite."
Over the years, Van Slyke has had talks with clients wanting to dedicate a large portion of their portfolio to everything from precious metals to land deals to a host of individual stocks. More recently, Bitcoin, the virtual currency gone viral, has generated interest. He will allow for some high-risk investing, but only within strict parameters - basically he lets his clients follow their whims on the side.
"We separate the money into a non-managed account where we do not do performance reporting," he says. "But I like to know it's there."
The amount recommended for allocation to these separate accounts depends largely on the client's ability to withstand a hit without hurting their ability to meet long-term financial goals, he says, adding: "I'm negotiating for the smallest amount."
Greg Opitz, a consultant to financial adviser firms with Omaha, Nebraska-based Peak Advisor Alliance, suggests advisers take precautions against working with clients who appear hell bent on pushing into risky investments that can derail their overall plans.
Potential clients with strong do-it-yourself tendencies can be avoided from the outset, Opitz says, if care is taken during prospecting to take on only those who appear ready to follow sound financial advice.
"With the markets going the way they have the past three or four years, you're probably going to see more people thinking they know more than the adviser," Opitz says; last year stocks were on fire, with the Standard & Poor's 500 stock index up almost 30 percent. Money invested in the SP 500 has practically tripled in the last five years.
Keeping up a push-and-pull relationship with an overly headstrong client can consume a disproportionate amount of time and may lead to compliance issues, he adds. And while Opitz himself is not a fan of allocating "fun" money, he stipulates that advisers not permit amounts of more than 5 percent to 10 percent of a client's overall assets to such an account.
That range seems to be in keeping with informal guidelines practiced by many advisers. Most, like Van Slyke, work to keep client-managed accounts apart to avoid finger pointing and not have big gambles count toward overall portfolio performance. If they help to execute trades, advisers are also sure to get the requisite disclosures indemnifying their responsibility for facilitating the investment.
"I think it's about managing expectations so there are no surprises," says Debbie Moses, an adviser with Pittsburgh-based McKinley Carter Wealth Services, which oversees about $700 million.
Even though her clients' self-managed accounts are segregated, she assists with vetting potential investment choices by providing research, if available.
The typical investment offered through an advisory firm - a mutual fund - "doesn't satisfy what I call a psychic pleasure- the sense of something exciting," Moses says. "We can keep an eye on it to the extent that they don't get into too much trouble. When we meet with them, we bring that account into the meeting."
TAXES AND OTHER SMALL PRINT-BIG MONEY ISSUES
Richard Gotterer, a Miami-based adviser with Wescott Financial Advisory Group, says it's important to advise clients about the tax ramifications of high-risk investments up front.
Whether such an investment is put in a taxable account versus a 401(K) or other tax-deferred account will impact capital gains, says Gotterer, whose firm manages about $1.6 billion.
He says his role as adviser is to be the "voice of reason," adding that his high-net-worth clients have recently shown interest in 3D-printing and medical marijuana operations. Among the strategies Gotterer utilizes when they want to invest in individual publicly traded stocks are stop-loss orders; they call for the broker to sell when an issue reaches a certain price, limiting losses.
Sometimes the limits already in place to protect investors will do the job for the adviser, says Jason Washo, a Scottsdale, Arizona adviser with about $50 million under management. Many clients don't realize that some potential investments, including private placements and angel investor networks that back startups, are restricted to accredited investors. Accredited investors must have net worth of at least $1 million or annual income of at least $200,000 per year.
"People hear about what is the rich person's investment and they want them and don't want to be told they can't have them," says Washo, who has sometimes turned down would-be clients insistent on risky bets.
"There's a fair bit of desperation," Washo says, noting he has seen baby boomers look to high-risk investments to make up for shortfalls in their retirement savings. "I would probably say as uncomfortable as it feels to tell a client, 'no,' nearly every time it was the best advice I gave."
Of course the Washos of the world have one other risk to contend with: What if the client ends up backing a winner? That could lead to a different kind of challenging relationship - one with a gloating customer.
- Financials Industry