The 5 hardest things to tell your client — and how to break the bad news

December 29, 2023 2:14 PM

To serve their clients' interests, financial advisors often have to tell painful truths.

A key part of a financial advisor's job is to tell their clients the truth. To make a sound plan for the future, investors need to know the real state of their finances — even if it's disastrous.

Of course, that's a lot easier said than done. How can an advisor tactfully break bad news, lower expectations or tell a client the investment they were so excited about is a bad idea — all without losing that client?

To find out, we asked the advisors themselves. Wealth managers from across the country told us about the toughest conversations they've ever had with their customers, how they handled them and what they suggest for other advisors in the same predicament.

Here are the five most painful truths they've had to tell, and their tips for how to tell them:

You’re running out of money

It's every advisor's worst nightmare: The client is rapidly spending down their savings, but for some reason they can't or won't stop. For their own sake, they need to know how dire their situation is, but chances are they don't want to hear it. It's up to the advisor to deliver the reality check.

How can financial planners do this? The answer, many say, is with a minimum of sugarcoating.

"The advice I give … is financial tough love: Be up-front and honest with the client," said Tom Balcom, founder of 1650 Wealth Management in Lauderdale-by-the-Sea, Florida. "Let him or her know the situation. That's all that you can really do."

Marguerita Cheng, CEO of Blue Ocean Global Wealth in Washington, D.C., remembers a conversation like this. Early in her career, a client was withdrawing 10% of their retirement account per year, which Cheng knew was "not sustainable." To make matters even worse, she knew that another financial professional had given this client some misleading advice.

How could she defuse this time bomb? Cheng chose to avoid mentioning the other advisor at all, and just focused on the facts.

"I think being honest, direct and respectful goes a long way," Cheng said. "I learned that sometimes clients want us to tell them what they want to hear, but as fiduciaries, we need to tell clients what they need to hear."

You can't retire yet

Few things are more disappointing than reaching what you thought was the end of your working life, only to find that the finish line has been pushed back. But sometimes a client simply does not have enough savings yet to retire, and it falls to their financial advisor to tell them.

Cindy Sforza, founder of Lucidity Wealth Advisors in Orange County, California, says this is the hardest thing she's had to tell her customers. To let them down gently, she recommends handling the conversation with as much compassion as possible — and some hope.

"My job is to give my clients my honest opinion and advice, which is sometimes not pleasant to hear, so the manner in which you deliver it means everything," she said. "The way to handle it is always with empathy first, and always without judgment, and also with some practical ideas for how to make things better."

Andrew Herzog, a wealth advisor at The Watchman Group in Plano, Texas, has also faced this kind of talk. Years ago, a couple he was advising hoped to retire within the year, but they were nowhere near financially ready. In an uncomfortable meeting, Herzog told the couple their situation and offered two possible solutions: They could keep working a while longer, or they could cut back significantly on their spending during retirement.

"They were obviously disappointed, and you could feel the enthusiasm being sucked out of the room," Herzog said. "It's difficult to let someone down easily, sharing with them the reality of the situation but also offering some hope and optimism."

But one part of his approach seemed to help, and Herzog recommends it for other advisors: As much as possible, let the numbers do the talking.

"I recommend relying on the math, so that you're not the bad guy — you're simply showing the numbers," he said.

You've been missing your RMDs

Even if you don't need the money yet, you can't avoid touching your 401(k) forever. The rules are complicated — and under the Secure 2.0 law, they just changed again — but many retirement plans have required minimum distributions. That means that starting at a certain age (73 in 2023), retirees must begin withdrawing a certain percentage of their savings per year. If they don't, they could face a heavy tax penalty.

But because the rules are so confusing, some seniors breeze past their RMD age without knowing they've done anything wrong. Ron Strobel, founder of Retire Sensibly in Meridian, Idaho, used to attend a regular retirement seminar that included a lesson on RMDs. It was common, he said, for retirees in the audience to be "shocked" by what they learned.

"I remember one instance in particular in which a woman in her 80s burst into tears and left the seminar crying because she had missed over a decade of RMDs," Strobel said.

How should financial advisors handle the RMD conversation? As early as possible, Strobel said. The longer a client keeps missing their distributions, the more fees they have to pay. And under Secure 2.0, if the retiree corrects their mistake within two years, they can reduce their penalty from 25% to 10%. So even if a client has already missed one or more RMDs, it still pays to catch the problem and fix it.

"I've had the 'You missed your RMDs' conversation with many new clients over the years," Strobel said. "It's never easy, but I always explain to them it's better to find out now instead of finding out years down the road, when the issue becomes even worse."

You need to set boundaries with your family

Family caregiving can derail a person's finances. According to one AARP study, 48 million Americans provide for a sick or aging relative or friend. Of those caregivers, 18% say they've had to cut back on their own long-term savings, and 12% actually withdrew from their retirement accounts to make ends meet.

This creates a difficult balancing act for both caregivers and their advisors: Clients want the best for their family members, but they also need to protect their own financial health.

"The tough discussion becomes setting a boundary to how much they can reasonably spend to support their [relative], and where they need to stop," said Jay Zigmont, founder of Childfree Wealth in Mount Juliet, Tennessee. "While they may love and want to care for their parent or other family member, there needs to be a limit."

As with so many other challenges, the key is to have the conversation well ahead of time. Long before a client's parents need care, Zigmont does a "deep dive" of research into what help they're likely to need — including healthcare, time and money — and how well they've prepared for it. Often, Zigmont said, it turns out the parents don't have nearly enough savings or insurance. That's when he and the client decide how much they can afford to pitch in — and where the limit lies.

"The best bet is to set a hard and fast boundary well before care is needed," Zigmont said. "It is much harder for clients to be objective when they are in the middle of caregiving."

Your loved one is losing your money

One particularly difficult fact to tell a client is that a trusted person is mismanaging the family savings — or even gambling them away.

"Occasionally, we will encounter a scenario where one spouse or family member is managing the family's retirement portfolio poorly," Strobel said. "This usually involves some sort of day-trading, crypto or other speculative investments."

This scenario is rarer than the others, but it can be many times more upsetting — which means advisors need to tread carefully. To ease into the bad news, Strobel recommends taking the Socratic approach.

"Instead of pointing out the problems, I usually approach this by asking questions like 'Do you think it's appropriate for your son to be day-trading your retirement accounts?'" Strobel said. "That usually leads to a more level-headed response than 'Look how much of your money they have lost!'"