Cannon Financial Institute

Financial Illiteracy and You - Part Three: Wealthy People Often Don’t Know Much About Money

While this can often be a surprise to those who haven’t been in our business, many wealthy people don’t know a lot about money. Some years back, I worked as a vice president for the wealth management division of a bank in South Florida. We signed a new client, I will call Mr. Gotbucks, who had a huge pile of money. He did not come from money and grew up poor. As a young man, he started and managed a business which became phenomenally successful.

Decades later he sold his business, and the size of his pile grew to a total of $250 million. Being risk averse, he kept all of his money in Treasury bills.  This client knew a lot about the business in which he made his fortune but nothing about the financial markets. He had never owned a stock, ever.

He had given his children large sums of money, and we managed those accounts in balanced portfolios of equities and municipal bonds. They gave him the nudge to talk to us about stocks. We met with him four or five times and discussed in detail the concept of return on different asset classes after inflation and the risk/return issues of being 100% long in Treasury bills.

One of our tax specialists cranked out various tax scenarios showing how restructuring his portfolio would reduce his income taxes. We enumerated every doleful fate which could befall him should he keep all his assets in short-term bills, and illustrated these potential calamities with color charts of all sorts illustrating everything you can imagine including the impact of inflation on the costs of a movie ticket over the previous 100 years.

None of this convinced Mr. Gotbucks. We needed reinforcements. So we armed ourselves with executive summaries of work done on Modern Portfolio Theory1 by Markowitz2, Ibbotson3, and Sharpe4. We showed Mr. Gotbucks the location of the efficient frontier and how one traveled there.5

Our senior portfolio manager read portions of Dodd and Graham6 out loud as if he were reading a Holy Book at Divine Service. He then told Mr. Gotbucks in the most reverential tones that the only way to protect the value of his money against inflation was to have equity investments.

Urged by his children, he finally stuck a toe in the water of the equity markets and gave us $10 million to invest in the stock market. This sum amounted to four percent of his liquid net worth.

Over four weeks our senior portfolio manager invested the entire sum of money in a portfolio of blue chips. A week after the account was fully invested, the stock market went into a brief swoon and dropped four percent over a five day period.

Our client had a paper loss in his account of approximately $290 thousand. Convinced we were about to enter another Great Depression he notified us in writing to sell his entire stock portfolio, immediately close the account, and return the cash to him. We complied. As you might imagine, our Executive Vice President at our corporate offices in New York expressed deep unhappiness.

This was true money anxiety. Although we had endeavored to educate Mr. Gotbucks on the financial markets, we could not overcome his money anxiety. Over the years, I have replayed this scenario many times. I long ago came to the conclusion that nothing we did or could have done would have relieved the money anxiety Mr. Gotbucks had.

Presumably, you have a handful of clients with high levels of money anxiety. What can you do? For your new clients, or potential clients with money anxiety, here are a few thoughts which may help.

Frequent communication is critical. Make it a habit of contacting them before they contact you. Further, give them a heads up about all the paperwork they will receive from you. Explain what all this is and why you have to send it to them.

Clients with money anxiety are more likely to read all the boilerplate which comes their way. If your client doesn’t know a lot, he can have an attack of nerves if he reads something as simple as a money market fund proxy statement. Let’s face it, many of the documents we are required by law to send clients have the look of something sent by a Federal Court. This makes anxious clients even more anxious.


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Contributing Writer: Subject Matter Expert Charles McCain

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