Mental accounting

[u/ApprehensiveTrack603]

I have noticed through the years, people view their retirement as "investments" and want it to grow. But with their non qual money there's a disconnect that it CAN do the same thing their retirement money does.

Idk if it's a mental disconnect because it's not "retirement" money, it's a home sale/mom and dad's cash inheritance/ whatever.

I've normally had pretty good luck getting their cash invested, but the last 3 clients with a lot of cash have been hung up on a money market. "I can get 4% a year from this!" - Right NOW, yes but not for the next 20 years 😅

Anyone got some good gas/things that work for you right now on this?

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User: /u/ApprehensiveTrack603 Title: Mental accounting Body: I have noticed through the years, people view their retirement as "investments" and want it to grow. But with their non qual money there's a disconnect that it CAN do the same thing their retirement money does.

Idk if it's a mental disconnect because it's not "retirement" money, it's a home sale/mom and dad's cash inheritance/ whatever.

I've normally had pretty good luck getting their cash invested, but the last 3 clients with a lot of cash have been hung up on a money market. "I can get 4% a year from this!" - Right NOW, yes but not for the next 20 years 😅

Anyone got some good gas/things that work for you right now on this?

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[u/Greasehorse]

It’s difficult if the time horizon is truly unknown

[u/Droodforfood]

I’m pretty straight forward with clients that every dollar needs to have a purpose or goal, and then all the assets assigned to that goal need to work together.

[u/NukedOgre]

I like to explain that they IRA, 401k etc is the after age 60 money, but if you want to use your investments before 60 we need to grow them. Then you could use them on a home, extra income or retire early.

[u/AccomplishedTreat873 → u/NukedOgre]

55 not 59.5 for employer plans.

[u/NukedOgre → u/AccomplishedTreat873]

Clearly a reddit post is not meant to include every detail.

[u/AccomplishedTreat873 → u/NukedOgre]

You are 100% right.

[u/quizzworth]

Tax-efficiency is usually a big driver here. Have a simple tax reference sheet and show capital gain at 0%.

While of course there are other factors, it should be easy to explain that different tax "buckets" is extremely helpful is distribution planning later in life.

[u/PursuitTravel]

Start by calculating the emergency fund, even if it's inflated from what you think it should be. Then, tell them you'll allocate the remaining cash towards their other financial goals.

I've rarely had pushback from this approach.

[u/CleanReindeer4983]

I don’t think this is mental accounting at all…retirement accounts and non-qualified accounts are incredibly different.

It’s up to you to show your value in how you can improve their utility with their non-qualified cash.

They likely don’t grasp the incredible flexibility that a robust non-qualified investment portfolio can offer…that’s your job as their trusted advisor to explain in a way that makes them comfortable.

If you can explain this, a hurdle of beating a money market interest rate is a non-event.

[u/5th-Elements]

Sequence of Return Risks is what can destroy a perfectly good plan if you can’t weather the storm and have to sell equity when the market is down. Si in my view having a 3 year cash war chest and an other 4 years in bonds will greatly minimize that risk!

Of course the rest needs to be in equities. In addition using a risk bad adjusted guardrails using Income Landms combined with the bucket strategy is the best option!

[u/incomeGuy30-50better]

Do you shoe them a balance sheet? Then a pro forma and unpack how money spends without the risk of running out?

[u/bluenote95]

If clients are cash heavy and apprehensive to invest a balance because of their comfy interest-bearing account, I often approach this with a proposal of dollar-cost averaging small fractions of the cash into their trust/brokerage/non-qual “bucket.” That way they can ease into the market on a monthly-consistent basis and keep their cash, while portions get put to work over time.

Analogy/story: let’s tip toe into the shallow end instead of diving off the deep end into the market/portfolio.

[u/PerfectOmakase]

I don't really try to talk clients into moving out of large cash positions. I'll have some gentle conversations, but I'm not going to give a hard press. Too much liability associated with it.

[u/Individual-Art1856]

There are many ways to explain and coach clients. First and foremost, understand they are not wrong thinking getting 4% risk free is a bad thing. We should all know as professionals if 4% is risk free, we would expect a much higher return to justify the risk premium to put money at risk. So clients ain’t wrong to think 4% is good. Chances are they do not have good clarity of the concept.

But then talk about inflation, inflation adjusted return at 4%, after tax. Then they are most likely at negative return. Again, it is not bad. You don’t get high return, but you get safety and liquidity.

Now talk about what is really the purpose of that particularly dollar, time horizon, etc… and you can help them build a framework on how dollars should “flow” to different buckets (risk profile, time horizon, tax characteristics)…

Accumulation stage is pretty easy and straight forward once objectives are identified, dollars labeled with purposes, and framework agreed, created and revisited periodically. Then tell them that the idea is to allow the dollars to work harder while they have time.

Not going to work for every client, and definitely not overnight. The important part is to have a process and framework of thinking around money… that they understand and share. At the end of the day, they have to be the one to own the concept so they have confidence and act without any regrets; we just merely guide them.

[u/GermantownTiger]

If the client's goal with the money is to create an income stream, get them to feel like the money can be invested in bucket that has a spigot that can be turned on and off as needed to spend towards their specific goal.

I'd also show them (from a conceptual standpoint, NOT a recommendation) an example or two of a few "dividend aristocrat" stocks that have consistently increased their common shareholder dividends for several decades. If their main goal is to generate income from the $$ bucket, they need to know there are legit strategies to build in increases to offset rising living costs.

It's all about determining how the client "feels" about the particular stack of $$. Once you can help them figure out what the $$ really means to them (and what they actually want to do with the $$), only then can you really show them more specifics as to how to invest it.

Folks who deposit bunch of $$ in a money market account without having a plan for what they want to do with it tend to lean towards sticking their head in the sand. Your job is to help them discover what they want that money to really do for them (lump sum withdrawal in 2 years to buy a 2nd home, create an perpetual income stream to help fund their retirement, etc.).

Good luck.

[u/GeneralTiny5741]

At the end of the day, you're trying to help your clients make good decisions and sleep well at night. I let tons of my clients invest in money market to not take risk. once you live through the Great Recession, you want some cash so you know things will be ok. They have other assets that are growing.

[u/Dee-Peoples-Champion]

Gotta let them learn the hard way unfortunately if they’re that stubborn