The last thing advisors want to do is nag their clients to spend less. But sometimes, it’s temping.
XAutoplay: On | OffWhen expensive hobbies take hold, it’s like turning on a cash spigot. As the costs add up for their clients, advisors might weigh to what extent they should intervene.
On one hand, advisors don’t want to overstep their bounds and dictate how their clients should — and should not — spend their money. Yet even high-net-worth clients can deplete huge chunks of their savings on art collections, horse farms and other passions.
“Our job is to help clients stay on track for their retirement goals and help them forecast what they may not have thought about,” said Tim McGrath, a Chicago-based certified financial planner. “Their goals can blow up if they aren’t prepared, so I’ll walk them through the cost [of an expensive hobby] and how it will impact them.”
Over his 27 years as an advisor, McGrath has found that what begins for clients as a mild diversion can mushroom into much more. Someone who enjoys hiking can wind up buying a vacation home in the mountains. Or a fishing enthusiast can decide to buy a boat.
Before that happens, McGrath might pose questions such as, “Are you willing to cut back on other expenses if you’re going to make that purchase?” and “Does it make sense to rent rather than buy?”
“I may try to suggest a better alternative before they go to the next step and spend all that money,” he said.
These conversations can get awkward. Facing resistance, McGrath might tell a client, “I realize it’s important to you to pursue your passion. But you’re paying me to protect you and I may tell you things that you don’t want to hear but need to hear.”
When clients sense that their advisor may not approve of their lavish spending on a hobby, they may make high-ticket purchases on their own. As a result, they may dread the next meeting with their advisor.
When McGrath learns that a client has forked over a large amount without conferring with him first, he remains calm and engaged. He might say, “We can’t reverse that, and that means we might need to change the plan we’re on. But I’m still on your side.”
“I’m not offended that they buy something big without telling me,” he said. “They want it so badly that they’ve already made the decision in their mind. Even if they call me first, they’ve already decided.”
For wealthier clients, even expensive indulgences will not endanger their retirement savings. In fact, advisors may get caught up in their client’s excitement over their hobby.
McGrath cites the example of a longtime client who loves to collect cars and bought a storage facility in Naperville, Ill., to house his six vehicles.
“It’s a gated community where car collectors buy these amazing garages that are nicer than most homes,” McGrath said. “It may not make the most financial sense, but he argues some of the cars will appreciate in value.”
A Rich Retirement
When clients retire with significant assets, advisors may focus less on reining in costly hobbies than encouraging them to stay active mentally and physically. As long as retirees have ample money to spend, the challenge becomes finding meaning and fulfillment after a successful professional career.
Matt Chancey, a certified financial planner on Orlando, Fla., has two retired clients who build open-cockpit classic airplanes for fun. After crunching the numbers, Chancey concluded that his clients — who are good friends — can afford their pricey hobby.
“I don’t see it as a reckless spending habit because not only do they enjoy it, but it gives them something productive to work on in retirement,” he said. “It’s about their overall health and well-being so that they don’t go stir crazy.”
But that doesn’t mean Chancey is unconditionally supportive when clients dive into expensive hobbies. For instance, a client in his 60s makes significant investments in fine art and antiques.
“I don’t monitor all of his transactions,” he said. “It would feel like I’m baby-sitting him if I did that.”
Nevertheless, Chancey notices that his client frequently spends heavily on certain items. And that begets other expenses such as storing the ever-growing collection.
While the client intends to sell each item at a profit, Chancey wonders what would happen if the client had to liquidate his inventory under duress — and whether he’d receive fair market value.
“He assures me the items will appreciate in value,” Chancey said. “That could be true. But it’s a substantial investment at this point. Will there by liquidity when he needs it the most?”
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