When investors tell financial adviser Zachary Scott that they want to set aside some money for risky wagers, he winces. He doesn’t want them to squander it.
“A lot of them want to have a ‘fun money’ account that they can play with,” said Scott, a certified financial planner at Castellan Financial Group in Catonsville, Md. “I talk them out of that.”
If clients want to buy risky stocks or cryptocurrency, he encourages them to rethink how they define “fun money.” They may claim that they enjoy making speculative bets — that they know what they’re doing and love the thrill of rolling the dice and coming up big — but he pushes back.
“My definition of fun money is money you literally use to have fun,” he said. “That means spending it on an experience like a vacation or a dinner out. Investing is something different. It should be taken seriously, not treated like gambling.”
At the same time, advisers know the limits of their role. They cannot tell clients how to spend their money. But they can offer guidance and expertise, and hope it sinks in.
Like Scott, Mark Matson rejects the notion of fun money as a sound part of financial planning. He’s founder and chief executive of Matson Money in Scottsdale, Ariz. The risk of fun money is that it can suck investors in. If an adviser agrees that a client can play with, say, 10% of their cash, it might be tough to stick to that percentage over time.
“If you get lucky [investing that 10%] with options or commodities or bitcoin, you think you have the ability,” Matson said. “You think, ‘Jeez, I’m a genius.’ Then you start chasing for more. It’s addictive; it’s seductive, and you can destroy your future.”
While Scott and Matson take a hard line on fun money, other advisers are flexible. They may indulge a client’s pleas to divert a certain amount of their savings for high-risk, potentially high-reward bets. Ron Strobel, a certified financial planner at Retire Sensibly in Meridian, Idaho, isn’t a fan of play money. But he’s willing to work with clients who insist on keeping a stash on hand.
“Play money can encourage gambling if the percentage is too high,” he said. “I’ve seen clients pull money out of their savings to invest in something that’s high-risk, and then they get into trouble.”
Strobel strives to accommodate clients’ need to speculate. He might say, “Don’t put any more than 2% into your play money fund.”
He knows that quick gains can breed overconfidence that leads to long-term disaster, so Strobel sets boundaries. His goal is to give investors leeway while pulling on the reins if the fun gets out of hand.
There’s also the matter of disclosure. Clients don’t necessarily divulge to their adviser how they spend every dollar. Some investors hide a chunk of cash from their adviser and use it to make dubious investments. Others keep a secret pool of money and treat themselves to indulgences.
Kristy Jiayi Xu has many younger clients who work in the tech industry. She’s a certified financial planner at Global Wealth Harbor in Walnut Creek, Calif. “Some of them like to travel,” she said. “They may spend a lot on travel, and they may feel a little guilty about it. So they don’t tell me about it initially. Their travel goals are not in our initial discussion.”
As Xu builds trust with clients, they talk about travel and other personal priorities. “At first, they put fun money in a different mental category,” she said. “Then we talk about it, and we work together.”
Plus: Why are my investments in a rut? That’s the way Wall Street wants it.
Also read: New year, new adviser? How to know when it’s time to switch.
Credit: marketwatch.com