The Client Who Wants the Highest Return and Fears Missing Out
Ravi, 34, has $95,000 in savings and no emergency fund. He asks adviser Chloe to put 80% into a concentrated technology fund that has returned 41% over the past year. He says he 'cannot stomach missing another run' and checks prices hourly. In the meeting he describes selling everything during a 20% dip two years ago, then buying back 15% higher. He also mentions a credit-card balance of $18,000 at 21% interest that he is paying minimums on. Chloe's firm earns a 1.1% trail on the technology fund and 0.4% on a diversified option. Ravi says, 'Don't give me the lecture about risk - I know what I'm doing.'
1. Apply behavioural-finance concepts to explain Ravi's stated preference, and assess whether following it would be suitable.
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Ravi's behaviour shows several recognizable patterns. The fear of missing out and the urge to chase a 41% return reflect recency bias and herding. His hourly price-checking suggests loss aversion and narrowed attention to short-term outcomes. Most tellingly, he sold during a 20% dip and rebought 15% higher - a realised behaviour that contradicts his claim to know his risk tolerance. Stated tolerance and revealed tolerance diverge, and the adviser should weight the revealed evidence.
Suitability cannot rest on his instruction alone. An 80% concentration in one sector, with no emergency fund and $18,000 of 21% debt, is inconsistent with his demonstrated capacity to stay invested. The debt alone is a guaranteed 21% cost that outranks any expected return.
Chloe should present the trade-off plainly: paying off the card is a risk-free 21% return. She should show what a 20% drawdown would do to $95,000 and ask how he would respond, using his own history as the reference point. If he still insists, she should document the advice, the conflict from the 1.1% trail versus 0.4%, and consider declining the concentrated allocation.
2. How should Chloe manage the fee conflict and the client's resistance to risk discussion?
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The fee difference is material: the technology fund pays nearly three times the trail of the diversified option, so Chloe has a financial incentive to recommend the concentration Ravi already wants. She must disclose this in dollar terms and explain that the recommendation is not driven by the fee. A practical step is to show both options side by side with the fee impact quantified over, say, ten years.
On resistance, Chloe should not deliver a generic lecture. She can use Ravi's own decisions as evidence, framing the conversation around what happened last time rather than abstract volatility. She should separate the emergency-fund and debt issues, which are not negotiable in the same way, from the investment mix.
She should set a clear process: build a $15,000–$20,000 cash buffer and clear the card first, then revisit the portfolio. She should record his instructions, her warnings, and his responses. If he proceeds against advice, a signed acknowledgment of the risks, plus a note that she recommended otherwise, protects both parties and keeps the advice honest.