Q: My clients are both in their mid-40s and are doing well financially. The family income is in the low six figures and they have healthy 401(k) balances. They have a set of twins who will graduate from high school this month. One child plans to work for a year before attending a community college. He has been their problem child, while his sister earned good grades and was accepted at a private university. My ethical challenge involves how to handle the investments set aside for the daughter's education expenses.
Mrs. Client has employee stock options that are "in the money." She exercises these periodically to reduce the concentration risk in their portfolio and to diversify to a more balanced position. She's received options in the past and had them expire "out of the money." Over the last couple of years, she has set aside the proceeds realized from exercising her options to pay her daughters' fees and tuition. There is now enough in a joint online savings account to cover the first two years of expenses comfortably. She plans to exercise additional options in the next two years to provide for the rest — that is, if the price of the underlying stock continues to rise.
The person who is not comfortable is Mr. Client. He sees the current equity returns and wants to invest the money aggressively to take advantage of the bull market. He's identified a mutual fund investing in
dividend-paying stocks that he is convinced will provide enough returns to cover the balance of his daughter's education. Mrs. Client just wants to be sure that there will be assets to pay for her daughter's education and asked me to tell them what to do. Meanwhile, Mr. Client is telling me to buy shares in the mutual fund with 80% of the online savings.
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A: Getting stuck between clients with different objectives is confusing and potentially dangerous. You do have a duty of loyalty to your clients. That means you are expected to do as they instruct you. Failure to execute a buy or sell order can leave you and your firm vulnerable to changes in the price of the security.
In this case, you have two conflicting objectives: grow the assets by speculating aggressively versus preserve the assets by investing safely. As we often tell clients, in a perfect world you could accomplish both of these goals at the same time, but in the real world it doesn't work that way.
Without clear direction from both Mr. and Mrs. Client, you cannot act. Your immediate task is to help them recognize the potential risks to their plan to fund their daughter's education. While gains may be possible at this stage of a bull market, there is likely to be more downside risk than upside potential. Perhaps you can persuade them to implement Mr. Client's approach with other funds to satisfy his penchant for performance. Whatever instructions you receive, be sure you document them fully. Make sure your clients understand the risks in the investment and have the capacity to accept the risk without impacting their overall success.
In this case, since only half of the education expense is currently met, it would be more prudent to protect what is now available while hoping the stock options will continue to provide for the rest of the need.
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Dan Candura is founder of the education and consulting firm Candura Group. Write to him to submit a question. All submissions will be treated confidentially.
