While the broad U.S. stock market posted a superlative gain of more than 30% last year, some well-known stocks produced much better numbers. Best Buy, Micron Technology and Netflix, for example, all tripled in 2013. Several small-caps soared even higher: Zhone Technologies, a network solutions company, returned over 1,000% last year.
As might be expected, some clients aspire to such success. “We get requests periodically,” says Ron Weiner, president of RDM Financial Group in Westport, Conn. “Often, it’s from a client who has heard about a promising company in his or her industry and wants to buy some stock.” If the proposed purchase doesn’t fit into his firm’s strategy for that investor, Weiner will arrange a small account for the client’s pursuit of superior returns. Such a practice may be known as letting clients have a modest “Las Vegas” or “play money” account for speculation.
According to Weiner, his use of such accounts stems from the dot-com boom of the late 1990s. “Clients started to call us,” he recalls, “saying they wanted to invest in a particular high flyer, usually a tech stock. In some cases, these stocks became a meaningful portion of the client’s asset allocation, but they were not in line with our investment plan. Even a small amount can have an impact on our models, so we set up separate accounts for this activity.”
The amounts allotted to these accounts varied, from client to client, but many were in the $25,000-to-$50,000 range. Clients could invest that money as they wished, without paying a management fee to Weiner’s firm, even though those holdings were included in performance reports. “With such accounts in place,” Weiner says, “clients let us manage most of their money according to the asset allocation plan that had been agreed upon, for long-term returns with appropriate risk exposure.”
The tech bust that began in 2000 reduced those speculative accounts along with clients’ appetite for betting on hot tips. Yet Weiner still gets such requests from time to time, and he handles them as he did in the last century: clients have a fixed amount to use however they like, with no asset management fee, while the remainder of their portfolio stays within the predetermined path.
Such a tactic has two benefits, Weiner has learned. For one, it provides an outlet for clients who are inclined to chase high returns. They won’t feel left out when the clubhouse chatter turns to buzz-worthy issues.
Second, managing even a few stocks can demonstrate to clients how much time and effort the process requires. They’re likely to turn their play money back to Weiner with a greater respect for the value his firm adds to their financial well-being. “We’ve ended engagements with some clients who wanted to do more of this type of trading, with our help,” he says, “but offering this service to interested clients on a small scale definitely has helped us to retain accounts that we otherwise might have lost. Providing these accounts means some work for us but it has been a good business decision.”
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
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