Many people approaching retirement have not saved enough, turning instead to their financial advisors to fix the problem. These clients tell their advisors to take what little they have in savings and invest it aggressively. Although this might fix the client’s problem, it creates a different problem for the advisor.

For clients who have spent too much money throughout their lifetimes, the most important advice an advisor should offer under these circumstances is to tell the clients that they need to change their spending and saving habits and invest in suitable investments. Don’t allow these clients to push you into choosing an aggressive portfolio, hoping it will grow, to resolve all their problems. In fact, this might not be suitable for them.

Take Mr. and Mrs. Smith, for example. They liked to spoil their adult children and then their grandchildren by buying them expensive gifts as well as paying for down payments on expensive houses and trips. Saving for the future was not on the Smiths’ radar, so when they spoke to their advisor about retirement, the advisor told them they had to tighten their belts and keep working and saving. The advisor told the Smiths the truth: they could not keep spending this way and would never retire in the manner they had dreamed, which was to travel in the winter and spend their summers at their cottage. In fact, the advisor then told the Smiths that they had to sell their cottage and add the sum to their nest egg so this sum could grow.

That led the Smiths to ask just how much could their money grow? The advisor explained that the more risks they took, the more their money could grow. However, in the short run, this could also lead to losses; so, he advised them that given their current financial situation, they couldn’t afford to take these chances, especially as the Smiths were both in their late 50s and their time horizon for their planned retirement was less than 10 years.

Still, the Smiths quickly concluded that they needed to make significant returns. Having only invested in guaranteed investment certificates and balanced mutual funds, they directed their advisor to take bigger risks with their money. They said they understood that markets went up and down, but they had about 10 years left to invest for their retirement and instructed the advisor to invest their assets aggressively.

All would be good if aggressive portfolios only went up and not down. However, we all know that high-risk portfolios can lead to losses. If the Smiths’ portfolio diminishes, they will turn to remedies available to them, such as a complaint to the regulator and litigation.

Regulators would then say the advisor invested the Smiths’ money unsuitably, only considering one criterion — “risk need” — and not the other important considerations, such as the clients’ ability to sustain losses, both actually and emotionally. As unfair as it seems, the advisor might be penalized accordingly, not to mention the publicity that results in reputational damage.

What about if the advisor was hauled before the Ombudsman for Banking Services and Investments (OBSI) or a court of law? If you, as the advisor, lose, you write a cheque to the clients and — presto — you have become their insurance policy. If you cautioned the clients in writing, OBSI or a judge might not hold you responsible, but the consequences are that you would “only” spend years involved in defending this matter.

So, what’s an advisor to do if faced with this common problem? My short answer is: Don’t make your clients’ problem your problem, offering high-risk investing as a band-aid solution. Tell them that they need to do the heavy lifting by increasing their savings and reducing their spending. After a thorough analysis of their risk profile — which includes their ability to sustain losses in the context of their time horizon — invest their money suitably.

If the clients are uncomfortable with this plan, then you have to inform them that they need to take their money elsewhere. Although you won’t like sustaining a blow to your assets under administration if they leave, it’s better that than a blow to your reputation and your own ultimate bottom line if you have to write them a fat cheque down the line.