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In the 2000 movie “Boiler Room,” a shady stockbroker scams a hapless investor into losing his life savings. Pressured by the broker, the investor keeps shoveling more money into worthless shares. All along, he keeps reassuring his wife that they will make a fortune as he sinks deeper into debt. In the end, his poor judgment causes him to lose his family.
It’s painful to watch. But for financial advisers, it’s all too common to meet clients who have lied to themselves — and others — about their botched investments or compulsive spending.
“For some folks, the lying is just a natural tendency to hide some of the lack of awareness and understanding they have of their financial situation,” said Jim Grace, a certified financial planner in Medfield, Mass. “And sometimes, it’s not lying so much as a lack of disclosure over credit card debt or being upfront about their spending.”
Overcoming financial self-deception involves two steps. First, you need to face the truth. Admitting what you’ve done — the decisions you’ve made and the losses you’ve incurred — can sting.
The second phase is equally hard: identifying why you acted the way you did, taking steps so that it doesn’t happen again and perhaps making amends.
“Maybe you’re ashamed of something and feel the need to hide it from your partner,” Grace said. “Or maybe you have a compulsion that comes from some past trauma that you need help with. Some shopaholics present symptoms caused by a past event or relationship and they lie to not face what’s really going on.”
Grace recalls a client who struggled with a gambling addiction and tried to cover it up. “When I looked at [the client’s] spending, the math didn’t add up,” he said.
Eventually, the client acknowledged “trips to the casino.” It became clear that these trips were sapping his savings. When Grace realized the severity of the situation, he referred the client to a financial therapist for counseling.
When exposing a lie, advisers need to proceed with care. If they scold the client, that can make matters worse. Grace prefers to empathize. He adopts their point of view and sees the world through their lens. “An addiction may be a result of childhood trauma,” he said. “As advisers, we can’t resolve things just by looking at numbers.”
Some advisers dabble in psychology to help clients confront their fibs. If a spendthrift insists that he’s frugal — and lies about his spending habits — an adviser may ask to look at his credit card statements.
A quick glance may show indulgent purchases for, say, an electric bike or jewelry. If the client justifies such expenditures as necessary given his increasingly long hours at work, the adviser might categorize these purchases as “compensatory consumption” — a means of compensating for the sacrifice of burning the midnight oil.
Assigning a label to excessive spending can trigger an aha moment: A client might decide it’s time to reduce or eliminate that entire category of purchases. In some cases, clients try to blame someone else for their financial mismanagement. The lie is an attempt to save face.
Manny Henson, a certified financial planner in Towson, Md., says that some new clients will lambaste their former adviser. They’ll say, “My old financial planner made me lose money.”
Digging through past brokerage transactions and following the paperwork trail, Henson often discovers that the client rejected a former adviser’s recommendation.. “I let it go but I also educate them,” he said. “I may find the reason they didn’t accept the old adviser’s recommendation is that they didn’t understand it.”
Clients also tend to lie about their stock-picking prowess, especially if they hit the jackpot at first and convince themselves they’re another Warren Buffett.
If clients pick a winner the first time, they might lie about subsequent stock picks that turn sour to perpetuate the notion that they’re an investment genius, Henson says. Their self-image hinges on their ability to fool others into thinking they are super-smart.
As any liar will tell you, it’s exhausting to spin a web of untruths. It takes energy to maintain a charade. “Some people get tired of dealing with the emotional weight of carrying it around,” Grace said. “That’s when they might come clean.”
Also read: ‘It’s my money. I can do anything I want.’ That attitude is a good way to go broke.
