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File this one under "What could possibly go wrong?"
A few years ago a former client of certified financial planner Rebecca Kennedy had wanted to help out his 20-something son with an investment opportunity. It was shortly after Colorado had passed a voter referendum making medicinal marijuana legal. The son wanted to start a grow operation with a friend.
The client was a scientist and had sold a patent that got him a sizable kitty. Since getting his windfall, he had spent wildly, though he had set up trusts for each of his four children. Using the money in the trust for this son, his second eldest, the father spent freely on the operation.
"Everything was the best of the best," recalled Kennedy, whose firm, Kennedy Financial Planning, is located in Colorado. "When it came to the water system, it was state-of-the-art, same with the lighting. He ended up using around $200,000 of the son's trust, which was about half its value."
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It's not hard to guess what happened next. The 20-somethings began squabbling about how to run the operation, and it folded within a year. "They sold the business for parts," Kennedy said.
Every financial advisor has a doozy or two about clients doing dumb things. Yet advisors say that while every situation is different, constant themes emerge. Among the most prevalent are parents who let their children take financial advantage of them.
Take the client of F. Reid Hartsfield, a CFP with BB&T Wealth Management, who swooped in after his parents' divorce. The father had built a successful real estate business in Florida.
The son convinced his 68-year-old mother to take the couple's sports cars, boats and planes as part of her $7-million-plus settlement for his own enjoyment. That reduced the amount she got by $1.5 million.
"I tried telling her, 'You really don't need these things, but you do need cash," Hartsfield said.
Then the son, who was 43 at the time, asked his mother for $3.8 million to invest in vacation timeshares in Orlando that promised to pay $300,000 a year in income. "Thankfully, I was able to talk her out of that one," said Hartsfield.
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But he wasn't able to talk the mother out of giving her son and his wife $500,000 to try their hand at house flipping. "That money was gone in three months," Hartsfield said. She also bought them a $1.5 million home, while she settled herself in a home valued at $300,000.
"She was very emotionally vulnerable, and she was letting her only son run all over her," Hartsfield said.
Now just $1.3 million of the settlement remains, and Hartsfield worries that at age 70, it may not last her the rest of her life.
Another emotion trap is real estate.
About a decade ago, two clients of Kevin Meehan, CFP and regional president, Chicago, at Wealth Enhancement Group, presented themselves as a responsible couple in their 30s trying to build their wealth. They made sure that their insurance, estate planning, retirement funds and education planning were all in order.
But a while later, they vacationed at a Wisconsin lake and fell in love with the area. They decided to buy a vacation home there and needed to liquidate their accounts to make the purchase.
"I said, 'What about all these stated objectives and plans?'" he said. "And they came back to me with, 'This is a lifestyle choice.'"
Because there were no more assets to manage, Meehan and the couple parted ways. But a year or so later, he checked in on them and asked how they were enjoying their vacation home.
"To their credit they came clean and told me that the house was uninhabitable," Meehan said. With no money left, they couldn't afford to do any repairs. They still came to the lake, but instead of enjoying their vacation home, they had to camp in a tent in the front yard.
"A second home is always an emotional decision," Meehan said. "I say that's OK if you can afford the emotion you're about to embark on."
And then there are clients who do dumb things only because they think themselves so smart. For Rose Swanger, a CFP and investment advisor with Royal Alliance Associates, one client has made three unwise money moves in the last year alone. And he has an MBA.
Last year, shortly after the birth of their child, he and his wife applied for life insurance. Insurance companies always ask about smoking. If the applicant admits to smoking occasionally—a promotion, the birth of a child—some insurance companies may overlook it or raise the premium only a small amount.
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This client did not disclose his occasional smoking, but enjoyed a cigar the night before his physical. The nicotine was of course detected in his urine sample. Instead of being offered a premium of $1,807 for a $700,000 death benefit, as he was originally quoted, the insurance company offered him a premium $2,981 for a $357,798 death benefit. He decided to forgo the insurance and is looking to increase the amount of his group life insurance policy at work.
The client also asked Swanger to assess his 401(k) plan, a well-designed plan with many low-cost options from Vanguard. What Swanger saw left her shaking her head. The client had 16 different target-date funds, all with different retirement-date assumptions.
"I've never seen that one before," she said.
Also in her initial review, she noticed that the man had a car loan with a staggering 25 percent interest rate. He had been the victim of identity theft shortly before and was working on rebuilding his credit. By the time Swanger met him, his credit score was 660 and she thought it was enough to qualify him for a less usurious rate. She called around and found a credit union willing to make the loan at a 1.6 percent rate.
"But he never did anything about it," Swanger said. "He could have freed up cash flow, maxed out his 401(k) and maxed out his Roth IRA."
—By Ilana Polyak, special to CNBC.com