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Appreciation in the Age of Regulation

For E. W. (Woody) Young, one day stands above all others for showering his lady clients with love: Feb. 14. Each Valentine's Day, Young, who runs Quest Capital Management in Dallas, hosts a lunch for his unmarried female clients. Though such a gesture might carry a whiff of paternalism, Young's clients apparently accept the luncheons in the spirit in which they are offered. Young has been hosting

For E. W. (Woody) Young, one day stands above all others for showering his lady clients with love: Feb. 14.

Each Valentine's Day, Young, who runs Quest Capital Management in Dallas, hosts a lunch for his unmarried female clients. Though such a gesture might carry a whiff of paternalism, Young's clients apparently accept the luncheons in the spirit in which they are offered. Young has been hosting the V-Day lunches for a dozen years, and the clients keep coming back. A year ago, he started offering a chauffeured limousine service to the restaurant for the 25 attendees. This year, he gave each client a photo portrait of herself, snapped by a professional photographer at the lunch.

None of this comes cheap, of course. In the past, Young did not have to foot the bill alone; wholesalers with whom he did business picked up part of the luncheon's cost. Now, facing increasing scrutiny from regulators, mutual fund companies are pulling back on their contributions to such events, and Young expects support for his lunch to be part of those cutbacks. Nonetheless, he plans to continue the luncheon and all the perks — especially the limo ride, which he says is a great way to loosen up the mood before the luncheons.

“When the clients arrive, they've already met the other women in the limousine, so they don't have to walk in the room without knowing anyone,” says Young. “It's something we will continue regardless of what happens.”

Shower the People You Love with Love

Chances are, you've done similar things — organized a dinner, lunch, outing to a baseball game or other events to thank clients for their business. Like Young, you might also have accepted some help from wholesalers, especially if the event leaned toward the lavish side. Some customer appreciation events can cost more than $40,000.

At the same time, however, you're probably loath to eliminate these events or cut corners, because clients have grown fond of them.

“My clients look forward to my dinner,” says Randy Carver of Carver Financial in Mentor, Ohio, who holds an annual dinner-dance for all his clients, at a cost of $30,000 or so. “They'd be upset if we stopped it.”

In fact, for many advisors, these gatherings are a business necessity. They're a way to solidify relationships with existing accounts, as well as to win referrals and even gain recognition in the community. That's why, these days, it's especially important to understand the rules of holding customer appreciation events — what works, what doesn't and what mistakes to avoid.

Under the Microscope

The new scrutiny from regulators isn't entirely a bad thing. Some reps say they welcome a clarification by wholesalers of just what is kosher and what procedures they need to follow to get funding.

“For a long time, there was no guidance in this area. Mutual fund companies were making their own policies,” says Ron Carson, president of Carson Wealth Management Group in Omaha. “It was everything from ‘anything goes’ to ‘here's the 38 hoops you have to jump through if you want money for an event.’”

The big change in wholesaler funding, according to reps, is that there must be a clear business purpose to an event in order for a company to contribute. Getting a fund wholesaler to help fund that fly-fishing trip for your 20 best clients is probably a no-no. On the other hand, a client dinner at which a representative of the business gives a talk, carefully ending with a plug for the company, will likely be OK. It also helps if, say, the wholesaler can write checks to a restaurant, as opposed to sending you the payment directly.

Still, advisors will need to learn how to navigate carefully. For example, Carson holds a party in his backyard every year, with fireworks, for clients and families. About 600 people attend. Recently, he added a new element — a 30-minute economic talk by an outside expert — in order to give a clear business purpose to the bash. To dot the i's, he makes sure the invitation includes all the relevant information, so there's no question about it.

If there's no obvious business agenda, you'll have to bite the bullet and pay for such an event yourself, and, if necessary, figure out where to cut corners. Eliot Weissberg, who heads Investors Center in Avon, Conn, has given up on wholesaler subsidies for his community events. Four times a year, he turns his office into a community gallery featuring art created by local talent. About 30 to 80 clients show up. In the past, six to eight sponsors have underwritten the $5,000 to $7,000 cost of the event. In their absence, Weissberg figures he will have to scale back. He's waiting to hear exactly what type of help he'll be able to get before deciding just how much he can afford.

The Rich Don't Dig Wholesale

The richer your clientele the less likely you are to get any help from wholesalers for client events. Throwing parties at which a wholesaler ends up appearing, no matter how subtle the presentation, tends to turn off wealthy clients. “These people don't want to be sold to,” says Matt Oechsli, author of The Art of Selling to the Affluent (John Wiley, 2005) and a Registered Rep. columnist. “And, they work 50 to 60 hours a week, so their time is precious.”

Elaine Kiernan, president of Financial Resources Associates in Santa Cruz, Calif., found that out the hard way. For years, she held a deluxe dinner at a five-star restaurant for 60 to 80 top clients, with a talk from a wholesaler included.

“Clients would come over and make comments about my trying to sell them something,” she says. “They obviously didn't like it.” A few years ago, she cut out the talks and started footing the $3,500 bill herself. Result: Turnout increased from about 50% of those invited to close to 100%. “One new client pays for it,” she says.

Other advisors take a different approach with their wealthiest clients, throwing smaller, more intimate get-togethers, like sessions with a golf pro or wine-tasting parties. A gourmet cook, Carlo Panaccione, of the Navigation Group in Redwood Shoes, Calif., throws dinner parties at his house for two to three couples who are among his largest clients, four times a year. The point of the gatherings is to get to know one another personally; business is rarely discussed. In fact, he recalls one dinner when his then-five-year-old daughter showed one client how to make Smores in their fireplace. The parties have been so successful that Panaccione is building an outdoor eating area, with seating for eight so he can hold parties al fresco.

Small Is Good

Smaller gatherings are often more productive. Scott Kays, with Kays Financial Advisory in Atlanta, used to invite all his clients to a single three-course dinner a year. But, as his client base grew, he realized he couldn't mingle adequately with the 350 or so people who would attend. So, he started holding three smaller events at a local club, serving hors d'oevres instead of a sit-down meal. Now, he not only has more of a chance to talk to everyone there, but he also has cut the cost in half. Plus, he uses the events as an opportunity to talk to clients about such changes in his practice as a 50-percent increase in staff and the introduction of new technology. “I'm able to use the time to show how we're reinvesting profits and doing a better job for them,” he says.

Many reps who once favored extravaganzas are cutting back. Carver started holding his dinner-dances 16 years ago. Today, as many as 1,200 people come. More recently, however, he started alternating the dance with a big luncheon every other year, slashing his cost in half. Panaccione throws a major bash, but only every three to five years. For the last one, three years ago, he rented an airport museum and provided a catered dinner and model plane-making contest. A Baskin and Robbins ice cream truck, parked inside, gave out free ice cream sundaes.

Back to School

Some reps combine education and appreciation events together. (They usually call them “workshops,” to differentiate them from a garden-variety seminar). Most effective are probably ones inspired by clients' own requests. Carson, for example, recently held a workshop for clients on identity theft. He got the idea after receiving many calls from clients concerned about how their personal information was protected. About 150 people attended.

On the other hand, Marty Kooman, who runs Kooman & Associates in Altoona, Pa., prefers to separate educational workshops from merely fun events. For example, every season he takes about 400 clients and their families to see the local minor league baseball team. He pays for it himself. Then, in addition, he holds several one-hour workshops at a country club where he serves light hors d'oevres; clients can attend one of two sessions, at lunchtime or 5:30.

No matter what type of event you throw and or who's footing the bill, you can expect to encounter your share of snafus. Carver, for one, once held a dinner where he presented a laser light show, complete with fog. “Half the people thought the room was on fire,” he says. “It panicked the old people.” Kiernan recently faced an awkward situation when two B-list clients who weren't asked to her fancy dinner, asked when they'd be getting their invitations. Turned out, both were good friends of people who had been invited.

In other cases, events just don't go over well, or aren't productive. Weissberg once treated a top client to a cooking class at her house, taught by a gourmet chef, inviting a number of her friends, too. They learned how to make lobster bisque from scratch and it helped solidify his relationship with the one client. But the effort was hardly the most efficient use of his time and money.

Says Weissberg, “It would have been nice to get some more business from it.”


Just how are broker/dealers reacting to the stepped up scrutiny of wholesalers who help pay for client events? It's not something a lot of firms want to talk about, some are saying they're considering changing their procedures.

First, for the rules. NASD regulations regarding the issue lie in rule 2830l-5, which deals with the issue of noncash compensation. It holds that wholesalers can host — and help pay for — events, as long as they are physically present at the occasion. The amount they are allowed to contribute can be “neither so frequent nor extensive as to raise questions of propriety.” If they don't show their face at the event, however, then it's considered a gift whose cost cannot exceed $100.

To avoid the appearance of impropriety, many b/ds have formalized reporting procedures. For instance, at Omaha-based Securities America, advisors who want to get reimbursed for an event must turn in an expense form. The sponsor pays the b/d, which, in turn, distributes the funds to the rep. Royal Alliance also reimburses reps for their expenses, although the preferred M.O. is for wholesalers to pay a facility holding an event directly, according to Mark Quinn, senior vice president and general counsel at Royal Alliance. At Raymond James in St. Petersburg, Fla., advisors submit a request to put on an event. The request is reviewed to make sure the occasion is educational in nature, and only then can the sponsor send the check to headquarters, which forwards the funds on to the advisor.

But now the compliance efforts are getting even more extensive. Securities America, Royal Alliance and Raymond James all have recently made changes or are considering adding to their polices or procedures. About two months ago, for instance, Securities America started requiring that reps disclose that a specific wholesaler is sponsoring the event by, say, including that explicit information on the invitation. Royal Alliance recently began “a little closer tracking” of broker expenses, according to Quinn. Raymond James is in the process of fine-tuning its guidelines regarding what the firm will or will not approve, according to Jason Thackeray, assistant compliance director. These efforts are, in large part, in response to requests by wholesalers to clarify, in writing, their procedures.

Meanwhile, the Financial Planning Association's code of ethics stipulates that advisors must disclose to clients whenever they receive sponsorship money. But, Michael DiGirolamo, senior vice president and managing director for the investment advisor division at Raymond James, says that RIAs generally don't accept such money.

Bob Smith of Spero Smith Investment Advisors agrees. The Cleveland RIA says he never takes funding from outside companies. Recently he threw a dinner for 30 clients and friends, a total of about 135 people in all, and spent about $5,000 of his own money on it. “I think it's a conflict of interest to do otherwise,” he says.

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