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My Cousin Says

The calls started not long after Doug Charney completed a comprehensive investment plan for a new client, a young man who had recently come into a sizable inheritance. We put all kinds of time into it, the Harrisburg, Pa.-based Wachovia Securities rep says of the financial plan, but no sooner had the ink dried then did the client's eye begin to wander. First he made noise about moving his account

The calls started not long after Doug Charney completed a comprehensive investment plan for a new client, a young man who had recently come into a sizable inheritance.

“We put all kinds of time into it,” the Harrisburg, Pa.-based Wachovia Securities rep says of the financial plan, but no sooner had the ink dried then did the client's eye begin to wander. First he made noise about moving his account to Smith Barney. When Charney disabused him of that idea, the client quickly came up with another.

“The very next day I get a call that he wants to transfer $150,000 to some hedge fund he'd heard about,” Charney says.

This time, Charney arranged a face-to-face meeting where he re-emphasized the basic tenet of the financial plan they had laid out together: “You aren't a high-risk client,” Charney reminded the client. “You don't want to be in a hedge fund.” The money stayed in the investments where it had been allocated.

Clients brimming with investment ideas, hot tips, warnings and other scuttlebutt gathered from newspapers, the Internet or — worse — family and friends are common to every rep's office.

As crazy as some of these “ideas” can be, reps have to walk a fine line in fending them off. A dismissive approach could offend the client and drive him away, but a too-soft response could encourage the client to insist on executing his idea.

Using “Yes” to Get to “No”

Some reps respond to this conundrum by treating all client ideas seriously, no matter their nature or source.

“You can't just discount it and say that has no value,” Charney says. “You have to evaluate it and say here's why I would or wouldn't buy it.”

The downside of this method is the time it takes to perform the investigative legwork. Since the rep is generally trying to convince the client that the investment idea is a bad one, the time spent on the task can be viewed as wasteful. However, if the investment research is treated for what it is — a client-retention effort — it's anything but a waste.

There are those who take this notion to an extreme. Gil Baumgarten with UBS in Houston treats outside investment ideas as challenges to his relationship with the client. “Those clients are exhibiting some level of uncertainty about what I'm doing,” says Baumgarten. “The key issue for me is to probe what it is that makes those ideas interesting, and then redirect them back to what I'm doing. Then I try to associate that with something I'm already doing that addresses that situation. That gives them confidence in the future that they don't need to worry about it, because I've already thought about it.”

One nearly universal measure for dealing with outside investment information is to review the client's risk profile and investment objectives.

“I ask them whether it will get them where they want to go,” says Fred Siegel, an independent financial advisor in New Orleans. His questions are basic: Does this fit in with the client's overall picture? Does it fit the risk profile?

“You do this a few times and they learn how to evaluate things themselves, and they don't bring them,” Siegel says.

But what is a rep to do when researching it isn't enough and when reminding the client of his financial plan does nothing to dissuade them from their bad investment idea? To start with, indulge them; the results aren't always bad.

When one of Siegel's clients brought a tip about a low-priced stock, after hearing Siegel's explanation of what he was getting into, the client still wanted to go ahead.

“The stock in the next five months quintupled and he sold it and was happy,” Siegel reports. “But there are more often horror stories.”

Especially bad, Siegel says, are those ideas that come after clients have attended investment seminars purporting to teach them how to be their own brokers.

“If they really want to, we give them a discount rate and let them go,” Siegel says. “And most of them self-destruct.”

Dan Ludwin, a Wachovia Securities rep in Richmond, Va., takes a slightly different tack by telling stubborn clients to go ahead, but making it explicit that they lack his blessing.

“We tell them, ‘If you want to buy this, you're buying it on your own watch and we're not watching it for you,’” he says. “Most peoples' reaction is, ‘Oh, my gosh, then I'm not going to do it.’”

However, Ludwin says he does have three clients who have decided to label part of their assets as “play money” and indulge their investment tips.

Not all reps regard a client bearing investment advice as unwelcome.

“It's a great opportunity to talk to the client,” says John Putnam, principal with Putnam Personal and Business Planning in Charlotte, N.C. Putnam encourages his clients to bring in articles, ideas — even gossip. In addition to simply keeping the lines of communication open, Putnam regards the appearance of outside investment tips as an opening for a discussion about the client's needs and goals.

“This is an opportunity to say, ‘Has something changed that we should talk about?’” he says.

On My Own

Whatever approach reps take to handling these investment ideas, they have to develop it on their own, because this aspect of a brokerage business is rarely addressed in formal training programs. Oddly, few reps try to head off the phenomenon by, for instance, instructing clients in advance how they would like to handle outside investment tips. Perhaps, Putnam posits, this is because the reps realize that a client who brings a hot tip is one who sees the rep as the person with the answers.

“What could be a bigger compliment than saying, ‘I had this idea and wanted to talk to you about it’?” Putnam asks. “Isn't that what we're after with our clients?”

Reps are divided about whether the overload of information about financial markets helps or hurts them in the quest to deal with client-borne investment gossip. Baumgarten, for one, contends that widespread availability of financial information has had a paradoxical effect on client ideas.

“Clients have experienced information overload,” he maintains. “They're placing less and less emphasis on it, and it's coming up less and less often.”

Still, many brokers complain, the financial content of the Internet, cable channels, magazines, newspapers and newsletters is convincing a lot of investors that they should take a more active role in the management of their investments.

“When I got into the business in early 1988, no one watched CNBC and they didn't have a lot of sources of information,” says Charney. “Now it's instantaneous everything.”

But just as sources of financial information have changed, so has the practice of being a rep. UBS' Baumgarten says viewing clients' outside investment ideas as opportunities to generate transaction fees is not only old-fashioned, but shortsighted.

“The incremental commission from whatever trade it might generate is not worth it,” he says flatly.

Siegel, a fee-only advisor, says the nature of his business restricts the number of investment ideas clients bring to him.

“They've already bought the strategy, so I just have to say, ‘Does this fit your strategy?’” he says. “That's something they can understand very quickly.”

He adds, “As more brokers take this path, they'll find fewer clients come to them with ideas.”

Perhaps the most striking perception about the way reps handle clients with investment tips is that there is no standard approach. Reps devise their own methods to suit their own personalities. And while that inevitably leads to a wide variety of systems, perhaps that's both unavoidable and for the best.

“There are a million different types of clients and a million different types of brokers,” says Ludwin. “The key is to define what you do and communicate that to existing clients. If you're willing to take those kinds of ideas and embrace them, great, but make sure that's your business model.”

Five Ways to Deal with an Investment “Tip”

  1. Take it seriously — if only as part of an effort to debunk it.

  2. Ask yourself why the client brought it to you.

  3. Place the idea in the context of the client's risk profile and investment objectives.

  4. Allow the client to pursue the tip — with a caveat emptor from you.

  5. Treat it as an opportunity to talk about changes to the client's investing sensibilities.

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