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I Heart Wall Street

Here's How I'm Going To Take Your Clients...

"It's not show friends, it's show business..." -Bob Sugar

When we take a call from potential client, more times than not they already have an existing advisor, and that's not surprising. According to Brightscope, there are now 774,827 unique individuals who are registered with either FINRA, the SEC, or both. 

Add to the fact that your client is calling me rather than replying to an advertisement we've run, or call we've made, or referral we've received, and obviously, it's probably not a great sign for you.

I'll tell you we don't hit below the belt, but we are thorough. And more times than not we find things that raise enough questions in a person's mind for them to gladly sign the transfer forms. Here's some of the ways we do it:

1) Fees. 

The reality is, if you're still charging 1% (or more -- really?!), you're in for some serious secular competition. Investment fees are probably one of the single largest line items on the expense ledger for a high net worth client & if you think $10,000 dollars a year is what your advice is worth to a million dollar client, you better believe we're going to compete for their attention, especially in a world when 10 year Treasuries are now below 2%.

Vanguard has done an incredible job at conveying one message-- Costs Matter. And between online advisory offerings coming to the marketplace and independent advisors (like us), who are able to cut out the middle man (i.e. the wirehouse), there is a ton of pressure for clients to rethink the value of their choices, especially if you're the type of broker whose whole practice is built on allocating money into various mutual funds or managers and being a "relationship manager". You heard it here -- the 1% pricetag for handholding is a dinosaur.

2) Funds.

We just reviewed some holdings for a potential client at a major firm. Almost all of the funds are invested in mutual funds. And almost all of those funds are in the firm's funds. Immediately, we'll point out how, in a universe of choices, somehow this broker saw fit to only allocate the client's money to the firm's funds which we'll also point out is the most profitable for the firm. 

Of those funds we reviewed, half of them were underperforming their index -- and the client was paying, on average 1.38% (before the broker's "advisory" fee). Comparing that to Vanguard's Total Stock Index of 0.06% is a jaw-dropper for most of the potential clients we meet. Sadly for clients, that fee & performance comparison is tame versus most of the accounts we review.

You need to look no further than PIMCO to see the writing on the wall. If they are moving to ETF-land, you'd better believe it's a trend that's here to stay. So, no matter what you might think, the overarching theme is this: Mutual funds have about $12 trillion invested in them today vs. $1.3 trillion in ETFs, and they are losing assets to ETFs -- where do you think the rest of that money is moving?

When the market is posting returns of 10%+ a year, not many people are watching very closely but if you're still an asset allocator using mutual funds and private money managers to beat the market, you're in for a tough road because everyone is watching right now. Exchange Traded Funds are a systemic shift in the landscape, which also means you need to rethink the entire value proposition of the market-beating prowess you're sharing with your entire practice. Coincidentially, I don't -- we've been using index funds for years now.

3) Conflicts of Interest

2008-2009 made it very easy for people to think radically different about the advice they're receiving, because:

1) If the banks are so smart about money, why did they need a bailout?

2) When an investment bank owns an advisory business -- who's their first allegiance to? The corporate client or the individual client?

Those two questions are all we need to ask. It's just that simple, and every single client we meet with hears the message loud & clear. As a matter of fact, this is probably the single biggest reason we get for why people are calling us, they no longer trust the legacy firms. 

3) Syndicate

If you're a broker and you've made your Christmas money selling Closed-End Fund IPOs, Structured Products, and New Issue Bonds you're dead to me. I'm going to tell clients how insane they are for listening to you. It's not your fault, you're addicted to money, I understand, but I'm going to tell clients about the syndicate credits you received to "advise" them to buy these pathetic products. I'm not going to go so far as to say all syndicate products suck, just most. Conveniently most of them will also probably be left sitting in your client's portfolio when I review it. 

And you know what? Clients are going to listen, and they are never happy to see that on page 129 of the prospectus it's all spelled out: the selling concession, the syndicate credits, the fees -- especially when they see most of those holdings have usually been shellacked with losses.

Really, it's quite a simple concept to convey -- Why would anyone in their right mind buy something brand new? Is this the one product that no one saw coming? The one new product that has so much demand for it, that the price will never drop again? Why be the first person to test the latest advance in parachute technology? Most days it pays to wait. 

4) Broker Check

Some of you might think this is playing dirty, I know, but we always use the FINRA's BrokerCheck to run background checks on a client's existing broker or an advisor we may be competitng with for the relationship. Some brokers have a ding on their compliance record that's understandable and we'll tell a client as much; I've been in the business long enough to respect that. But I also can't tell you how many times, we've also found out some intensely scary things -- things that make you wonder how a broker is even still in the business. Most of the investing public still doesn't even know about this service, but for those times when we've shown the dark skeletons, clients are forever grateful.

In the end, it all adds up.

I didn't even go into the horror show of insane asset allocations I've seen. None of it should be a surprise. None of this is revolutionary. But all of it usually adds up to illuminating the difference between the implied value of their relationship with their advisor versus what's tangible. And more times than not, that's exactly what my newest client needed to see & hear when they called me. 



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