The treacherous rollercoaster ride Wall Street has endured over the past several months goes to show that, well, gravity is a force to be reckoned with in the markets. What goes up must come down. But it also underlines another fact: Today's financial system is thoroughly interconnected. Mortgages were sold to investment firms, which sliced them up and packaged them as securities based on risk. Then, hedge and pension funds gobbled them up. The collapse in housing prices set off a dire chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans, and the securities that underpin them are, quite simply, in trouble.
As a result, more than a few brokers—and their clients—find themselves in a bit of a panic. We asked some branch managers and other industry experts for their advice on how branch managers, advisors and clients might best deal with the situation—and, perhaps, even make a little “lemonade” out of these “lemons.” For the most part, they recommended taking advantage of the current market volatility to stress financial planning and long-term investing lessons with clients.
“Reps can say to their clients, ‘With the market's volatility, let's run a retirement plan analysis to make sure you're on track,’” says a legacy Smith Barney BOM in N.Y. Also in terms of adding value, he notes, most big firms have a mortgage capability—so there's an opportunity to refinance a client's mortgage. “An investment may go up or down, but helping a client refinance to a lower rate is a guaranteed winner.”
Another BOM in the south, who also asked that his name be withheld, counseled lots of hand-holding. “Consistent client contact and investment advice during bad markets is a great way to sow the seeds of a vibrant business in the future. Sow now, reap later,” he says.
But that doesn’t mean you want to make lots of big changes in client portfolios. In his recent “Economic and Market Review” report, Dr. Carl E. Steidtmann, Chief Economist and Director of Consumer Business for Deloitte Research in New York, offered the following advice for dealing with the sub-prime mortgage crisis: “Most likely, clients shouldn’t make massive changes in their portfolios; too often investors overreact to this kind of news.”
Tom Kane, a former financial consultant, branch manager and regional sales manager who is president of Investment Business Solutions, LLC, a wealt- management consulting firm in Fairfax Station, Va., offers the following six steps to guide branch managers and advisors through these tough times:
1.) Anticipate: Anticipate that the mortgage meltdown is adversely affecting your advisors. “You would almost have to be living under a rock not to understand that this impacts them,” Kane says. “Though you may not be fully aware of the dramatic affect it has on their lives.” Compounding a loss of income from a decrease in production with the emotional strain of constant hand-holding, the potential losses in their own portfolios, and losses associated with their firms’ exposure—which could affect retirement accounts, 401(k) plans, deferred compensation, etc.—can sap the energy or optimism out of even the most stalwart professionals, he says.
2.) Educate: Don’t assume your advisors fully understand the causes, effects and extent of the crisis. “It is your job to ensure that each of your reps is an expert on sub-prime mortgages, mortgage-backed securities, SIVs, the mortgage insurers, CDOs and the like,” he says. Simply “assuming” that they not only understand how these complex products and markets operate, but that they comprehend the extent of the ripple effect caused by the recent meltdown as well can be costly—if not downright deadly—to your business.
3.) Evaluate: “Ask yourself if you fully understand the extent of the issues confronting you and your office,” he says. “Have you done an assessment or analysis of the impact to portfolio balances, account retention, significant positions in affected securities, and the negative influence continued media coverage is having on the markets in general and your firm in particular?”
Then, do the same with your reps. “If you do not assess the problem’s specific effect on each and every one of them, you’ll never know the true extent of your risk and opportunity. Sit down with them and review their books—looking for ways to shore up relationships and perhaps make some money in the process,” Kane says. “Perhaps repositioning certain portfolios, or considering alternative investments typically not in that broker’s mix, are strategies worth pursuing.”
4.) Participate: Your advisors need you to be their partner and number one supporter, Kane says. But, you must diagnose before you prescribe. “Get to know how the changes in the markets are affecting the lives of your advisors on both a personal and professional level,” he says. Try to consciously practice empathetic listening. Roll up your sleeves, put on your boots and hop in the trench.” This may include going on joint calls, helping put together an office-wide workshop for existing clients. Take whatever steps are necessary for your team to see that you are in this battle with them, he says.
5.) Initiate: This is where taking the offense is critical, Kane says. “Other firms are going through the same crisis. If your firm is not one of the behemoths caught in the middle of it all, you may be positioned to take advantage of the situation—picking up unhappy advisors and clients from your rivals. Regardless of your firm, your advisors must be proactively calling clients to discuss this tumultuous environment. Not doing so is akin to professional suicide. It’s your job to ensure this is happening, and that they initiate these contacts with the proper frequency and content.
For BOMs, it’s a great time to recruit. “Many advisors—hesitant to move in the past because of stock options or other deferred compensation—have seen these nest eggs drop by 50 percent or more,” says Kane. “Additionally, if their manager isn’t giving them the support they need, they’ll be intrigued and enticed by a progressive, proactive management approach at such a critical time.”
6.) Motivate: Now more than ever, Kane says, advisors need to be inspired. “I once heard sales defined as transference of enthusiasm. It’s essential that you help your team stay energetic and upbeat. Keep them focused on the long term, as they try to do the same for their clients.”
Share a little market history with them, he says. “I recently dug up some headlines from 1982, the true start of a period of sustained and extended expansion affectionately referred to by many as the Super-Bull Market. When I was a BOM, I reminded my advisors that on August 13, 1982, the Dow Jones Industrial average opened at 777. The market, which bottomed on that day, rose 35 percent by the end of the year. Unemployment was at 9.2 percent. Interest rates on T Bills peaked at 16.3 percent in 1981 with the 30-year Treasury at 15.4 percent. Then I showed them a statement from a growth mutual fund I opened in 1981 with $1,500; it grew at an annual rate of 10.55 percent, and is now worth $16,542.”
Perspective is a great way to motivate advisors and investors, Kane says. But, whatever methods you use—inspirational quotes, historical events, accentuating positive results, etc.—you must provide constant leadership and inspiration to your troops to not just survive 2008, but to succeed.