Rules of Thumb

What do you mean by ‘client allocations’?  Please clarify.

[quote=mooose]

Hey everyone,

I am still relatively new and I was wondering if I could get some advice from the vets on some of the does/donts of this industry when it comes to client allocations.  I know this is very broad and it depends on the individual client, but I am looking for some "rules of thumbs" of things an FA should never do, and things they should do.  Things that are not taught in training and a newbie may over look as they may have the "blinders" on!

all advice is appreciated...even yours bobby!

mooose

[/quote]

Now I feel some pressure to come up with some advice.

A couple of simple rules:

1. Never confuse genius with a Bull Market.

2. Bulls will make money.  Bears will make money.  Pigs will lose money.

[quote=mooose]

Hey everyone,

I am still relatively new and I was wondering if I could get some advice from the vets on some of the does/donts of this industry when it comes to client allocations.  I know this is very broad and it depends on the individual client, but I am looking for some "rules of thumbs" of things an FA should never do, and things they should do.  Things that are not taught in training and a newbie may over look as they may have the "blinders" on!

all advice is appreciated...even yours bobby!

mooose

[quote=Bobby Hull][quote=mooose]

Hey everyone,

I am still relatively new and I was wondering if I could get some advice from the vets on some of the does/donts of this industry when it comes to client allocations.  I know this is very broad and it depends on the individual client, but I am looking for some "rules of thumbs" of things an FA should never do, and things they should do.  Things that are not taught in training and a newbie may over look as they may have the "blinders" on!

all advice is appreciated...even yours bobby!

mooose

[/quote]

Now I feel some pressure to come up with some advice.

Ask a lot of questions before you take your clients high tolerance for risk at face value. Everyone has a high risk tolerance, until the market goes down.

Dont take on your family and friends for the first year or two.

Other than that, there are no rules of thumb. Everyone is different. However, build a streamlined business. Have an investment matrix, so you dont have to reinvent the wheel each time you get a new client with money to invest. Have 3, 4 or 5 asset allocation models, and decide on a platform/level of service, for different levels of assets. Figure out which model they fit into, then plug in the investments from your matrix

[quote=pratoman]

Dont take on your family and friends for the first year or two.

[/quote]

[quote=ManagedMoney] [quote=pratoman]

Dont take on your family and friends for the first year or two.

[/quote]

[/quote]

IMHO, Most people, not all but most, wont bring in enough money from friends and family to make their career, and if they dont bring in freinds and family, in the beginning, it wont hurt their career either. My feeling is, assuming thats the case, get comfortable with what you do first. Most, again most not all, but most people new in the buseinss, have no idea how much they still dont know about investing  prudently. Just my humble opinion.

Always be more conservative than they think you are being.

Stay in control of the situation

Tell them what you ARE GOING to do, as opposed to letting them run the show.

Don't buy CDs....ever.

[quote=pratoman][quote=ManagedMoney] [quote=pratoman]

Dont take on your family and friends for the first year or two.

[/quote]

[/quote]

IMHO, Most people, not all but most, wont bring in enough money from friends and family to make their career, and if they dont bring in freinds and family, in the beginning, it wont hurt their career either. My feeling is, assuming thats the case, get comfortable with what you do first. Most, again most not all, but most people new in the buseinss, have no idea how much they still dont know about investing  prudently. Just my humble opinion.

I am also relatively new and I did bring in a few friends (family has no money).  I think the biggest risk of doing either is the fact that most of us newbies won't be here in a couple of years and that will leave our friends and family hanging.

Not only that but if you start off prospecting friends and family, you will get comfortable and not learn to prospect properly.

[quote=STFU]

Not only that but if you start off prospecting friends and family, you will get comfortable and not learn to prospect properly.

Most people can’t and the ones that do are in a tiny minority.

Without question try to stick to 4-5 models you use for various client risk profiles. 

Also, make sure you find out how they define their own investment style.  If they’re passive or an active investor.  If they say their active test them a bit to make sure.  Since you are trying to simplify your life and manage a book its much easier to have the passive investors in managed money or funds etc, but the active investor may need individual stocks or a cyclical allocation strategy.  Also, it’s silly to force feed trading on a passive investor,even though it may be your style.  Once you know the answer to active or passive it narrows your investment options a bit.  Keep it simple. 

Mooose, I like ya' I have an empathy for your position and I have a soft spot for the firm you work for.

"Relatively new" is an understatement for sure, but fine.

Unfortunately, everything that you ought'nt do is everything that your firm is going to tell you to do (including your BOM, most likely because he'll use you to achieve the ridiculous grading rubrick the firm has for his success). Fortunately, just do what they tell you to do (this is why it's best to leave friends and family out of the equation on this see the joke I'm about to post on this subject on weekend joke).

When I got started, I concentrated on dividend paying stocks. Don't go for the 15% ers because there is a reason they are at 15% and it's generally not a good reason. Most people like the idea of getting a chance at growth while they are making more than they could in a cd, especially if there is a good company behind the dividend.

This strategy served me well when the crash of 1987 came along. Most people were realtively ok due to the dividend and the fact that people who owned dividend stocks weren't calling their brokers and selling into the mess (whether they should have been or not is another question).

I'd say hang back from funds because you tend (not you particularly) to overweight a single fund based on the idea that a single ticket buys you diversification. But when it goes down, then the portfolio is overweightedly down.

Mostly, at this juncture it's keep your head down and keep swinging. It's like the first years of college before you really know what you want to be. Stack away the assets somewhere where you can feel they'll be there when you go looking for them again.

Second piece of advice. What you want is the money in the account. If that's 90 day CDs, fine. You want cash where you can call the client with an idea and he doesn't have to decide to send you more money for it (but he always can).

Build your business like you want it to be in 10 years.

Work with people you like.

If you get clients who can only meet on nights and weekends you may still be working nights and weekends for years to come.

As far as working with friends and family, fortunately everyone I know personally is broke.  I have heard senior advisors in my office agree and disagree with this approach.  All I can tell you is one of the new guys tried working with a good friend recently and has now lost that good friend.  The best advice I heard from someone who does work with friends and family is to treat them the same as any other client.

Stay away from individual stock picks until you earn some stripes.  Do your best for every single client.

I disagree VBrainy. If he goes for good, dividend stocks (utilities, pipelines etc, nothing too new, nothing too exotic) he should be ok AND what's nice about stocks is they give you a reason to call on your client again with a second stock and with a third stock and a fourth....

It's not a matter of. "I picked the best one ever!" when you buy a stock, it's a matter of "I think this is timely now." With a fund, you are supposed to have picked the bestest best fund the first time and so why do you have any reason to call again except to say "Gee, why don't you buy some more?" You bought ED with a 5% yield and now you want to add GMR with an 8%, next we'll get KO with a 2.5% then we'll add FCH pr A with 7.3%." (Not that I'm saying that anyone should buy any of these particular names.) None of these calls requires selling the previous stock.

[quote=Whomitmayconcer]

I disagree VBrainy. If he goes for good,
dividend stocks (utilities, pipelines etc, nothing too new, nothing too
exotic) he should be ok AND what’s nice about stocks is they give you a
reason to call on your client again with a second stock and with a
third stock and a fourth…

It's not a matter of. "I picked the best one ever!" when you buy a stock, it's a matter of "I think this is timely now." With a fund, you are supposed to have picked the bestest best fund the first time and so why do you have any reason to call again except to say "Gee, why don't you buy some more?" You bought ED with a 5% yield and now you want to add GMR with an 8%, next we'll get KO with a 2.5% then we'll add FCH pr A with 7.3%." (Not that I'm saying that anyone should buy any of these particular names.) None of these calls requires selling the previous stock.

In general if your going to recomend individual stocks, you should
recomend big solid companies or else solid classic growth companies.
And in general they should be non-cyclical companies.



That said, stock picking is fun, and you can make it the core of your business. I have with our firm’s REIT list.



It gives you a big leg up over A-share/SMA pushers.

use products that pay you upfront for 3-5yrs, then use fee based platforms.

Create a few model allocations (i.e. conservative, moderate, etc) and fill them in with products that you know (or will know) very well. You do not need to reinvent the wheel everytime you sit down with a new client.

Don't push product or you simply become a "broker" to them and one of the many that have called to pitch the latest and greatest stock, bond, etc..

Emphasize your process. Explain to the client right up front how you work and why they should want to work with you. I would highly recommend that you sit down with the top producer or team within your branch and find out how they deal with clients. I can assure you that they have a well defined process from initial client contact, to discovery, to creating the asset allocation, etc, etc.. The clients with money will sense the difference and will be much more willing to work with you.

The money is in individual stocks and fixed income. Learn to be an expert in those and you will build a very large book.

I agree with generating commssions at the beginning then going into wrap accounts later on.

Meet as many people as you can and tell them what you do...sound excited when you talk about work.  You're a salesperson, not a PM or an exotics structurer.  There's money in everything.  Don't worry about spending time allocating or researching, that's what your firm's (back office) research department is for. 

Allreit,

Just so that I'm clear... I was absolutely NOT suggesting that anyone actually buy GMR, I was just looking for a yeild stock to include in the example of being able to reconnect with the client to buy yield in a different category than the time before.

Also for full disclosure, I had in the past purchased GMR and taken profits when I hit 20%. When the company did the big payback of their cash, I sold again.

"In general if your going to recomend individual stocks, you should recomend big solid companies or else solid classic growth companies. And in general they should be non-cyclical companies." This, BTW, is gobbledegoop (which I figure must mean "turkey poo") . It sounds like you're "talking Turkey" but it's a whole lotta crap. You recommend cyclicals at the bottom of their cycle, it's what makes them "Timely". You buy "Growth" when it looks like the country will never grow again, otherwise known as when they look their least "solid" if you buy them when they are "solid" then you are always at the mercy of a reversing economy. You have to buy them when no one likes them and sell them when everybody likes them.

[quote=Vin Diesel]use products that pay you upfront for 3-5yrs, then use fee based platforms.[/quote]

Then go straight to "Out Of Business" the first time the market poops the bed. Do not pass "Go" do not collect $200!

Fee-based is a bad idea for brokers, it is a good idea for firms.

[quote=Whomitmayconcer]

You have to buy them when no one likes them and sell them when everybody likes them.

We've hit on it Allreit. You are not a good saleman.

That is why this is a sales business, because you have to be able to convince people to do SOMETHING. A.I.D.A.

Attention.

Interest.

Decision.

Action.

Without a salesman getting the prospect's attention (finding the greed lever in the client) you cannot go on to the second third and fourth step.

That's what salesmen do for a living, and if Mooose is going to be in a salesprofession (either in this industry or in another) he might just as well learn how to do it right!

Get their attention; "If I can show you how to get a better income stream than the cd is showing you AND give you the opportunity for growth of principal consistent with relative safety is that something you would be interested in?" 

Peak their interest; "Mr Jones, I'm working with a shipping company right now that ships dry bulk goods around the world. It has an 8% yield at this time, and the dividend is based on the companies stated dividend goal, in the past they have exceeded thier dividend goals based on higher than expected earnings. My clients have made money in this position in the past and we took our profits when we had a 20% gain over and above the dividend income. Are you able to commit $x to this idea?"

Make them decide; "Mr. Jones, the reason that I'm calling you at this particular (the reason I last called on this stock) time is that we've seen a strong retracement in fuel prices. As a result of this retracement I think that companies that are net fuel consumers will be able to lock in these lower prices. What this means is that there will be earnings surprises when these companies report earnings versus last year when fuel prices were higher. This is an opportunity for us to take advantage of a short term abnormality and be ahead of the market, that's why this is an idea that should be acted on SOON as in now. Before some talking head comes on CNBC and says the same thing

Ease their action; "Mr. Jones, how would you like the account to read? Individual or joint with your wife?"

I'll address your second problem in a separate post. 

[quote=Whomitmayconcer]

[quote=Vin Diesel]use products that pay you upfront for 3-5yrs, then use fee based platforms.[/quote]

Then go straight to "Out Of Business" the first time the market poops the bed. Do not pass "Go" do not collect $200!

Fee-based is a bad idea for brokers, it is a good idea for firms.

[/quote]

That is a load of crap.  Wait till you want to sell your book someday.  See what you get for transactonal books vs. fee based books.

Second issue is the very bad habit of superlativizing everything. "You try selling clients stocks that nobody likes and thus are seriously undervalued."

Things don't have to be "seriously" undervalued when they are out of favor. They may well be fairly valued but stagnant.What the saleman is looking for is the stock that will become the belle of the ball.

I don't know who Seth Klarman is but I feel that he is an alarmist for his own vested interest. "99%" that's a bogus statistic! How do I know? Because 257% of a mistake is a lower stock price (in the customer's mind) Therefore, buying and undervalued situation that stays down is somewhat less than 99% the same as a mistake. And buying one with a tasty dividend is very much lower a percentage.

I know it helps with the sh*tshoveling to ratchet everything up to "11", but you should remember, "Never Bullsh*t a Bullsh*tter!" I know the difference.

VBrainy,

There's more than one way to skin the cat.

The object of the game will to be in business long enough to have a book to sell at the back end. When the market is going down, how many of your clients are going to ignore those "fees"? And your income will be going down with the market, day after day after day after day...

When they cut the accepted norm on fees from 2% (because the "C Section of the WSJ" decides to expose fees as the rip off that they are for clients. Just how much should a client pay your portfolio manager to hold IBM forever in a portfolio?) to .5% then where is your business going to be and what multiple are you going to get for selling it?

You're going to get diddly flippin squat for it, that's what!

You're supposed to be forward thinking in this industry, use your head for something other than a hat rack!

[quote=Whomitmayconcer]

Get their attention; “If I can show you how
to get a better income stream than the cd is showing you AND give you
the opportunity for growth of principal consistent with relative
safety is that something you would be interested in?” 

Peak their interest; "Mr Jones, I'm working with a shipping company right now that ships dry bulk goods around the world. It has an 8% yield at this time, and the dividend is based on the companies stated dividend goal, in the past they have exceeded thier dividend goals based on higher than expected earnings. My clients have made money in this position in the past and we took our profits when we had a 20% gain over and above the dividend income. Are you able to commit $x to this idea?"

[quote=Whomitmayconcer]

I don’t know who Seth Klarman is but I feel that he is an alarmist for his own vested interest.

[quote=Whomitmayconcer]

And buying one with a tasty dividend is very much lower a percentage.

The object of the game will to be in business long enough to have a book to sell at the back end. When the market is going down, how many of your clients are going to ignore those "fees"? And your income will be going down with the market, day after day after day after day...

I agree.

"Except that client is in no able able to evaluate what you are saying."

Here's a little secret... They're not supposed to. Salemen know that people buy the sizzle they don't buy the steak. As a salesman you are supposed bring the sizzle. As a stockbroker, you're supposed to make sure it is USDA Prime that you're bringing to the table.

There is no such a thing as no risk. No matter how many times you try to tell yourself that you are taking risk and vested interest out of the equation, the fact is that it remains.

" Relative safety indeed, if GMR blows up , you run a real risk on the relationship."

Yes, this is true. Thank you Captain Obvious! The point is that you had a relationship to risk! And that is what our man Mooose is trying to establish.

Rule number one in this business is "You are going to lose money for people in this business" Rule number two "You can't change rule number one!" Will you lose all money for all people? Probably not. Will you lose money for all people, there will be those who never experience a loss of any sort at any time, but they are exceedingly rare.

If you are good, you will make people money in greater quantities and/or more often than you will lose it and the net result is that the client will outperform so called "Riskless Investments."

But I do find it interesting that you are more worried about the "relationship" then the fact that the client lost money. Gee, where's that RIA altruism that we're so used to seeing?

"How many people pushing stocks, have actually bothered to read the filings, understand the risk factors, understand the industry, do a financial analysis, and all the other good work you should do before buying a stock?"

More often than you have bothered to take off your rose colored glasses when espousing your line of BS. (We've been through it several times already , let's not bother to do it again.)

"Do know what happens to stocks who's[sic] dividend[sic] get cut?"

Yes. I do. And I know how to play it to my best advantage too. It depends on where the stock was before the cut and how long the cut has been anticipated. If the stock has been depressed and the cut is widely foreseen, then buying the stock right after the dividend cut is often a very profitable trade. Just like restructurings are often reasons for the stock to rise. Of course these events are also market dependent, it depends on the general "mood" of the market.

"Drybulk, and other shippers tend to be high payout stocks (often approaching 100% of FAD, just like REITs), except that ships and shipping rates are nowhere near as stable as buildings."

Which is why they are no good for people who like to "Set it and forget it" while they are out hunting for more clients to set and forget. But they offer substantial rewards to people like me who will trade them. Which is why it is SO important to set Mr. Jones right at the buy by telling him that you have a target of 20% on the trade and that he can expect a phone call when this stock is approaching that target.

"If there is one thing missing from most investment thinking it an appreciation for downside risk."

Yeah, FAQ too!

[quote=Whomitmayconcer]

“Except that client is in no able able to evaluate what you are saying.”

Here's a little secret... They're not supposed to. Salemen know that people buy the sizzle they don't buy the steak. As a salesman you are supposed bring the sizzle. As a stockbroker, you're supposed to make sure it is USDA Prime that you're bringing to the table.[QUOTE]

Whats the residual value of sizzle after 30 seconds?

GMR and drybulkers (and convered call funds, etc etc) are what I call "Phosphate injected". They shrink when you cook 'em

[quote]But I do find it interesting that you are more worried about the "relationship" then the fact that the client lost money. Gee, where's that RIA altruism that we're so used to seeing?[/quote]

I'm worried about the relationship becuase the client lost money. I don't want that.

When it comes to investments, I am very risk averse, which IMHO is the the way to go vs trying to do volume business. The margin of safety is job #1 when it comes to picking stocks.

[quote]"How many people pushing stocks, have actually bothered to read the filings, understand the risk factors, understand the industry, do a financial analysis, and all the other good work you should do before buying a stock?"

More often than you have bothered to take off your rose colored glasses when espousing your line of BS. (We've been through it several times already , let's not bother to do it again.)[/quote]

You haven't answered the question. Fact is that most folks pushing investments haven't earned the right to talk about them. Doesn't stop them from pitching them.

That's good for everyone except the incumbent provider.

[quote]"Drybulk, and other shippers tend to be high payout stocks (often approaching 100% of FAD, just like REITs), except that ships and shipping rates are nowhere near as stable as buildings."

Which is why they are no good for people who like to "Set it and forget it" while they are out hunting for more clients to set and forget. But they offer substantial rewards to people like me who will trade them. Which is why it is SO important to set Mr. Jones right at the buy by telling him that you have a target of 20% on the trade and that he can expect a phone call when this stock is approaching that target.[/quote]

And when the stock falls %25, does he get a phone call too? Or just a warning email about a forced margin sellout.

What your doing is market timing via hot stocks vs trying to build portfolio's from the bottom up. This history of people chasing and promoting hot tips isn't too good.

I'm not saying hot tips can't work, but the amount of work that goes into a stock recomendation takes real craftsmanship. Often lacking in this industry, relative to salesmanship skills.

Wow!

"forced margin sellout"

Hyperbolize much?

This is exactly what I was saying about ratchetting it up to 11.

You remind me of the guy who get onto the airplane and see's a little girl seated in the seat next to his seat. She is reading a book on investment theory. He says to her. "I've heard that talking can make the trip go faster, would you like to talk on the trip?"

She looks up from her book, gives the guy the once over and folds her book. She smiles sweetly and says, "Sure, what would you like to talk about?"

He says, "Well I've read Seth Klarman extensively, would you like to talk investment theory?"

"Klarman?... Really?... Well then before we start, let me ask you this... Horses, cows and deer all eat grass don't they?"

"Why yes, I suppose they do." said the man, patronizingly.

"Yet when the cow poops it makes cow flop, when deer poop they make pellets and when horses poop, they essentially poop out grass, isn't that true?"

"Well yes little girl, I suppose they do."

"Why is that? Why don't they all poop the same?

"Gee, I don't know.. "

"Wel if you don't know sh*t, why do you think you're qualified to talk about investments?" and she picked up her book.

Don't tell me how to sell. Don't tell me how to invest. Don't tell me what I should know when I'm speculating. You have no idea how to do any of the above!

[quote=Whomitmayconcer]

Don’t tell me how to sell. Don’t tell me how
to invest. Don’t tell me what I should know when I’m
speculating. You have no idea how to do any of the above!

More like the log in your neighbor's eye.