When advisers become a target

You’re at a party and a guest berates you for your role in the economic crisis. How do you respond? Bryce Sanders, president of Perceptive Business Solutions, offers some diplomatic solutions.

Today many people consider The City of London a villain, responsible for most of the ills facing the economy, investors and ordinary citizens. You are a financial adviser. You are ‘The City’ to people you meet at parties. Are you the target of politely worded hostile questions? Can you respond without losing your composure? Is it a business opportunity in disguise?

Before you answer, we’ve all heard: “Fools rush in where angels fear to tread” (Alexander Pope An Essay on Criticism, 1709). Before answering, draw them out. Ask: “Why do you feel that way?”, “Why do you say that?” or “What have you heard?” Restating the question shows you are listening. Here are some complaints you may encounter and some responses you could use:

• Stockbrokers are out for themselves. You don’t care about the little guy.

I’m an individual investor just like you. My clients and I buy similar investments. I consider all of my clients important. There is no “little guy”. In the US we are bound by rules. For example, when the firm changes an investment opinion on a stock, as advisers we must wait a significant amount of time before we can buy or sell that stock in our own accounts. This gives time to contact our clients and give them the news and the opportunity to act first. Lean on your connections to the community. “We are all in this together.” You put the interests of your clients first.

• Big investment firms make money betting against the economy

Every trade has two sides, a buyer and a seller. Logically a person sells a stock because they feel it’s going down or something else may rise faster. Assuming rational behaviour, the buyer in that transaction feels the opposite. Transparency is important. So is full disclosure of information. If everyone is making decisions based on availability of the same information, it’s a level playing field. If they really feel large firms have an unseen advantage, have they considered “getting that firm on their side” and buying a mutual fund or managed product run directly by that firm?

• You can’t trust advisers – they are all crooks.

During the stock market decline, the US had several high-profile cases of financial advisers who were accused of “ponzi schemes”. If you are affiliated with a large firm, this can be an advantage. Sell the firm. What awards has it won for its quality of research and client service? How does your firm rank in comparison with its peers?

People want to do business with number one. Size matters. The number of clients and the amount of their money at a firm can be a measure of trust. When financial advisers come under siege, make the case for the integrity of the firm you represent.

• Where is the market going?

No-one knows. What do you believe about the future? If you feel the era of capitalism is dead, the consumer will no longer spend and businesses will no longer grow; that’s a good case the market is going down. If you feel over time economies will grow, governments will spend and consumers will continue shopping, that’s a good case the economy and the stock market will do well in the long term. Are they an optimist or a pessimist? That can determine their view of where the economy and the market is going. Focus on the long term.

• Why is the market so volatile?

Lots of research reports show over the last 80 plus years the stock market has returned about 10% on average. Unfortunately it doesn’t do it in a straight line. If it did, why wouldn’t everyone, including the Government borrow money at a cheaper rate, put it into the market and pocket the difference? When the market rises it’s healthy for it to pull back and take a breather. Unfortunately it seems the market rises like an escalator and declines like an elevator.

The market can be a great place for your money assuming you don’t need it for a long time.
Another reason for its volatility is liquidity. What other investment is priced every day, has a visible bid and offer and gives you proceeds from a sale in about three days? Not real estate. Not art. The easy liquidity explains a lot about volatility when people need to get at money in a hurry. Stress long term performance of the market, not short term swings.

• Am I paying for those big bonuses investment bankers are paid?

You personally? Probably not. A big firm is made of many divisions. I’m a financial adviser. Assuming you are my client, some of your fees will go towards my compensation. If those fees are based on a percentage of the assets you allow us to manage, and they grew you would consider that pretty fair. If you didn’t feel we did well on your behalf, you could fire us.

Investment banker bonuses come from other operations. Companies are run by senior management for the benefit of shareholders. If they do a good job and the company reports good earnings, they deserve a bonus too. Some of your fees probably are used to reward them for good performance. Stress your relationship with your clients. That’s most important to the client and a major part of the cost.

• Your firm is much too expensive. I can do it on my own with no load funds.

That’s fine assuming you have the time and resources to devote to the project. Let’s not confuse no-load with free. You are still paying, although there’s no financial adviser receiving a sales charge, hence the “no load” expression.

Assuming you use some mutual funds to bring some professional expertise in on your behalf, it would be good to learn what this is costing you annually. It should be in the prospectus, but it’s easy enough to research online. Let’s assume you are paying about 1% in built-in fees and my firm charges about 1.75% for professional money management within a financial advisory relationship. You would need to determine if the service, attention and advice were worth the additional 0.75% a year. Stress no-load is not free. Establish the costs they are paying, compare to the cost you are charging. Establish the difference and make the case for value. This is an in depth discussion for another time.

• I already have an adviser.

Draw them out. What do they like best about them? Would they recommend them? In what areas do they feel there is room for improvement? When people tell you what they are not getting, they are often revealing what’s missing in the relationship.

The book The Millionaire’s Advisor by Russ Alan Prince and Brett Van Bortel makes the case the wealthy have three plus financial advisers on average. When they explain: “They have an adviser” you might respond: “I expected that.” Successful people often have multiple advisory relationships. You are obviously successful. How many do you have?” If the advisory relationship is solid, respect that. If they have multiple advisers, down the road you may be able to compete for a slot.

• I was sold an investment product and I lost money.

Tell me about it. Why did you buy it? What was it supposed to do? Did you understand how it worked? If the return discussed was higher than the return you could get elsewhere, it may sound “too good to be true.” Don’t buy investments you don’t understand. In the US, lots of people got into trouble getting mortgages with low introductory rates that are adjusted upward later. They didn’t understand what they bought.  If you can’t explain how a particular investment works in layman’s terms to a spouse or parent, that’s a bad sign. Investments with ‘few moving parts’ are the easiest to understand. How much risk are they taking on?

• I don’t need you – I made money in the market. I’m happy with the results.

Between March 2009 and March 2010, the US indices were up in the 60%-70% range. It’s good you made money. Two questions you should ask: “How did you perform compared to the relevant indices?” and “How much risk did you take to get the return you received?” These are both easily measured today. Your adviser can probably do it for you. If not, or if you are investing on your own, I’ll be glad to show you if you supply the necessary information. Comparative performance and risk levels are two measures investors shound understand. You can help provide them.

Next steps

Don’t be pushy – be tactful. Volunteering your card is pushy. If you ask for theirs and offer to continue the conversation tomorrow, you have politely given them a way to back out. (I didn’t bring any cards!) Don’t let the market discussion go too long. They may feel “prospected”. Suggest a different conversational subject. Give them the option to stay with the topic. If they provide a business card, offer yours in return.

Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, PA. His book Captivating the Wealthy Investor is available on Amazon.com.