Advisor Teams can benefit from coaching.

By Curtis Brown, Vice President, Supernova Coaching

The age of the sole practitioner advisor is giving way to team-based advisors for many reasons.

There are essentially four reasons to form a team:

1) Improve productivity and grow revenues
2) Deliver the “wow” client experience
3) Create a retirement succession plan for your practice
4) Improve the personal quality of life for you and your family

Improving productivity and growing revenues

All of the big firms who studied the impact on team productivity decided teams are more productive than the sole practitioner model and then implemented incentives for FAs to be on a team. Most have key initiatives around team formation. Teams must be structured in a way that is more than cobbled together solutions and also provides the basis for leverage. In other words, 1+1=3, or by pairing two individuals the team has the leverage equivalent of three producers.

Let’s review a few statistics surrounding team productivity. According to a study conducted by Price Metrix, ‘55% of advisors are on teams and manage more assets, generate more revenue and maintain more client relationships than sole practitioners.’

The average team manages $260m and generates $1.7m in revenue across 280 relationships, compared to the average sole practitioner who manages $110m, generating $830k across 140 household relationships”.

Unfortunately, when teams are being formed, they can skip many of the strategic and operational issues and go straight to, “how are we going to split the production?”

Teams need to establish a strategic plan that identifies the team’s value proposition, mission statement, and elevator pitch.

These are necessary components of a team-based strategy that should be discussed to determine if each team member is aligned with the strategy. This also provides unity of purpose.

Teams should also go through the exercise of performing a SWOT analysis. Identifying (S)Strengths; (W) Weaknesses or developmental needs of team members; exploring (O) Opportunities for productivity improvement; and examining (T) Threats associated with team success. While going through this analysis, action items should be identified along with the delegation of duties and responsibilities for team activities or initiatives.  Once a team is sufficiently organized around specific processes, strategies can then be developed for the development and penetration of niche markets, building new relationships via centers of influence, and gaining referrals from existing relationships.

Ponzi Schemes have been around since man first exchanged money for services. There are hundreds of Ponzi Schemes going on as we speak. There are over 50 that are exposed each year, with over 150 exposed in the wake of the Great Recession. Some are pure scams, while others are somewhat market dependent. Some start out in legitimate fashion, but because of bad bets, bad markets turn into Ponzi Schemes to hide bad decisions. By the way, it is never theft according to the perpetrator, it is just “borrowing the money”. They “always intended to put it back”. To them, this nuance make it OK. Others are just crooks. In my personal experience with Merrill Lynch, those Financial Advisors that were caught “borrowing” money from client accounts were always going to put it back. The FA’s were always fired immediately and the clients made whole. It was usually involved a relatively small amount of money. I had one FA borrow money from a client’s account to buy a computer. It ended up being other things and a total of $25,000. He was fired. Another made up false statements after hours after

having asked the client to make checks payable directly to his name. We got him when the FA went on vacation and the client called about his account. He was fired. A cashier once borrowed some money by making up false deposit slips in a lesser amount than the one given back to the office. When these small discrepancies appeared, she claimed she knew nothing about it. She was fired and went to jail. I had former banker who colluded with his buddy at the bank to borrow money from clients of the bank, trade in fictitious accounts at ML. When the trading was successful they put the original money back and split the profits. When it was unsuccessful, they simply left us with an unsecured debit balance and put the original money back in the bank. This was my first office as manager, so it was a shock to me that someone would be so brazen and risk their careers for so little money. They were convinced that they had a perfect scheme and wouldn’t get caught. We quickly put a stop to this, brought in the FBI and they went to jail for five years.

On a much larger scale there is fraud and deception going on all the time. In my home town of Indianapolis, there have been two famous cases involving Ponzi schemes. One where the Financial Advisor borrowed money from his clients, lived the high life, and when confronted faked his own suicide by jumping out of his airplane over North Carolina.

On an even larger scale, we had a individual buy a financial institution, turn it into his personal piggy bank, live the highest of high lives and eventually go to jail. They both made the highlight reel on “American Greed”.

So how do we protect ourselves, our loved ones and our institutions from these schemers? Understand that if these guys weren’t good, they wouldn’t get away with as much as they do. They tend to pray on our weaknesses. When we are in financial trouble they are there to take advantage of us. When we are greedy or envious, they are right there to help us out. They pray on the elderly in particular. These are the saddest cases where a trusting unsuspecting person turns over their life savings to a relative stranger. These people are masters of instilling trust, confidence in them.

So why don’t we see the problem sooner. Why do these scams last for years? We all have a very strong need to be right. The bigger our ego, the greater the need to be right. Even after they take away these schemers in handcuffs, clients are still defending them. We also hate to be embarrassed. This publicly admitting that we are wrong. This is why people would rather lose $100,000 rather than turning in a crook. Knowing this, how would you start a Ponzi scheme?

Twelve Steps to Starting a Ponzi Scheme

  1. Set up an Independent Investment Firm that required no supervision
  2. Invest substantial capital in the office, and your lifestyle
  3. Impact the local community by giving large pledges to their favorite causes
  4. Buy a large home, lease an expensive car, boat airplane. Join the right Club, church, and civic organizations
  5. When people ask you what you do, be vague. Talk about coffee futures, derivatives, options and other exotic products. Explain that you have figured out the system and are making money hand over fist. Explain that you are sharing the idea with a few close friends and family members.
  6. Take their money. Give them a promissory note and a regular stream of income above the market ie 12-25%. Give statements monthly showing compounding effect of money. Never return any money after initial returns. When absolutely necessary pay old investors with new money.
  7. Only take money reluctantly and only through referral from trusted sources.
  8. Spend client’s money lavishly on more new cars, boats, airplanes, hookers and drugs.
  9. Eventually run out of new money to pay old, skip town, fake suicide, get caught, and go to jail.
  10. Plan new scam while in jail
  11. Get out of jail
  12. Do it all over again

How to Avoid Ponzi Schemes

  1. Only do business with brand names that you can sue successfully
  2. Avoid complicated schemes that sound too good to be true. They always are.
  3. Avoid anything guaranteed except government bonds
  4. Be wary of smooth talking confidence men in $3000 suites, with fast cars, boats, airplanes and even faster women who befriend you and make you feel that you deserve everything that they have. All you have to do is turn over your money to them.
  5. Be wary of “credibility by association” who use religion, ethnic origin, club status, or other affiliations to establish credibility
  6. Be wary of the “credibility by referral” when accepting. “If he is good enough for Tom Smith, he is good enough for me”.
  7. Be wary of previously credible people whose lifestyle suddenly changes due to an amazing new investment strategy. Opportunity is different from schemes.
  8. Be wary of friends in the investment business that fall prey to the temptations of alcohol, drugs, women or gambling. I monitored very closely my FA’s that had a reputation for trips to Las Vegas. Pump and Dump stories are very common in Las Vegas.
  9. Never invest more than 5% of your assets in an illiquid investment where you could lose it all. We are all tempted by Private Equity deals. Even the most legitimate people fail more than succeed in these ventures. If you buy them through a name brand, at least you can get your money back if the GP runs off with your money.
  10. Report suspected Fraud immediately to your State Securities Commissioner.

 

fill your tank

We have all had to face this difficult situation with a client. You discover that they are clearly spending well beyond their budget. They have no apparent means of replenishing their principle, but they continue to spend in spite of your advice. What do you do?

When I would visit an office in my District, I would often build this warning into my speech. “You all have one or more clients that are outspending their money. They are headed for the cliff where they will no longer be able to maintain their lifestyle, pay their bills and eventually face bankruptcy.

Who will they turn to?

Who can they blame?

Inevitably it will be you! Especially if they have a good lawyer. What will they say? ‘You should have warned me. You should have protected me from myself.’ Here is the tough part. They will often win in a board of arbitration. Potentially, there could be tremendous cost to you in terms of time, lost productivity and reputation.”

So what can you do when faced with a client that is outspending their budget and won’t listen?

  1. Be sure that you have all the facts. The client may be expecting a large inheritance or other windfall that will change his/her circumstances.
  2. Double check your original Cash Flow Analysis. Once you review all the facts, be sure the math is right. (See the Advanced Learning Library for a Cash Flow Analysis template)
  3. Update the Cash Flow Analysis based on current figures. This usually means that the budget you had for the client may no longer applies. The new budget is even less.
  4. Call the client in and share the news. It may be smart to have a witness to this conversation. Depending on the seriousness of the situation, your manager or compliance officer may make excellent witnesses. Have a clear agenda for the meeting. Present the updated analysis, your recommendations and possible solutions.
  5. Explain the options available: modify lifestyle and stick with the new budget. Increase income by getting a job. Increase income by taking more risk.
  6. Probation. Once the client has agreed to taking the appropriate action, put him/her on probation. If s/he doesn’t comply with your suggestions in the next 90 days, fire the client. Although this is difficult, it is better than a lawsuit.

This is an important topic to bring up with your clients during their semi-annual reviews. These are difficult conversations to have but of vital importance. Remember, as I’ve said before, clients are either spending too much or too little. They are never spending the right amount. Larry Wilson taught me a great lesson: our job as an advisor is to help our clients grow up and make better choices. Supernova’s 12-4-2 program does that by keeping you in regular contact with your clients to make sure that they are spending appropriately.

Suggested reading: Have You Ever Encouraged a Client to Spend More Money?

 

carGiving your clients permission to spend more money is one of the greatest gifts you can give them!

Most successful people grew up working hard and saving money. That, probably, is why they are rich now. When you do a cash flow analysis as part of this client’s financial plan, you quickly realize that they are never going to outlive their money. In fact, their nest egg is growing. They grew up believing, like their parents, that “debt is bad” and “it isn’t how much you make that counts, it is how much you save.” They are uncomfortable spending money and are living a simpler life than they deserve.

You have an obligation to give them permission and teach them how to enjoy the money they have saved. The familiar quip, “If you don’t fly first class, your children will,” applies here.

Here are some ideas on how they might use their money to further enjoy their life:

Update the family home.
This can be a good investment as well as a way of bringing pleasure to your everyday life. Most folks spend money to fix up their home in order to sell it. Why not do it now and enjoy it?

Buy that second home. Depending on your priorities, buy in a destination that will be attractive to the grandchildren. Renting a vacation home is great but owning is better.
Take the entire family on a vacation. This will build great memories for years. Friends of ours took their whole family (15 people) to Ireland for two weeks. They said it was the best money they’d ever spent.

Set up a Family Foundation.
 Include all adult family members to serve on the board. Encourage them to present to the board charitable causes they are passionate about. Allocate funds based on well-researched ideas and the passion of the presenters. This will teach the family the value of giving back, leadership, roles and responsibilities on the board, teamwork and cooperation. Benefits also can include a small stipend and improved standing in the community.

Set up a Dynasty Trust. This can be set up as an incentive trust to encourage values and behaviors that the client wants to pass on to their children. This trust typically lives on for generations but isn’t funded until the death of the client. It is typically funded with a Second-to-Die life insurance policy. Once activated, it typically pays the blood relatives a small salary based on different achievements as directed by the client. For example, they might pay $10,000/year if the child graduates from college. If they get a Master’s degree, it might rise to $15,000 and a Doctorate to $20,000. You can add special payments for the birth of a child, becoming an eagle scout and weddings. Papa and Nana can be remembered on special occasions for generations to come.

Make a difference. Feel the joy of making a real impact by giving appreciated securities to your alma mater or favorite charity. Making money is fun; giving it away brings real meaning to your achievements.

Treat yourself. Whether it’s special occasions or exotic trips, fly first class, rent a private plane, and generally be kind to yourself. You are only going to be 65 once. You have earned it. My wife rented a seaplane for my 65th birthday and flew us to Key West for lunch, followed by a boat ride and a lobster dinner on Useppa Island. We have talked about it ever since.

Remember, clients are either spending too much or too little. They are rarely spending just right. Your job as their advisor is to make them aware of what they are doing and to help them to make better choices. Supernova’s 12/4/2 program keeps you in regular contact with your clients to make sure they are spending appropriately.

Suggested to read next: What to Say to Clients that Overspend

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