Sales focus will cost you clients

About 2 months ago I met with an affluent referral who was a busy medical professional and he asked me to review his situation and create a financial plan for him. When we sat down to meet I was stunned by how many advisors he was dealing with and, as a result, what poor advice he had been receiving.

He dealt with 2 insurance advisors, 3 investment advisors and 1 banker. Each was pitching one “idea” at a time and it created a very unfocused final product. No one took the time to look at the big picture with a comprehensive financial plan.

He was bringing in approximately $1,000,000 a year in revenue in his professional corporation for the last several years and because of this must have become a target of “salespeople”. And yes I use the term salespeople and you’ll see why in a second.

The Leverage Illness I’ve been in this business for over 20 years and have seen some truly horrible proposals regarding leverage to inappropriate individuals ranging from the 80-year old advised to borrow $400,000 to meltdown his RRIF, to this beauty.

The above business professional was sold a margin loan in excess of $2 million to be invested in 100% stock seg funds and was advised not to worry as it was sold on the tax write-off benefits. It is important to note that the clients risk level is about a 3-4 out of 10.

Bad advice, 5 years later

He has paid over $300,000 in interest charges; yes, he got to deduct these, but his net out of pocket is still about $180,000. His loan is still at the same level, but his investments are down more than $400,000.

This client is down almost $600,000 on this strategy. The advisor also decided that the correct and most appropriate choice was to invest these funds via deferred sales charge (DSC), which is an acceptable practice for many instances, but for this one I believe it really does cross the line. The advisor earned over $100,000 plus over $10,000/year in trailer fees for providing what I consider very poor advice.

Cleaning up the mess

The DSC fees to exit and swallow the losses are almost $75,000, which would further increase his losses. So we decided to re-allocate the portfolio to a more protective stance, withdraw the 10% free amount and apply it directly against the loan. We will do this each year until the units are free and then pay the loan off entirely. This strategy will cause my advisory fee to drop from $10,000 to approximately $0 on these assets within 3 years.

Here is proof that doing the right thing for the client is always good business practice. The salesperson who originally suggested this is losing a large client (there were also other assets involved). The client will be placing all of his insurance requirements through us as well. Wwe will be managing all of their assets (about $3 million), including banking assets for as long as the relationship lasts which we hope will be at least 20 years. We have become the trusted advisor.

The revenues derived on our fee based compensation will more than eclipse that of the one-time DSC commission that the original salesperson received. As well, I can sleep soundly at night knowing I am helping and doing the right thing for the client, not just the right thing for my pocketbook.

For every situation where you are recommending something always ask yourself: Would I employ the same strategy if I were the client? Would I recommend this strategy to my mother or father?

I know that the above case represents a very small percentage of advisors, as most of us care deeply about our clients and always do what we believe to be the right thing for them. If ever you are tempted to follow the sales approach, just know that your career will probably be much shorter lived than a trusted advisor.

Best of luck in your practice.

Robert Abboud, CFP, PFP, is the co-founder of AdvisorPractice.com, which offers advisors practical solutions to help transition to a financial planning practice and offers a 12 week training program. He is also the author of ‘No Regrets, A Common Sense Guide to Achieving and Affording Your Life Goals’. He has been offering life goals financial plans for over 15 years through his firm Wealth Strategies. Robert is available to speak at conferences and educational days. You can contact him at rob@wealthstrategies.com.