Clients ask advisors to invest in wacky stuff
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Financial advisers are often praised for their sense of investing. Often their greatest value is saving customers from their worst impulses.
Indeed, the top advisers on CNBC’s annual list of 100 financial advisors have received many requests for weird, risky, or downright stupid investments over the course of their careers – and, if left to their own devices, clients. may have lost hundreds of thousands or millions of dollars.
“People are always hoping for the home run – that this program or that idea will set the world on fire,” said David Rea, president of Salem Investment Counselors in Winston-Salem, North Carolina, which ranked No. 2 on this year’s FA 100. “And they can be sold. “
Long live the telephone booth
About 20 years ago, a longtime customer approached Rea with a supposedly winning idea: to buy coin-operated payphones.
Cellular communication, then bottom-up, was a fad, and payphones would come back in fashion once Americans lost interest, he thought.
The client, a retiree, was willing to stake his entire individual retirement account, worth $ 1 million, into the business.
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Of course, Apple launched the iPhone in 2007 and the rest is history. About 97% of Americans own a cell phone of some kind; 85% of them own a smartphone, up from 35% in 2011, according to the Pew Research Center.
Meanwhile, only 5% of the 2 million pay phones in the United States in 1999 are still there today.
“It would have been life changing,” Rea said of the client. “[His account] would have gone to zero. “
Fortunately, Rea was able to dissuade the person from investing. The idea of the public telephone had been initiated by an individual who had promised high returns; the hype man also had an uneven disciplinary record and couldn’t provide a prospectus with basic investment information, Rea said.
All three are telltale signs of potential problems.
“I was able to talk to the customer from the ledge, thank goodness,” Rea said. “Indeed, I think cell phones have caught on. “
Sometimes there is little that counselors can do to curb a client’s animal spirit.
In the 1980s, a client of Mark Mirsberger bought hundreds of thousands of dollars in physical silver, over Mirsberger’s objections.
(Investors often view silver, gold, and other physical assets as a safe haven during massive sell-offs in the stock market.)
“The world is ending, I need the money,” recalled Mirsberger, CEO of Dana Investment Advisors in Waukesha, Wis., Which ranked No. 1 on CNBC’s FA 100, of the Client Thinking Process. .
“Thirty years later he called us and said, ‘I have these bags of silver coins. How do I get rid of them?’” Mirsberger said.
Mirsberger located a coin dealer; after a 2% to 3% commission, the money was worth less than it was 30 years earlier.
Decades later, Mirsberger was able to save another client from possibly large losses in another “hot” investment. This time it was shares of Zoom Video Communications, a video conferencing company whose shares soared at the start of the Covid pandemic at a time when people couldn’t meet face to face.
The client was adamant about buying shares for hundreds of thousands of dollars in the ZOOM ticker. But there was one problem – it was the wrong stock symbol. (The correct ticker is ZM – a fact that Mirsberger fortunately pointed out before the money changed hands.)
ZOOM was a so-called penny stock issued by Zoom Technologies, which had not made a public disclosure since 2015. The Securities and Exchange Commission halted trading in March 2020 because so many investors were making the mistake.
The most important job of an advisor?
Research has shown that behavioral coaching is perhaps the most impactful part of a financial advisor’s job.
Advisors can add around 3% to clients’ net returns through seven key services, such as asset allocation, profitability, portfolio rebalancing and spending strategy, according to a 2019 study released by Vanguard, a manager. of funds.
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Investors get about half of those returns through behavioral coaching (helping a client stay disciplined and in control of their emotions), which is the largest share compared to other counseling services, according to Vanguard.
However, customers often don’t see this value. Investors ranked “helps me stay in control of my emotions” as the least valuable attribute of a financial advisor, out of 15 choices, according to Morningstar behavioral researchers.
“The counselor is there sometimes to protect people from themselves,” Mirsberger said.
Dog parks and beer
Ready-made investments aren’t necessarily all bad, if investors understand the risks and can take potentially heavy losses, the advisers said.
Wayne Wilbanks, for example, is currently assessing the viability of building a brewery near Orlando, Fla. That would also serve as a dog park. It is likely that he will recommend going ahead with the investment, which would generate income through the monthly subscription fees.
“It’s a bit wacky – and potentially risky,” said Wilbanks, senior director and chief investment officer at Wilbanks, Smith & Thomas Asset Management, based in Norfolk, Va., And No. 41 on CNBC’s FA 100. “You have to get it. Up and running, find members, advertise.”
The client will likely need to inject around $ 1.5 million to $ 2 million into the project, Wilbanks said.
“But it’s a pretty good investment,” he added. “There are all these dog parks out there that are big with millennials.
“It was a great eye-opening experience for me.”
As we look to 2022, CNBC’s Financial Advisors Summit will bring together forward-thinking advisors like the FA 100 companies to hear from industry heavyweights on the state of the markets and share innovative ways to meet needs. of their customers. Sign up to join us December 8.