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Financial advisors are often praised for their investment acumen. Often their greatest asset is keeping customers from their worst impulses.
In fact, top advisors on CNBC’s annual Financial Advisor 100 list have received numerous inquiries about strange, risky, or completely stupid investments over the course of their careers – and if left to their own devices, clients could otherwise have lost hundreds of thousands or millions of dollars.
“People are still hoping for the home run – that this plan or idea will set the world on fire,” said David Rea, president of Salem Investment Counselors in Winston-Salem, North Carolina, which ranks # 2 on this year’s FA 100 “And they can be sold.”
Long live the payphone
About 20 years ago, a long-standing customer approached Rea with a supposedly successful idea: the purchase of payphones.
Cellular telephony, on the rise at the time, was a fad, and payphones would be fashionable again as soon as Americans lost interest, he believed.
The client, a retiree, was ready to put his entire individual retirement account, worth $ 1 million, into the company.
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Of course, Apple introduced the iPhone in 2007 and the rest is history. Approximately 97% of Americans own some type of cell phone; 85% of them own a smartphone, up from 35% in 2011, according to the Pew Research Center.
Meanwhile, there are only 5% of the 2 million payphones in the US in 1999.
“It would have changed life,” Rea said of the customer. “[His account] would have gone to zero. “
Fortunately, Rea was able to dissuade the person from investing. The pay phone idea had been conceived by someone who had promised high returns; the hype man also had patchy disciplinary records and couldn’t provide a prospectus with basic investment information, Rea said.
All three are tell-tale signs of potential trouble.
“Thank goodness I was able to persuade the customer,” said Rea. “Of course I think cell phones have caught on.”
Bags made of silver
Sometimes advisors can only do so much to curb a client’s animal spirits.
In the 1980s, against Mirsberger’s objections, a customer of Mark Mirsberger’s purchase of physical silver valued at hundreds of thousands of dollars.
(Investors often view silver, gold, and other physical assets as a safe haven in the event of heavy sell-offs on the stock market.)
“The world is ending, I need silver,” said Mirsberger, CEO of Dana Investment Advisors in Waukesha, Wisconsin, which ranks # 1 on CNBC’s FA 100, recalling the client’s thought process.
“Thirty years later he called us and said: ‘I have these bags of silver coins. How can I get rid of them?'” Said Mirsberger.
Mirsberger found a coin dealer; After a commission of 2% to 3%, the silver was worth less than it was 30 years earlier.
Decades later, Mirsberger was able to save another customer from likely major losses in another “hot” investment. This time it was a stock of Zoom Video Communications, a video conferencing company whose shares soared at the start of the Covid pandemic when people couldn’t meet in person.
The customer was eager to buy hundreds of thousands of dollars in stock on the ZOOM ticker. But there was one problem – that was the wrong ticker symbol. (The correct ticker is ZM – a fact that Mirsberger luckily marked before Geld changed hands.)
ZOOM was a so-called penny stock from Zoom Technologies that had not been publicly disclosed since 2015. The Securities and Exchange Commission stopped trading in March 2020 because so many investors made the mistake.
The most important job of a consultant?
Research has shown that behavioral coaching is perhaps the most powerful part of being a financial advisor.
According to a 2019 study by Vanguard, an asset manager, advisors can add around 3% to clients’ net returns through seven key services such as asset allocation, cost efficiency, portfolio rebalancing, and spending strategy.
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Investors get roughly half of those returns from behavioral coaching (which helps a client stay disciplined and control emotions) – the largest proportion compared to other advisory services, according to Vanguard.
However, customers often don’t see this value. According to Morningstar behavioral researchers, among 15 choices, investors ranked the least valuable quality of a financial advisor as “helping me control my emotions.”
“The consultant is sometimes there to protect people from themselves,” said Mirsberger.
Dog parks and beer
Out-of-the-box investing isn’t necessarily bad if investors understand the risks and can handle potentially heavy losses, the advisors said.
Wayne Wilbanks, for example, is currently exploring the feasibility of building a brewpub near Orlando, Florida that doubles as a dog park. It is likely that he will recommend proceeding with the investment that would generate income from monthly subscription fees.
“It’s kind of crazy – and potentially risky,” said Wilbanks, managing principal and chief investment officer at Wilbanks, Smith & Thomas Asset Management, located in Norfolk, Virginia, and number 41 on CNBC’s FA 100. “You have to get it in.” Start operating, find members, advertise. “
The customer would likely have to pump about $ 1.5 to 2 million into the project, Wilbanks said.
“But it’s a pretty nice investment,” he added. “There’s this whole world of dog parks that are big with millennials.
“It was a great experience that opened my eyes.”
Looking ahead to 2022, CNBC’s Financial Advisor Summit will bring together forward-thinking advisors like the FA 100 firms to hear from industry heavyweights about the state of markets and share innovative ways to meet their clients’ needs. Register to participate on December 8th.