Years ago, when I worked as a financial advisor at a major brokerage firm, we learned highly sophisticated ways to analyze clients’ investment ideas so we could consistently tell them “no.”
I recall the time my client wanted to invest in a promising real estate project in his hometown. I sent it to my firm’s real estate department for review. I also shared the opportunity with my manager. Ultimately, we wound up pitching the client on investing in the firm’s upcoming private real estate fund and passing on the local project.
At the time, I was a young advisor and did not know any better. I really believed the firm’s experts had a much higher likelihood of producing a successful real estate project than the local team in the client’s backyard.
And then 2008 came. Some of the smartest investors in the world got caught with their pants down. There was carnage in every risk asset in the world, including the private real estate fund I convinced the client to choose over the local opportunity. The leverage taken on by the fund wiped out more than 50% of the fund’s net asset value. And with that, I learned a valuable lesson about investing: No one has a crystal ball — not even the sharpest people.
All anyone can do is their best at devising an investment hypothesis and executing it. All investments involve an element of chance and risk. And yet we consistently tell our clients that we are smarter than them. That our ideas are better than theirs.
QuoteI don’t want every advisor to become a yes man. But we should be more open-minded and not eschew investment ideas simply because they are out of our comfort zone.
Financial advisors have a natural incentive to say no to opportunities that remove capital from the portfolios they are managing. It’s an unspoken conflict of interest that gets very little attention — the more clients remove money from their portfolios, the more it reduces compensation to the fee-based advisor. This is short-term thinking that will ultimately backfire.
What becomes of a one-note relationship where the advisor always says no? It leads clients to distrust our advice overall. It exposes our bias. It tells the client that their opinions don’t matter. We create an intellectual hierarchy where we see ourselves as the smart ones in the relationship. Although our clients are the ones who made the money in the first place, we are silently telling them that they can no longer trust their own instincts. It leads them to do things behind our backs, often without the benefit of our wisdom.
When I left the bulge-bracket brokerage firm, I felt like my blinders had been removed. I started an RIA in 2012, and decided I wanted to do things differently. I wanted to figure out ways to say yes. Maybe not every time — but certainly more often than in my former life.
My new philosophy was tested pretty early on. One of my clients had recently retired from a nine-year NFL career. Although he had a phenomenally well-diversified and economically productive portfolio, he started sending me an onslaught of investment opportunities that had come his way. His financial plan had been executed flawlessly, but he was a 31-year-old, already set for life as a millionaire. He had nothing but time on his hands. It became apparent that he was going to invest in a business whether I liked it or not. He wanted to get his hands dirty, and I couldn’t stop him.
I tried to be open-minded, but the deals that came across his desk were terrible. In almost every case, he would put up the bulk of the capital, but would own a minority equity stake, with no control over the decisions of the business. I needed to find something to which I could comfortably say “yes.”
I decided to help the client evaluate franchising opportunities. Franchising seemed similar to football, where the coach draws up the play and the players go out on the field to execute. My client and I proceeded to crisscross the country, meeting with potential franchisors.
Ultimately, we landed on a fitness concept that seemed like a good fit. We evaluated the management team together. I ran the numbers and helped him negotiate a favorable franchise agreement. I advised him to structure the business entity in a way that gave him a majority equity stake, and the management control he deserved. I built a team of professionals around him, from franchise attorneys, to real estate attorneys to fitness industry experts and commercial realtors. This project gave me a chance to put my full skill set to work for him.
QuoteFinancial advisors have a natural incentive to say no to opportunities that remove capital from the portfolios they are managing. Saying yes produced outstanding results for my client and my business.
Saying yes produced outstanding results for my client and my business. First, the investment gave my client’s professional life renewed purpose, as he transitioned from the NFL to the life of a business owner. Second, the process solidified my relationship with the client better than ever before. Lastly, it added a new expertise to my practice that would attract more clients in the future.
I have several other stories where saying yes has yielded similar results. One involves a real estate deal that would have been a complete disaster were it not for my advice on structuring the deal and imposing an iron-clad contract.
I don’t want every advisor to run out and become a yes man or woman. But I do want you to be more open-minded. We can’t eschew investment opportunities simply because they are out of our comfort zone, or because we didn’t think of them first.
Ultimately, I believe our clients want more than advisors. They want partners who help them not only reach their financial goals, but also help them express themselves through their money and investments.
And it starts by saying “yes.”