Practice Wise: How I Almost Lost a Client to a Broker

Sheryl Rowling’s new Practice Wise column is available first in Morningstar Office Cloud.

We have a client--actually a longtime client’s son--who has invested with us for almost a decade. We gave him the usual good client service--including informational quarterly letters, emails when the market was behaving badly--and we were always available to answer questions. His situation changed drastically when the company he invested in sold and his share was over $40 million--a far cry from the $100,000 he had with us from his father’s gifts.

Of course, we paid attention to him when the payday came in. We worked with him to create an appropriately diversified portfolio, did major tax planning, and even prepared his tax return. After year-end, we sent him a summary of all the great work we did and how much money he saved from our efforts.

So, we were taken by surprise when a broker from a household-name bank called to let us know our client would be transferring all of his portfolio to them because they could “work within his risk tolerance and provide for his cash flow needs.” I was outraged! After all we did for him, he was going to transfer his account to a nonfiduciary broker??!!

We had messed up, and there were several reasons:

1. He was not in the habit of reading emails unless we texted him first. (Maybe we should have realized this from his habit of texting us whenever he needed something.) Because we didn't text him about our email, I'm sure he never read it.
2. He lives out-of-state, and we never met face-to-face. This was a big mistake. Our excuse was his account was small until the big event, and he lived in a place we don't typically visit.
3. We didn't realize how unsophisticated he was about investing--probably a result of not meeting him in person.

I texted the client and got no response. Feeling helpless, I lamented the loss of revenue but was even more upset that he would be taken advantage of by a commission-seeking broker. Here’s where my employees saved the day. They recommended emailing him with the details of what we’d already done for him as well as the differences between a fiduciary and nonfiduciary. We explained the concept that a fiduciary gives advice in the client’s best interest.

Crucially, they suggested texting him to read the email and offering to meet with him in person.

He told me he appreciated the email and didn’t realize what he might be giving up. He said he would like for us to come see him. He also wanted us to meet with the broker. I agreed to meet with the broker on the condition that the client would be there, too, and I would meet with the client alone before and after.

So, I flew off to meet with the client the following week, prepared with a proper presentation and ready to meet the challenge.

The client was very appreciative and listened intently as I reviewed the presentation with him. We then drove to the broker’s office and gathered in a messy conference room. We sat down across from each other while I asked the broker questions.

Question: How did you start out in this business?

Answer: I was an engineer and then decided to do something else. I joined the bank 10 years ago, and now I'm a senior vice president on the brokerage side.

Question: So, you have at most 10 years of experience in the financial business?

Answer: Yes.

Question: Do you know I have 40 years of experience?

Answer: Don't flaunt your experience! Experience means nothing!

Question: You have an engineering degree; do you have any finance degrees, designations, or certifications?

Answer: I read the study guides. That was enough. By the way, you seem confrontational. Why is that?

Reply & Question: Aren't you the one who told my client you could do a better job with his money?

Answer: Yes, I did. I can get him 4% in bonds; you lost money for him last year.

Reply & Question: The market was down last year. We more than made up for that this year to date. We also created tax benefits worth over $600,000 for him from tax-loss harvesting. Were you aware of that?

Answer: Well, I asked a CPA friend of mine, and he said you can't tax-loss harvest with mutual funds.

Question: Really? I happen to know a lot about tax-efficient investing, and I can assure you that mutual funds can qualify for tax-loss harvesting.

Answer: Well, it's a gray area.

Reply & Question: No, it's not. But let's move on. Has your company ever had any issues with the SEC or Finra?

Answer: Of course, we have. We're a big company.

My client then asked if they ever had to make a settlement payment to a client as a result of a regulatory claim, and the broker's answer was yes. With that, the conversation ended. I kept the client. He told us he was surprised by the enormous differences between what my firm does versus the broker, and he was appreciative that we had made the trip to see him.

I also learned some lessons:

1. Make sure you communicate with clients in the way they prefer.
2. Know your clients--and meet with them face-to-face on a regular basis.
3. Toot your horn in a way each client can understand.
4. Lean on your employees; sometimes they know better than you!

This could have been a costly lesson. I feel lucky that it worked out. But I will never take a client for granted again!