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Financial advisors are often lauded for their investment acumen. Frequently, their biggest value is in saving clients from their worst impulses.
Indeed, top advisors on CNBC’s annual Financial Advisor 100 list have received ample requests for strange, risky or outright dumb investments during their careers — and, if left to their own devices, clients may have otherwise lost hundreds of thousands or millions of dollars.
“People still hope for the home run — that this scheme or this 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.”
About 20 years ago, a longtime client approached Rea with a supposedly winning idea: buying coin-operated pay phones.
Cellular communication, then ascendant, was a fad, and pay phones would come back in vogue once Americans lost interest, he believed.
The client, a retiree, was willing to stake his entire individual retirement account, worth $1 million, on the venture.
Of course, Apple debuted the iPhone in 2007 and the rest is history. About 97% of Americans own a cell phone of some kind; 85% of them have a smartphone, up from 35% in 2011, according to the Pew Research Center.
Meanwhile, just 5% of the 2 million pay phones in the U.S. in 1999 are still around today.
“It would have been a life changer,” Rea said of the client. “[His account] would have gone to zero.”
Luckily, Rea was able to dissuade the person from investing. He’d been pitched the pay-phone idea by an individual who’d promised lofty returns; the hype man also had a spotty disciplinary record and couldn’t furnish a prospectus with basic investment information, Rea said.
All three are telltale signs of potential trouble.
“I was able to talk the client off the ledge, thank goodness,” Rea said. “Sure enough, I think cell phones have caught on.”
Sometimes, advisors can only do so much to curb a client’s animal spirits.
In the 1980s, a client of Mark Mirsberger bought hundreds of thousands of dollars’ worth of physical silver, over Mirsberger’s objections.
“The world is ending, I need silver,” recalled Mirsberger, CEO of Dana Investment Advisors in Waukesha, Wisconsin, which ranked No. 1 on CNBC’s FA 100, of 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?'” Mirsberger said.
Mirsberger located a coin dealer; after a 2% to 3% commission, the silver was worth less than it was 30 years earlier.
Decades later, Mirsberger was able to save another client from likely major losses in another “hot” investment. This time, it was stock in Zoom Video Communications, a video-conferencing company whose shares soared early in the Covid pandemic at a time when people couldn’t meet face-to-face.
The client was adamant about buying hundreds of thousands of dollars of stock in the ticker ZOOM. But there was one problem — that was the wrong ticker symbol. (The correct ticker is ZM — a fact Mirsberger luckily flagged before any money changed hands.)
ZOOM was a so-called penny stock issued by Zoom Technologies, which hadn’t made a public disclosure since 2015. The Securities and Exchange Commission halted trading in March 2020 because so many investors were making the mistake.
Research has shown behavioral coaching to be perhaps the most impactful part a financial advisor’s job.
Advisors can add about 3% to clients’ net returns via seven key services, such as asset allocation, cost efficiency, portfolio rebalancing and spending strategy, according to a 2019 study published by Vanguard, a money manager.
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Investors get about half those returns from behavioral coaching (helping a client stay disciplined and control emotions) — accounting for the biggest share relative to other advisor services, according to Vanguard.
However, clients often don’t see that value. Investors ranked “helps me stay in control of my emotions” as the least valuable attribute of a financial advisor, among 15 choices, according to behavioral researchers at Morningstar.
“The advisor is there sometimes to protect people from themselves,” Mirsberger said.
Out-of-the-box investments aren’t necessarily all bad, if investors understand the risks and can withstand potentially heavy losses, advisors said.
Wayne Wilbanks, for example, is currently assessing the viability of building a brewpub near Orlando, Florida, that doubles as a dog park. It’s likely he’ll recommend moving forward with the investment, which would generate revenue from monthly subscription fees.
“It’s sort of wacky — and potentially risky,” said Wilbanks, managing principal and chief investment officer at Wilbanks, Smith & Thomas Asset Management, based in Norfolk, Virginia, and No. 41 on CNBC’s FA 100. “You have to get it up and running, find members, do the advertising.”
The client would likely need to pump about $1.5 million to $2 million into the project, Wilbanks said.
“But it’s a pretty neat investment,” he added. “There’s this whole world of dog parks that are big with millennials.
“This was a great eye-opening experience for me.”
As we look 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 the markets and share innovative ways to address the needs of their clients. Register to join us December 8th.