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Why Advisors Can Approach Friends for Business

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Risk to the Friendship? Are They Really Serious?

“You can’t fire friends.” Advisors often rationalize why friends don’t approach them for business and vice versa. When you think about it, the “risk to the friendship” is always on the downside. If you doubled their money every three years, there would be no risk to the friendship. Zip. Zero. Nada. It’s when you lose them 20% a year over three years the risk emerges. They feel if the worst happened, they have lost both a friend and money. Is this a real or an imagined barrier?

Why It’s Imaginary – Scenario One

The argument gets turned upside down when you have something they want. Close your eyes. Name the person considered the smartest investor in the world. Now suppose they were taking on 100 retail clients. The minimum was modest. $ 100,000. You and only you were tasked with finding these 100 people. It’s big news. It makes the newspapers.

You approach your friend with this great opportunity. Will they say: “Smartest money manager in the world. It’s tempting, but no. I don’t do business with friends.” Absolutely not. They would approach you. They would insist you include them. They would play the friendship card. The guilt card too. Oh, they want their brother-in-law to get in on the opportunity too.

The rules changed when you had something in demand.

Back to the real world. Through your managed money platform, do you have access to a (possibly less famous) money manager that’s considered a genius? What’s the minimum account threshold? $ 100,000? Do they know you can do that for them? (Obviously suitability and asset allocation play a part in the decision making process.)

Related: 14 Ways to Get Clients to Take Money off the Table

Related: The Wobbly Relationship: Clients Who Jump

Why It’s Imaginary – Scenario Two

There are people who think the stock market is rigged. Shadowy professionals get in and out, leaving retail investors in the lurch. Years ago, they blamed hedge funds, thinking there are a handful or really smart people running them. According to Reuters in 2017 there were 9,754 hedge funds in total. (1) There are lots of smart people competing against other smart people.

Hedge funds aside, your friend is convinced there’s one firm out there that’s the best at investing. Why? Because those folks are really smart. They are predatory. Maybe the stuff they do is legal, but it’s not always moral. They operate in the grey area.

Ask your friend: “Who is the most despised firm on Wall Street?” They name one. Why? They give the reasons above. You mention they offer mutual funds and money managers available to the retail investor. You suggest “Why don’t we get them on your side? Put them to work for you!”

Why It’s Real – Scenario Three

They really like you. You married their brother. If the business relationship didn’t work out, holiday gatherings would be really uncomfortable. This might range from prolonged silence you them chasing the advisor with a meat cleaver as dishes fly everywhere. On the serious side, they truly value you as a friend. They don’t want to put the friendship at risk.

As an advisor, you might say: “If you become my client and take my advice, you should get a report card. If I’m doing a lousy job, you should be able to fire me.” The periodic portfolio reviews tracking progress to goals are the report cards.

You’ve done a couple of good things here:

  • You will report on how your suggestions worked out. Clients admire that trait. You stand by, not behind your advice. Not everyone does that.
  • Exit strategy. “If I’m doing a lousy job…” You explained how they can unwind the relationship if they choose. They don’t need to feel guilty, because it was your suggestion in the first place.

The report card strategy should go a long way towards putting them at ease concerning the perceived risk to the friendship.

In the first two cases, it’s a perceived problem. You can work through it. In the last case, it’s a real problem. You can also work through it, addressing their concerns.

https://www.reuters.com/article/us-hedgefunds-flows/more-hedge-funds-closed-than-started-globally-in-2017-idUSKBN1GZ33B
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