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FEATURE STORY
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Weathering
The Mortgage Meltdown
By Susan Konig
The treacherous rollercoaster ride Wall Street has endured over the
past several months goes to show that, well, gravity is a force to be
reckoned with in the markets. What goes up must come down. But it also
underlines another fact: Today's financial system is thoroughly
interconnected. Mortgages were sold to investment firms, which sliced
them up and packaged them as securities based on risk. Then, hedge and
pension funds gobbled them up. The collapse in housing prices set off a
dire chain reaction: Lenders are tightening their standards, borrowers
are having a harder time refinancing loans, and the securities that
underpin them are, quite simply, in trouble.
As a result, more than a few brokers—and their clients—find
themselves in a bit of a panic. We asked some branch managers and other
industry experts for their advice on how branch managers, advisors and
clients might best deal with the situation—and, perhaps, even make a
little "lemonade" out of these "lemons." For the most part, they
recommended taking advantage of the current market volatility to stress
financial planning and long-term investing lessons with clients.
"Reps can say to their clients, 'With the market's volatility, let's run
a retirement plan analysis to make sure you're on track,’" says a
legacy Smith Barney BOM in N.Y. Also in terms of adding value, he notes,
most big firms have a mortgage capability—so there's an opportunity to
refinance a client's mortgage. “An investment may go up or down, but
helping a client refinance to a lower rate is a guaranteed winner.”
Another BOM in the south, who also asked that his name be withheld,
counseled lots of hand-holding. “Consistent client contact and
investment advice during bad markets is a great way to sow the seeds of
a vibrant business in the future. Sow now, reap later,” he says.
But that doesn’t mean you want to make lots of big changes in client
portfolios. In his recent "Economic and Market Review" report, Dr. Carl
E. Steidtmann, Chief Economist and Director of Consumer Business for
Deloitte Research in New York, offered the following advice for dealing
with the sub-prime mortgage crisis: "Most likely, clients shouldn’t
make massive changes in their portfolios; too often investors overreact
to this kind of news."
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(continuation
of article)
Tom Kane, a former financial consultant, branch manager and regional
sales manager who is president of Investment Business Solutions, LLC, a
wealt- management consulting firm in Fairfax Station, Va., offers the
following six steps to guide branch managers and advisors through these
tough times:
1.) Anticipate: Anticipate that the mortgage meltdown is
adversely affecting your advisors. “You would almost have to be
living under a rock not to understand that this impacts them,” Kane
says. “Though you may not be fully aware of the dramatic affect it has
on their lives.” Compounding a loss of income from a decrease in
production with the emotional strain of constant hand-holding, the
potential losses in their own portfolios, and losses associated with
their firms’ exposure—which could affect retirement accounts, 401(k)
plans, deferred compensation, etc.—can sap the energy or optimism out
of even the most stalwart professionals, he says.
2.) Educate: Don’t assume your advisors fully understand the
causes, effects and extent of the crisis. “It is your job to ensure
that each of your reps is an expert on sub-prime mortgages,
mortgage-backed securities, SIVs, the mortgage insurers, CDOs and the
like,” he says. Simply “assuming” that they not only understand
how these complex products and markets operate, but that they comprehend
the extent of the ripple effect caused by the recent meltdown as well
can be costly—if not downright deadly—to your business.
3.) Evaluate: “Ask yourself if you fully understand the
extent of the issues confronting you and your office,” he says.
“Have you done an assessment or analysis of the impact to portfolio
balances, account retention, significant positions in affected
securities, and the negative influence continued media coverage is
having on the markets in general and your firm in particular?”
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(continuation
of article)
Then, do the same with your reps. “If you do not assess the
problem’s specific effect on each and every one of them, you’ll
never know the true extent of your risk and opportunity. Sit down with
them and review their books—looking for ways to shore up relationships
and perhaps make some money in the process,” Kane says. “Perhaps
repositioning certain portfolios, or considering alternative investments
typically not in that broker’s mix, are strategies worth pursuing.”
4.) Participate: Your advisors need you to be their partner and
number one supporter, Kane says. But, you must diagnose before you
prescribe. “Get to know how the changes in the markets are affecting
the lives of your advisors on both a personal and professional level,”
he says. Try to consciously practice empathetic listening. Roll up your
sleeves, put on your boots and hop in the trench.” This may include
going on joint calls, helping put together an office-wide workshop for
existing clients. Take whatever steps are necessary for your team to see
that you are in this battle with them, he says.
5.) Initiate: This is where taking the offense is critical, Kane
says. “Other firms are going through the same crisis. If your firm is
not one of the behemoths caught in the middle of it all, you may be
positioned to take advantage of the situation—picking up unhappy
advisors and clients from your rivals. Regardless of your firm, your
advisors must be proactively calling clients to discuss this tumultuous
environment. Not doing so is akin to professional suicide. It’s your
job to ensure this is happening, and that they initiate these contacts
with the proper frequency and content.
For BOMs, it’s a great time to recruit. “Many advisors—hesitant to
move in the past because of stock options or other deferred
compensation—have seen these nest eggs drop by 50 percent or more,”
says Kane. “Additionally, if their manager isn’t giving them the
support they need, they’ll be intrigued and enticed by a progressive,
proactive management approach at such a critical time.”
6.) Motivate: Now more than ever, Kane says, advisors need to be
inspired. “I once heard sales defined as transference of enthusiasm.
It’s essential that you help your team stay energetic and upbeat. Keep
them focused on the long term, as they try to do the same for their
clients.”
Share a little market history with them, he says. “I recently dug up
some headlines from 1982, the true start of a period of sustained and
extended expansion affectionately referred to by many as the Super-Bull
Market. When I was a BOM, I reminded my advisors that on August 13,
1982, the Dow Jones Industrial average opened at 777. The market, which
bottomed on that day, rose 35 percent by the end of the year.
Unemployment was at 9.2 percent. Interest rates on T Bills peaked at
16.3 percent in 1981 with the 30-year Treasury at 15.4 percent. Then I
showed them a statement from a growth mutual fund I opened in 1981 with
$1,500; it grew at an annual rate of 10.55 percent, and is now worth
$16,542.”
Perspective is a great way to motivate advisors and investors, Kane
says. But, whatever methods you use—inspirational quotes, historical
events, accentuating positive results, etc.—you must provide constant
leadership and inspiration to your troops to not just survive 2008, but
to succeed.
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