Adviser Lee Munson with his guests at a shooting range. For every prospect, there's a firearm -- and an investing strategy to pitch. Photograph by Jared McMillen for SmartMoney.
The CNY Healing Arts Wellness Center & Spa, a facility just outside Albany, N.Y., draws a big crowd on weekends. On this particular day, a group of mostly middle-aged women have gathered in an earth-toned room where life-affirming aphorisms are posted on the walls. Dancing is silent poetry, reads one. But as the women enjoy a series of salon services a chair massage, a facial steam, a softening of the hands in paraffin wax a dance of a different sort starts to play itself out. While the women get pampered, hosts Lisa Miller and Eileen Price steer the talk toward topics like wills, trusts and long-term-care insurance hardly typical chatter for a relaxing weekend.
The hosts want their guests to enjoy themselves, of course. But they also want to plant a few ideas in their heads like the thought that they might need an expert to guide their financial lives and manage their money. For Miller and Price, the invitation-only event is a business-building tool for their growing practice with the adviser-and-broker arm of financial giant AXA Equitable: Even the most investing-averse prospects aren't likely to turn down a free back rub, much less duck out in the middle of one. "This is the sugar with your medicine," says Price.
These days, the deal-sweetening can turn into a case of sugar shock. Forget the tried-and-true sales methods of previous generations glossy mailings, cold calls or maybe a ho-hum luncheon presentation at the Lions Club. In an effort to grab a larger share of the more than $10 trillion that Americans have invested through financial professionals, the country's 325,000-plus advisers are employing a range of clever, pricey or just plain over-the-top tactics to woo clients. An adviser in California has rented out a movie theater so prospects can enjoy the latest Pirates of the Caribbean film with their kids. Another, in New York, stages elaborately themed parties and dresses up in appropriate attire say, as Zorro for a Spanish-style bash to work the crowd. And still another in New Mexico parlays a fascination with weaponry of all kinds, from vintage submachine guns to safari-worthy hunting rifles, into prospecting outings at the local shooting range. Call it firearms-meets-personal finance.
And call it all pricey and dicey prospecting. By many measures, advisers are increasing (or planning to increase) the time and money they devote to bringing in new clients a big change from the days when many merely relied on referrals from existing clients to boost their practices. According to a 2010 survey by SEI, a consulting firm that works with more than 6,500 financial professionals, 66 percent of advisers say growing their business is their top priority. (By contrast, just 25 percent say they need to meet with current clients more frequently.) To critics, the emphasis on aggressive solicitation has the potential to demean a profession that's already been tarnished in recent years by Ponzi schemers and misguided money managers. While the ethical lines aren't always clear, experts say advisers can go too far when spending on a potential client is out of proportion or when a "free" event turns into a heavy-handed sales push.
Some of the biggest critics of the new tactics are veteran financial professionals, who say potential clients should be sold solely on the strength of an adviser's service and investment strategies. Bruce Fenton, president and founder of Atlantic Financial, a Massachusetts-based investment firm, says good advisers spend less time on selling and more time learning about investments and taking care of clients. He also argues that serious clients can see past the pomp. "Would people pick a doctor based on how good of a bowling party he threw?" he asks.
Behind all this salesmanship> is an industry in flux. After a "lost decade" of subpar stock market returns and a loss of faith in the country's financial institutions, plenty of advisers are hurting. Many have seen frustrated or panicked clients walk out the door. But even advisers fortunate enough to hold on to their clients have been stung by market declines, since many base their fees on a percentage of client assets. And while the recent market rally has provided some relief advisers saw their average annual revenue go from $488,000 in 2008 to $522,000 in 2010, according to PriceMetrix, which tracks the industry the numbers aren't completely encouraging. Advisers who depend on fee-based accounts have seen the average size of those accounts drop from $289,000 to $255,000 since 2008. The bottom line: If advisers are earning more, they're probably also working harder to make those numbers happen
But there's another fundamental change behind the sales push an industry shift from large brokerage firms to smaller independent practices. In 2010 the ranks of registered investment advisers who are not brokers a key group of independent practitioners increased by 12 percent, to 22,000, according to an estimate from Cerulli Associates, the largest such growth over the past five years. That means financial professionals who once depended on Wall Street giants to do the heavy lifting at least when it came to marketing must carry that burden themselves. Even the most marketing-savvy independent adviser can probably afford to spend only a few thousand dollars on advertising each year. By contrast, Bank of America, which now owns investment giant Merrill Lynch, spent $2 billion on marketing in 2010, with much of that sum going to promote Merrill's "thundering herd." For many advisers, "being with Merrill Lynch or Smith Barney was enough to get them clients," says Kevin Dinino, a San Diego based publicist who works with advisers. Now, he says, "they're all asking, 'How the heck am I going to get business?'"
For many, the answer is to network in new ways even in the name of ending the spread of polio. Christopher Kimball, a financial planner with a big insurance company in Lakewood, Wash., has found clients through Woodstick, a fund-raiser he hosts in which hundreds of drummers take part in what amounts to a massive jam session. He came up with the approach several years ago, when he realized that cold calling was no longer a viable option to boost his practice the advent of caller ID and the do-not-call registry spelled the decline of that time-honored sales approach. So he drummed up business by, well, drumming and benefiting a worthy cause (in this case, charities that support everything from school music programs to terminally ill children) at the same time. While Kimball says he doesn't make a direct pitch for his practice at the event, he sees the gathering as an effective marketing tool. "If people like you and see that you're genuine, they'll ask about what you do," he says.
For Lee Munson, chief investment officer of Portfolio in Albuquerque, N.M., being genuine translates to a day at the shooting range. The veteran adviser, whose firm manages around $125 million in assets for 100-plus clients, invites current and prospective clients for a little target practice, using an array of guns that Munson and the guests themselves provide. The gatherings may seem unusual to the firearm-phobic, but not to the wealthy, outdoorsy clientele that Munson cultivates. But the real benefit, says the adviser, is the bonding that occurs and the one or two new loyal clients that each event inevitably generates. "You can go to dinner, you can play golf, but when you start shooting guns with a client, those are lifetime clients," he says.
Some prospects may require a softer touch, and that helps explain why spa retreats are a popular option among female advisers targeting female clients. Three times a year, Julie Murphy Casserly, founder of JMC Wealth Management in Chicago, flies salon specialists in from California to tend to her current and prospective clients. This is hairstyling and massage with a feng shui orientation, meaning the specialists try to match an individual's natural essence to the techniques they employ. (Think fire, wood or metal as the inspiration for your next haircut.) As prospecting events go, it's unusual, but also, Casserly says, unusually effective; she says she's never had to make a cold call in her 15-plus years in business. "I'm a big believer that you have to let your own freak flag fly," she says.
But when does> a freak flag become a red flag? Regulators rarely have an issue with an adviser treating a potential client to a reasonably priced perk say, lunch at a midrange chain restaurant. It's when the perk is accompanied by a questionable sales spiel that an issue arises. "Bad behavior can be associated with a particular type of marketing," says Robert Plaze, an associate director of the Securities and Exchange Commission, which has overall regulatory authority over advisers. The SEC has taken action against advisers for luring seniors to free "educational" lunches that turn out to be little more than product-pushing sessions. In a 2007 report coauthored by other regulators, the agency said more than half the luncheon gatherings it reviewed appeared to fail to comply with federal standards. The agency said some advisers marketed the events by making "misleading or exaggerated claims" about the products they were selling or failed to make it clear that they had a vested interest in the investments they were touting. Senior-advocacy group AARP estimates that nearly 6 million seniors have attended "free" lunches that often turned out not to be so free.
Even when regulators spot potential problems with prospecting, they can't always do much about it. Despite the financial scandals of recent years, the agency has seen its full-time staff decline during the past half-decade, from 3,851 employees in 2005 to 3,748 in 2010. And while the agency has increased the number of "enforcement actions" it has initiated against advisers during that period, the growth has been relatively small, from 95 in 2005 to 107 in 2010. Perhaps more significant is the fact that, at current rates of investigation, advisers who fall under the agency's direct purview essentially, all advisers except for brokers who work strictly on commission can expect to be examined less than once every 11 years. (The SEC recently acknowledged problems with its exams, attributing them in part to staff shortages, but says it is beefing up the exam program.)
Brokers essentially fall under their own watch via a broker-funded regulator, the Financial Industry Regulatory Authority, which is overseen by the SEC. Some critics question how effective such self-policing can be. "It goes without saying that industry representatives will be more sympathetic to industry needs," writes securities attorney Stephen J. Nelson. Finra says that it has proved itself an effective watchdog in 2010 it filed 1,310 disciplinary actions against member firms, an increase of 13 percent from the previous year and that it examines brokers at least once every four years. But Finra Chairman Richard Ketchum acknowledges that the prospecting issue could merit a closer look, beyond the senior lunches. "If those things are being used to suck people into a relationship [that eventually goes bad], then that's a concern," he says. (To read an interview with Ketchum, see page 70.)
Robert Pietrasko, a retired federal employee who lives in Moriches, N.Y., says he knows firsthand what it means to be wined and dined by a financial professional, only to have significant regrets after the fact. Pietrasko attended a dinner at an upscale American eatery in his area, hosted by a local advisory firm. He says that from the "long-legged, good-looking blonde" who greeted invitees at the door, to the cocktails that came with the meal, every detail of the event left an impression that this was a firm that liked to cater to its clients. But Pietrasko says that after signing on as a client and losing $50,000 in a series of investments, he grew disillusioned. He's since moved his money to a different adviser. "I'd rather skip the bull...and get right to meeting the person in their office," he says.
Pietrasko's experience is far from unique. When problems do occur with advisers who prospect aggressively, it's often in tandem with investments that are loaded with fees or that have hidden risks. In its examination of those "free" senior lunches, the SEC cited variable annuities, equity-indexed annuities, real estate investment trusts, mutual funds, reverse mortgages and "private placements" in speculative securities (including oil and gas interests) as products that came up time and again. That doesn't mean such investments are automatically bad, of course, but industry experts say it does indicate that investors should be on high alert.
For their part>, advisers who prospect in creative ways say they're happy to skip the spiel if a potential client prefers it that way. But they also say there's a big difference between hard-sell events and socially oriented ones where it's more about adviser and prospect getting to know each other without a deep discussion of finances or signing on the dotted line. Advisers also argue that clients need a level of comfort and familiarity with them. So why not begin the process by meeting in an engaging setting outside the office, such as the shooting range? "When I'm back in the office, we can talk about the stock market all day long," says Munson, the Albuquerque financial adviser.
In some ways, the new prospecting techniques are simply a matter of changing with the times. Today's advisers are largely targeting the 70 million plus baby boomers, a market that looks for adventure and enlightenment at every turn. So while a lunch at the club or a round of 18 holes could be considered pass , a gathering at a yoga studio or night at a jazz club might be welcome. Aaron Schindler, a financial planner with the New York based Wealth Advisory Group, favors those kinds of approaches. He describes his boomer-age clients as curious and urbane, and he wants to forge a bond with them by showing he speaks their language. "In an environment marked by general distrust of the financial industry, these events strike a cultural chord," he says.
Which brings us back to that upstate New York spa party hosted by advisers Lisa Miller and Eileen Price. For the guests on hand, it translated to a feeling of goodwill toward the hosts. It didn't hurt that those prospects may have been the beneficiaries of some added pampering and perhaps an extra glass of wine or bite of sushi from the spread Miller and Price provided, since a few expected attendees failed to show. But was it enough to persuade them to become clients or at least to schedule that all-important follow-up meeting? "It's getting me to think about it," says Giulia Earle-Richardson, a medical researcher from nearby Oneonta, speaking after her turn at the paraffin-wax station. (She later signed on.)
The advisers, who spent $500 on the event, seemed neither thrilled nor disappointed by the results. Prospects take time to nurture and often don't commit to a meeting until a key event like marriage, divorce or death all but forces them to consider their financial situation. A day at the spa is nothing more than a door-opener. And while some may question what paraffin waxing has to do with financial planning, Miller and Price have no qualms about the appropriateness of their approach. "We want to have people come to something, chat with us and get to know us so that they feel comfortable," says Miller. Which means there will be more spa and other prospecting events ahead. "People are test-driving us in a nonthreatening way," says Miller. In other words, the dance continues.