More On Legal & Compliancefrom The Advisor's Professional Library
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
How a friend’s death led a wirehouse broker to go independent; lessons learned from a difficult, delusional client; how to prevail against a client suing for alleged portfolio mismanagement—these are just a few of the stories the 30-year veteran advisor Bob Collins tells in a new book he hopes will inspire advisors to reach success.
Collins’ just published book, Principle Matters, tells the unlikely success story of a newly minted college graduate who in 1982 took his first job with a brokerage firm, First Jersey Securities, where the branch manager handed out scripts. He had not known the firm was a boiler room pushing penny stocks.
“I started on a Monday and quit on a Friday my first week in the business,” Collins told AdvisorOne in an interview. The firm’s CEO eventually went to jail, but Collins learned through a career strung with surprising ups and downs how to make it in an industry he feels fortunate to be a part of.
The 52-year-old principal of Bethesda, Md.-based Collins Investment Group, an independent broker clearing through Wells Fargo Advisors Financial Network (FiNet), heads a team managing around $600 million, and is a former Research Magazine Advisor Hall of Fame honoree and a Barron’s Top 1,000 Advisor.
But even just a few years ago things were not going so smoothly for Collins, having made the fateful decision to go independent just months before the Lehman bankruptcy that brought the market plunging.
Collins tells how the sudden death of a friend, in his late 40s, sparked the decision to go independent, with all the difficulties such a move can entail for a wirehouse broker. Collins started worrying about what would happen to his wife and his daughter if he were unexpectedly to die.
And on the business side, “I started thinking about what would happen to my team if I got hit by a bus. My team would have to find new jobs and everything I built up just implodes. That is probably the No. 1 reason why I left.”
Wirehouses, at least at that time, he said, just divvied up the clients and dissolved the team that managed the business. Wirehouses today have some better policies to address succession, but the approach then, he said, was “I hope you have a lot of life insurance.”
The move was costly and risky. Collins had to leave behind nearly $1 million in forgone retention bonuses and would have to pay a percentage of first-year revenue to buy his book of business.
Bouyed by an outside valuation that valued his business at something like four times the retention money, Collins determined the pain could be endured to free him and his team to build their business independently.
“In a corporate situation you don’t control your own destiny,” he says.
What he could not have foreseen, though, was the Lehman crisis, which brought about a litany of woes: “assets dropping; fees dropping; clients getting nervous; and [I had a] team of eight with a lot of overhead.
“My clients got through the crisis because their income off their principal did not drop dramatically,” said Collins, adding that he always told his clients: ‘You never want to count on the stock market to pay your bills.’”
But the advisor found that to survive the downturn, he had to suspend that principle himself, dipping into his own capital in early 2009, to weather the storm.
“There were months there where I had to go against my cardinal rule about going into principal. So I made a decision to take it quarter by quarter.” Collins said the market bottomed out by the spring of 2009 and by September of that year, the business was on a secure footing.
That fact that his incipient firm survived Lehman and has gone on to thrive suggests to him that “high-end advisors don’t need wirehouses anymore. I predict that more and more higher-end advisors will leave the wirehouses and start their own businesses.”
Another lesson learned from going independent?
“I’m a better advisor [today] by owning my own business.”
Collins recounts other lessons in the book, including one learned from a client called Frieda. An unmarried woman with just a high school diploma, Frieda was the daughter of a New York City cab driver and suffered from mental illness. Despite her humble background, she had slowly built up a portfolio worth $1 million. She had no close relatives other than an estranged brother.
“As a team we discussed firing Frieda many times because she was verbally abusive; I left it up to the team to vote,” Collins said.
The team decided to keep her on, and indeed came through for her in her hour of need.
“One night walking the streets in a delusional state, Frieda wound up taken to a mental hospital. I helped her hire social workers.”
This experience with a difficult client taught Collins his business was not about making money but about making a difference. “It’s about taking care of people, about why an advisor should go beyond duty,” he says.
“We are making a difference in people’s lives. That’s why our assets are going up in this negative environment,” he added.
Another key lesson the financial advisory business has taught Collins is the necessity of perseverance in the face of adversity. Despite the reluctance any advisor would have admitting to having been sued, Collins’ book details an arbitration brought on by a disgruntled client and how he won.
Back in the go-go late '90s, Collins had a real estate developer client eager to take on risk to increase his portfolio returns. Collins had arranged for the client to devote 10% of his investment net worth to aggressive investments, which were doing quite well in 1998-1999.
“He wanted to take money out of his conservative portfolio and put it in his fast-paced portfolio. I said, ‘Send me a letter and explain to me in detail' why he wanted to do this.
"Months later he wanted to do it again,” so Collins asked him to write another detailed letter. When the tech sector exploded in 2000, the client sued Collins.
To win the case, Collins' lawyers used a simple but compelling strategy. They blew up the two letters to 6 feet by 4 feet, and kept pointing back to the letters every time the client's attorney made a point about broker malfeasance.
“Firms always want [advisors] to settle, but I took the risk of fighting it and I won it,” Collins says.
His book details another trying legal challenge when the FBI drew him into their investigation of a client suspected of fraud. “The legal people were telling me to get rid of client at a time when the family needed me most,” Collins said.
The lesson this teaches brokers, he says, is the need to persevere. “It’s unusual when situations like this happen; but when they do happen, you can’t quit, you can’t run,” Collins says.
That’s also a lesson Collins took to heart when he took upon himself the difficult task of publishing a book of this kind and pushing it through compliance. “Lawyers and compliance don’t want you to do anything. But I just wanted to give back some nuggets to the world in our industry and outside of the industry," he says. "You’ve got to have principles and goals.”