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Sometimes It Pays to Beware of Newcomers

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When you own and operate a small business, it’s critical to keep a close eye on expenses. Moreover, in the budgeting process, expenses are often easier to control than income. Even though expenses are more easily controlled, bad decisions can still cost you. In this post, I’ll share such an experience and discuss the lesson I learned in the process.

Most advisors have a good idea of what they’d like their business to look like before they begin. I was no different. However, this “vision” also requires a capital outlay. And, as I mentioned, advisors must make good decisions about where they allocate their resources.

For example, all advisors need tools to conduct research. There are a number of good-quality software offerings on the market that require a financial commitment. Once the decision on a particular piece of software is made, there are a few additional decisions that need to be addressed. These decisions may include such things as the time commitment and the structure of the payment. It’s typical that committing to a longer term will produce a lower price per annum. This is exactly what I found to be the case in mid-2010, when, in retrospect, I made a bad decision.

When I passed the two-year point as an independent RIA, I entered into a three-year subscription with a relatively new software company. Their portfolio management tool was quite intriguing, and I was very excited. But unfortunately, six months into the contract, the company decided to exit the software business and become a portfolio subadvisor. They said they would continue to support their software subscribers, but their main focus had changed.

The mistake I made was accepting a long-term contract with a relatively new company. This is because a new company is more prone to change directions as they re-evaluate and refine their strategy.

I made a commitment to pay monthly installments and the company sold my contract to a leasing company so they could receive the entire subscription fee up front. Thus, I had little recourse with the company. I spoke with a couple of attorneys and found I could have sued the company, but after the expense of a lawsuit, it would have cost me more than it was worth. Hence, I resigned to take my lumps and pay the monthly fee. Fortunately, I had adequate income to support this decision, but it was a hard lesson. I’m happy to report that the contract (and my last payment) ends this July. This was a lesson well learned.

To summarize: Be very careful before entering into a long-term subscription with a new company.