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Broader Horizons

Investments are a good way to grow your business and strengthen your relationships with your clients.

By Janet C. Arrowood

Our world of financial services continues to change by leaps and bounds. Soon, banks and insurance companies will be integrated entities, and maybe one day we will have at least some of our Social Security contributions invested in mutual funds (a story for another time). So we must change the way we do business.

There was a time, not so long ago, when the attractive returns of interest-rate sensitive life insurance made investing in other products seem almost superfluous. Then came steadily falling interest rates, exploding policies and clients who expected more from their money. So, what are we waiting for?

Consider the following facts and projections:

There are over 8,000 mutual funds out there today. Some have sales loads and some don’t. If you aren’t a registered investment advisor (RIA) or otherwise able to manage money for a fee, you are probably limited to offering the funds with sales loads. In fact, if you even discuss no-load funds, your broker-dealer may consider your actions to be “selling away,” a definite no-no.

Many studies indicate that investors who work with a registered representative are less likely to take their money out of their investments during market downturns. I believe that’s because a good registered rep educates his or her clients to understand that these downturns happen, and not to panic. In addition, a rep has some good reasons to keep in touch. Downturns represent a buying opportunity, as such: “If you liked the mutual fund (stock) so much when it was at $50 per share, you should love it at $35 per share” or, “If you liked the suit at $200, it will look like a bargain for $100.”

Managing a large portfolio of client assets in mutual funds, variable annuities and (sometimes) variable life insurance can be a way to prepare for your future retirement. If you have $20 million under management and the trailers are based on 0.25 percent of these assets, the gross dealer concession is $50,000 per year. If your broker-dealer pays you 75 percent of this amount, you are receiving a “retirement annuity” of $37,500 per year. If the overall trend of the stock market is upward (although the past is no predictor of the future), your “retirement annuity” might grow a bit, unless your clients take out more than the annual dividends and gains when they retire. This money is income to you that picks up steam just as the renewals and service fees from more traditional life insurance products are fading away.

How do you get this $20 million portfolio? There are a number of places to find the money. Three of my favorites are pension rollovers, small company pension plan implementations and investors who contribute regular amounts of money every month (the proverbial dollar-cost averaging approach to wealth accumulation). If you are able to increase the amount of money you manage (in funds) by $1 million per year, you could have $20 million under management in 10 to 12 years, depending on market performance. In addition, you would earn about $24,000 to $48,000 depending on your broker-dealer and the actual sales charges.

How do you accumulate $1 million in assets under management in one year? If you approach all your existing clients to start contributing $100 per month into a mutual fund (or possibly a variable annuity), and you get 100 clients to start this dollar-cost averaging plan, you will have attained $120,000 per year of your goal. If you set up three SIMPLE IRA pension plans per month, and the average annual contribution per plan is $15,000, you will have another $540,000. The remaining $340,000 could come from 401(k) rollovers when clients or prospects change jobs. The business is right in front of you, in your current book of business, contacts and prospects. Many of them will welcome your call.

Once you have decided to take the plunge and broaden your market to include (more) securities sales, what do you need to know to keep compliance happy and the regulators at bay?

First of all, keep good records. You need to keep copies of all client statements readily accessible for at least two years and in storage for another three or more. Keep all client correspondence for the same amount of time. If you are an RIA, the requirements are even stricter. If you get a complaint from a client (in writing or by telephone), notify your compliance department immediately. Send them copies of relevant files and correspondence. Keep a separate file of compliance correspondence and materials.

Make sure you have professional liability insurance (“errors and omissions”) that covers your insurance, variable products and securities activities, as well as RIA activities when applicable. It is a good idea to make sure that the policy includes a “duty to defend” provision and a “first dollar defense” provision, as well as at least $1 million of actual coverage per incident/per year.

Investments are a good way to grow your business and strengthen your relationships with your clients.

Janet Arrowood is managing director of Investment Decisions, Inc., in Denver, a provider of advanced business and estate planning for business and individuals. She is a registered representative and has written for various business and legal media, including Colorado Lawyer and Denver Business Journal. She can be reached at 303-567-0996.


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