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Save Clients From Business Blunders

By Chris Latham August 6, 2014

Advisor Leon LaBrecque talked a robotics designer out of becoming a home builder. He stopped an auto industry executive from opening a hair salon. But he couldn’t keep an IT expert from buying into a car wash that went bust.

Financial advisors who catch clients on the brink of bad business decisions must make a decision of their own. Should they speak up and save clients from disasters that could very well harm their finances, or keep their noses out of a business they may know little about? It depends on the advisor-client relationship and what services the practice offers, experts say.

As managing partner of LJPR, an FT 300 RIA in Troy, Mich., with $660 million under management, LaBrecque often deals with entrepreneurs who feel emboldened to try new ventures — and thinks they have a tendency to overestimate their skills. Sometimes he knows from the start the scheme is doomed to be a dud. In the robotics designer’s case, LaBrecque asked the client what he knew about home building. When the answer appeared to be not much, the advisor suggested that investing in stocks would probably earn him more than constructing houses.

With the automobile executive, he stressed that hair salons have unreliable staffing and poor client retention. LaBrecque even offered to shred $100 bills in front of the client as an example of where his money would go. But the IT consultant was a lost cause. When LaBrecque reported he’d been able to pay cash at the supposedly credit-card-only car wash — a sign of theft — the client shrugged and went ahead with the deal.

“I view my job as being a fiduciary and protecting my client, not protecting my ego,” says LaBrecque. “If I overstep my bounds, my client will tell me.” In fact, the IT expert fired him, angry at the advisor for butting in.

Brian Power
Stubborn entrepreneurs may even reject warnings from advisors familiar with the business in question. When a client who owned a printing and promotional business told Brian Power he wanted to start making golf shirts and selling them to pro shops on golf courses, the concept sounded familiar. Power, a principal at Gateway Advisory in Westfield, N.J., with about $300 million under management, has another client who formerly marketed golf shirts.

Power connected the clients on a three-way phone call. The client who’d already done it fought hard to dissuade the eager entrepreneur, citing costs and barriers to entry, being blunt about how foolhardy he considered the idea. The warning failed, as did the second golf shirt venture. Five years later, the client who had rejected the advice has massive unpaid loans and is steeped in litigation.

Despite his efforts to make the client see reason, Power is hard on himself. “If only I had known more about the business, I could have done more, or maybe brought yet another person to the table,” he says. “But I didn’t know how much of a risk it was.”

Bad Exits

Another area where entrepreneurs often stumble is in buying a new business or selling their own, according to Michael Schwerdtfeger, managing director at Schaumburg, Ill.-based M&A consultancy Chapman Associates. Schwerdtfeger says a conscientious advisor should ask — tactfully — to see the financial statements of a client’s business, as well as those of any company the client is thinking of merging into or acquiring. Even advisors who aren’t CFAs would probably catch any major cash flow issue.

Advisors are better suited to protect clients who are selling their businesses than those who are acquiring one, Schwerdtfeger says. That’s because sellers often fail to ensure that their businesses are properly valued and staffed — shortfalls an advisor can spot — whereas a target company may have inherent risks invisible to acquirer and advisor alike.

Clients preparing to exit their businesses may also falsely assume that adult children are natural choices to take over, according to advisor John Wheeler of Castle Wealth Advisors. The Indianapolis firm, which manages $195 million, also conducts valuations of clients’ businesses. Speaking against children in any way can be a minefield, Wheeler warns. Yet if the child has no training and is fresh out of school, for example, it’s appropriate to quiz the client on challenges the child might be unprepared to face.

“We feel comfortable giving our opinion if the client has given us consent to weigh in,” Wheeler says. “We’re not judging them to say right or wrong, but we are pointing out implications of what might be a bad decision.”