I was on a panel earlier this year at the ComCap conference in Portland, discussing how my colleagues and I manage to do what other financial advisors seem incapable, unwilling, or downright frightened to do. Audience members recounted tales of bringing this taboo investment subject up to their financial advisors, only to be rebuked, scolded, and dismissed.
What strikes such fear into the hearts of financial advisors? Local investing.
As more and more investors seek to move some of their money from the global financial system into their local economy, their advisors can present a roadblock. The truth is, many financial advisors are held back by some mix of compliance restrictions, lack of knowledge, fear of change, and/or fear of litigation.
Over the last five years, I’ve transformed my financing advising capacity from a typical restricted sales-driven, broker-dealer market listed securities job, to a liberating and free independent impact-driven investment advising and community education career. Along the way I’ve lost track of how many times I’ve had similar exchanges as the one above.
I’m writing this post for my fellow advisors—not because I want to convince you to care, but because I want to let you know that sooner or later, your clients will make you care. This is really a post about client retention.
Even I Have Disclosures
I’m the Chief Compliance Officer and Principal of our ragtag independent registered investment advisory (RIA) firm, Revalue. It’s my job to keep our clients safe and to not give anyone a reason to take issue with us, whether they be investor or regulator. For the record, this article does not constitute professional or investment advice. What you do with your business is up to you; I’m only sharing what I’ve learned. I am not a securities attorney, therefore my interpretation of state and federal regulations may not be accurate. You should always consult your attorney in these matters. It’s also always worth noting that investing in privately held illiquid businesses in your community can carry high risk. If you’re an investor, please do find someone in your network of personal and professional relationships to help you as you decide how much and in what you decide to invest in your local community.
The Arms-Length Approach
I once heard a well-respected colleague, James Frazier from Natural Investments, describe how his firm balances clients’ demands for help with local investing with his firm’s compliance department’s cautiousness. He said, “We help people through an arms-length relationship.” We’ve done a bit of that too. If you work for a large firm, or even a small firm with strict investment guidelines, here are a few ways you can help your clients invest locally:
Municipal bond offerings
This is a tried and true method that is often overlooked as almost the ‘grandfather’ of local investing. These can meet the interests of clients who care about infrastructure, education, and even access to medicine. What we haven’t seen as much are municipal bonds for economic development initiatives. Every now and then you might find a local Industrial Development Revenue Bond (IDRB), but not often. Try reaching out to your local units of government to find out if they’re planning on issuing a new bond to the market.
Cash equivalents at local institutions
Every portfolio has cash and cash equivalents (money market or commercial paper), as well as low interest fixed income allocations (CDs). Most clients end up holding these in their Fidelity or E-Trade account because it is easy to do so. As an alternative, you could inform them about their local community banks and credit unions. Make a few calls and find out how much of the banks’ deposits are invested in local small businesses through lending. Find out what their CD rates by checking sites like bankrate.com. Communicate those to your client as they’re considering their cash options.
Teach them how to do due diligence
Sometimes I think there’s a fear that exists in the industry – that if clients knew how to do due diligence, then they wouldn’t need you. Or, the other fear I encounter, is the secret ‘fraud fear’ that no one wants to talk about. You know, that voice in the back of our heads that says things like ‘but they’ll find out the truth… that you don’t know how to do investment research either… you’re not an analyst”. In some ways, the voice is true. Many of us don’t know how to do analysis on an individual offering, because we were never taught. But we can change that by learning from each other, and teaching the public. There’s nothing in the rules that say you can’t teach people how to do their own due diligence. We hold classes to teach people—advisors and investors alike. Contact us to bring a workshop to your area.
Inform clients about investment clubs
Your compliance department might not want you organizing an investment club, or providing advice or guidance to an investment club, but that doesn’t mean that you couldn’t hold a workshop on how to start an investment club. You could cover the difference between pooled and unpooled clubs and provide links to resources. You could also provide a list of local investment clubs that you found online to your clients—look for clubs on sites like Meetup.com.
Point them toward intermediaries
There are other options in the marketplace that your compliance department may let you discuss. One example is the Calvert Foundation’s Community Investment Note (CIN). They have other interesting investment pools and campaigns, but the CIN is a pool that goes directly to communities in the U.S. You can easily find out where their investment activity has taken place and whether they are in your backyard or not. Calvert Foundation has a long 20+ year track record, which should pass muster with compliance, and they have a newer program called Ours To Own that targets investments in individual cities.
The All-In Freedom Approach
Or, you could go the route we did—embrace the possibly maybe inevitable fiduciary rules and launch
your own registered investment advisory (RIA) firm. It’s not nearly as daunting now as it once was. There are tons of out of the box solutions (literally) and advice via blog posts for starting your own practice. It may sound scary at first, but remember why your clients are with you in the first place – because of you. If you go this route, here are some of the more fun things you get to do:
Help make offerings happen
Maybe you don’t want to get in the middle of the deal, but what you could do is help put the parties in the same room. I’ll give you a real world example we’re working on right now. A local municipality would like to do a PACE bond offering to increase energy efficiency in commercial buildings. They would love to have local investors involved in this, but don’t know how to meet them or who they might be. Host a meeting, with proper disclosures that you are not endorsing this offering and have not performed due diligence on it (unless you have), but just make an introduction. If you are not profiting from the introduction or the investment, there is no conflict of interest.
Perform due diligence for groups of investors
While you can’t say that x investment is right for y investor without thoroughly knowing their financial situation, you can do research on a local offering and provide that research report to clients who have paid you for research services. The tripping point here is that most advisors determine that it’s not financially feasible to provide research that takes 10-15 hours (minimum) to complete at a price that a single client could afford. But could five clients pool their advising fees to have you do this research and provide it to all of them? Sure.
Help deal flow by speaking publicly
If you’re in one of the 35 states that has passed intrastate securities exemption rules over the last three years, then businesses in your community can raise capital from local investors. Call your state securities office and find out where your state stands on this movement. If your state is one of the 35, become educated on the exemption and make yourself available for local speaking engagements where you can explain what it is and where people can get more information. Your clients may want to invest locally and you may be excited about that, but you’ll find out quickly that without deal flow there are no deals.
I could write another thousand words about how you can, and absolutely need to, evolve your practice to meet this growing local capital repatriation movement. I honestly believe that a decade from now, an advisor who laughs a client out of their office or derides them for their “lunatic” notion that a responsible portion of their portfolio ought to be invested in something other than the global financial system, will himself be laughed out of the profession.
If the baby boomers’ rise in consciousness doesn’t convince you, the millennials complete abandonment of the 20th century financial industry tactics and standards should.
Here’s to a happy, free, and socio-economically relevant practice for all advisors!
Angela Barbash is the Principal and Founder of Revalue, an independent RIA in Michigan that serves values-driven and local impact investors. Angela is also a founding member of the National Coalition for Community Capital (NC3).