This is a good news-bad news case study. I was a fairly new stock broker in 1987 (that is what they called us before we became “Financial Advisors”). I opened an account or a retired postman who had his pension but had also saved $216,000 for retirement. The client decided to split his $216,000 between me and a broker at another major brokerage house. He had never married and had no children. In the months that followed, I would suggest each time we talked that he consolidate the monies with me. I am pretty certain the other broker was suggesting he be given the total as well. With little traction, eventually, I quit suggesting consolidation.
A few years later, my client called and said that, since his account now topped $1 million, he wanted to come buy me lunch. He did. During that lunch he said he should transfer the other account to me. I asked how it had done. He told me the other advisor had laid out a well-conceived financial plan with graphs and pie charts and statistical analysis. The account was invested across a broad spectrum of assets and well diversified. However, while his account with me had grown from $108,000 to over $1 million, the other account had only grown from $108,000 to $140,000 over the ten or so years since he had split the lump sum.
My first reaction was to suggest he keep the account with the other financial advisor so he would have a measure of how I had helped him. But that was not in his best interest and he moved the account to me.
Now, this client was a very kindhearted man and often approached by homeless people, and he would give them $20 or so to cut his lawn or wash his windows or do some other chores around his house. Within a few months after he consolidated his accounts with me, he was approached by a homeless guy who asked for $20. My client refused, saying that the last time he had given the guy $20 to mow his lawn the homeless person took the $20 but never cut the lawn. So the client refused. The homeless guy attacked my client, knocked him down and kicked him time after time in the head. My client was left brain damaged. The homeless guy went to prison for three years.
The bad news was that the client had brain damage that left him with such diminished mental capacity that he required a special skilled nursing brain damage facility. The good news is he had the financial capability to afford to pay for such a facility with his pension monies and earnings from the account he had with me.
Over 20 years have passed since he went into the skilled nursing facility. He is now in his late 90s and has had the financial ability to afford the brain care facility. Had his account continued with the other broker he would have probably been a ward of the state, living a very different life.
There is a reason to build a margin of safety. There are unexpected and unplanned events in each of our lives. Some we can handle without great financial burden. Others may not be so easy.
My focus is to build a margin of safety into each client’s portfolio. Do you have a margin of safety? Are you building a margin of safety for the unexpected?
Update on the Incentive Profit Sharing Account
At the end of July $1,000,000 would have grown to $2,033,945 compared to the S&P 500 TR at $1,110,157net of all costs and sharing. Yes, a $1 million initiated in February 2020 has doubled by the end of July!
The Incentive Profit Sharing Account has only become available recently. Regulators require a minimum account value of $1,000,000 and net worth of $2.1 million excluding home. Morningstar does monthly reports on the Long/Short Profit Sharing Account. It is GIPS compliant. The growth accounts are compiled on a quarterly basis.
President & Principal