Lessons from Billionaires Who’ve Gone Broke

Dan Richards

One strategy for successful advisors is to focus your practice on a concentrated group of clients and develop specialized expertise in solving problems that generalist advisors can’t match. As a result, you become the safe choice for this group and word-of-mouth kicks in.

While there are big advantages to this approach, it does have its downsides. One unhappy client can damage your reputation. You could get hurt badly if the client segment you focus on encounters hard times (think real estate developers in 2007). And sometimes your client segment has qualities that can make dealing with them challenging.

A recent conversation with an advisor who focuses on successful business owners illustrated one of the downsides of working with this group and provides some lessons for dealing with clients who have abnormally high appetites for risk. And some new Price Waterhouse Coopers (PwC) research on billionaires who, over the last 20 years, failed to maintain their wealth provides additional perspective on dealing with risk-prone clients.

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Dan Richards

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Dan Richards
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The downsides of dealing with business owners

When I ask advisors about the clients they’d ideally like to deal with, high-income business owners are often at the top of the list. Recently I spoke to Robert, a CPA and ultra-successful advisor who has built his practice by focusing on those successful business owners.

I come from a family of entrepreneurs and genuinely like bigger-than-life personalities. Because of my background I can relate to people who run substantial businesses and feel good about the fact that I can add significant value through sophisticated estate and tax-planning strategies, in a way that’s not possible if someone is an employee. I also like that people who run businesses are decisive. I don’t have the patience to deal with clients who dither and can’t make decisions.

Then we got to talking about the downsides of having business owners as clients. In response to that question, Robert made three points:

First you have to be patient. Many entrepreneurs have the bulk of their assets tied up in their businesses so you may have someone with a net worth of $50 million who has an investment account of $500,000. You never know when a liquidity event will take place so that you have to treat these clients as if they have much more money with you than they actually do.

Second, some business owners have huge egos and won’t listen to advice. I’ve learned the hard way that if a business owner is full of himself and isn’t really interested in my opinion, there is no chance of a lasting client relationship.

Finally, some business owners are overconfident about the future for their business, seeing the stock market as a crap shoot by comparison. At one level, I get this – if someone isn’t confident and optimistic, they’ll never get past the barriers that can discourage people, especially early on. But that same confidence and optimism can lead clients to hugely over-concentrate their net worth in their business and become vulnerable to unexpected downturns as a result.