Big Blunders
Everyone makes mistakes, and top advisors tell us some of theirs.

One of the chief jobs of a financial advisor is to help clients avoid mistakes before they happen-and to be in a position to deal with them when they do.

But what happens when advisors are the ones making the mistakes?

Advisors who've been in that position say there's really only one thing you can do when that happens: Learn from them.

"I've been around long enough to recognize that there is no one, if they are honest, who can say they never made a mistake," says Joseph Murtagh, president and founder of The Source financial planning firm in Goshen, N.Y.

What was Murtagh's biggest mistake? In the 1980s he poured client assets into high-quality, triple-net-leased real estate partnerships, in the process obtaining a $2 tax deduction for his clients for every $1 invested. Then an unfortunate thing happened: The federal government did away with the deductions in the 1986 tax reform act. Murtagh knew such a turn of events was possible, but what he didn't expect was the feds eliminating the grandfathering provisions that had been granted in prior tax reforms.

As a result, his clients' assets were stuck in partnerships-some of them to this very day. He lost most of his clientele in the process and had to rebuild much of his practice, almost from the ground up.

The lesson, as he sees it, is to never trust the government, so much so that he even tells clients to be wary of the tax benefits of Roth IRAs.

"What I learned from that very painful experience is that laws change, governments change their mind and that the tax consequences of investments that my clients are considering could be completely different or vanish," he says.

Some mistakes are so high on the "learning experience" meter that they become part of firm folklore. David Diesslin of Diesslin & Associates in Fort Worth, Texas, never tires of retelling his biggest blunder. It happened in the 1980s when, against his better judgment, he allowed a client to talk him into helping him buy a home that Diesslin felt was beyond his means. The purchase, Diesslin feels, played a part in an ensuing divorce and bankruptcy that the client went through. The ordeal led to changes at Diesslin's firm, the primary one being that Diesslin will no longer compromise with clients when it comes to his best advice.

Quite often, to drive that philosophy home, he will tell clients the story of the bankrupt and divorced client. "I remember how much sleep I lost and how bad I felt," Diesslin says.

Early in their careers, some advisors say, they learned lessons that might save colleagues a few wasted years. Dan Moisand, for instance, feels advisors shouldn't wait too long to make a move to practicing independently, as he did. Moisand left American Express in 1997, but says that he should have made the move at least two years earlier. Holding him back were fears about building up a new clientele, income and the financial security of his family.

"Looking back, most of my anxieties were a bit overblown," says Moisand, of Optimum Financial Group in Melbourne, Fla. "Eventually it dawns on you: The longer you wait, the harder it will be."

Shashin Shah, of Financial Design Group in Dallas, feels he wasted a few years of his career by not trusting his instincts upon landing his first job with a regional brokerage firm. Among the things he found suspicious was that all nine people who also were interviewed at the time got a job. There was no formal training program. And in his first year at the 30-person firm, 51 people came and went in various positions.

"I should have researched the company harder," he says. "It became increasingly difficult to compete with advisors working with reputable firms."

Partnership Blunders

Business partnerships are a blooper breeding ground for memorable mistakes, some advisors have learned.

E.W. "Woody" Young, a CFP licensee in Dallas, got into the financial planning profession in the early 1980s, after a career in strategic planning with IBM and other companies. Young's specialty was developing strategic plans for small businesses, but after devising such a plan for a financial planning firm, he became enchanted with the financial planning profession.

"I got fascinated with it because they were planning for people what I had been planning for companies," he says. "I discovered I was more of a people person than a boxes and hardware guy." He was so much of a people person, in fact, that he decided the best way to launch a career in financial planning would be to partner with someone.

So, as Young puts it, he started "looking around for someone to partner with." In hindsight, however, he feels he was just looking for an "easy answer."

He eventually hooked up with the first local planner he could find who was interested in a partnership. A year-and-a-half later, however, it was clear to Young that the partnership was a failure. Young, for example, wanted to build a comprehensive financial planning firm, while his partner didn't hold the slightest interest in branching out. Young, it turns out, ended up feeling his partner wasn't even a good financial planner. "I couldn't let him work with my clients when I wasn't there," he says.

The partnership, and the eventual breakup, stunted Young's financial planning career by a couple of years. Afterward, Young was so soured on partnerships that he tried going solo. But he eventually found this was impossible, considering his hopes to grow a comprehensive planning firm.

It wasn't until 1987, when he found two other planners with like-minded goals, that Young hit on a formula for success. "The difference is we took two to three months to plan it out," he says. "We spent time defining the business, defining values and wrote a business plan."

One advisor who wishes he had taken a more thorough approach in selecting a partner is Jack D. White of St. Charles, Mo. With the help of his broker-dealer, White set out looking for an Arkansas firm to buy in 1996. The search led him to a firm that was run by a local church pastor. "I talked to him, and we seemed to be of the same theological and religious convictions, and he seemed honest," White says.

The two of them decided on a plan in which White would buy the firm, but the pastor and the pastor's name would remain associated with the business. White was confident he'd found a match. So confident, in fact, that he ignored a few "oddities," as he puts it, that were evident from the beginning.

The pastor, for example, made White promise that he would not talk to any of the firm's clients before finalizing the deal. He also wasn't allowed to talk to any other professionals in town that the firm dealt with, such as CPAs and attorneys.

"He said he didn't want them to get jittery about" the deal, White says. "I honored that, thinking he was being honest with me."

It didn't take long, however, to discover that the pastor's explanation may not have been the real reason he didn't want White snooping around. As White recalls, it wasn't long after they completed the deal that people started "coming out of the woodwork" telling him horror stories about their dealings with the pastor. Many of the stories dealt with the pastor placing client assets in unsuitable investments, including retirees' money in bad annuities and limited partnerships. It soon became evident to White that the pastor would do anything to make a sale-even if it was at the expense of his clients' welfare.

"I ended up going back to him saying, 'What I purchased here was your good name and your name stinks,'" White says.

White and the pastor eventually came to an amicable agreement to dissolve their deal, but that wasn't the end of White's mistakes. As part of the breakup, White agreed to retain his former clients. White felt he could reconcile the damage the pastor had done and build up the business. It was, in hindsight, an overly optimistic outlook. The clients, it turned out, stayed away, and White had to eventually declare personal bankruptcy. He recovered a year later, with the creation of his current business outside of St. Louis. White looks back upon the ordeal with great irony: He was a financial planner who did absolutely no planning in setting up a business.

"I think it was a combination of pride and egotism on my part," he says.

Even if a partner is a good match, it doesn't mean you can get away with a lack of good planning. Just ask Linda Leitz, co-owner of Pinnacle Financial Concepts Inc. in Colorado Springs, Colo. In 1997, Leitz and a friend merged practices on a solid foundation. The two were close friends, they both specialized in serving clients involved in divorces, and they were quite thorough in setting up the merger. They built in contingencies for just about everything, including the mechanics of what would happen if one partner decided to quit the business.

It was a meticulously laid out plan. Yet to this day, Leitz still thinks about an oversight that later turned into a glaring error: "We never put anything in there about what would happen if someone did not show up for work one day and never did again," she says.

Leitz and her partner started their divorce practice in July 1997. In October 1999, Leitz's partner, a pilot, died in an emergency crash landing of her plane in San Antonio.

Besides the emotional trauma of her partner's death, Leitz could have confronted a disastrous business situation, as well. She considers herself fortunate because she and her partner's siblings were quick to agree on a resolution, with Leitz writing them a check for her partner's share in the business. Yet Leitz remains amazed at the oversight, and the potential problems it could have caused. She even remembers one day in the office, during their first year in business, when she and her partner talked about how they needed to get life insurance for one another. But it was something they put off.

"We were both so young, and we had other things on our mind," she says. "At the time of the conversation, neither of us had hit 40. We were two healthy women feeling we were pretty safe before we hit the middle-age barrier."

It's a classic case of advisors not following their own advice, Leitz says. If it had been a client in that situation, Leitz would have been adamant about the need for life insurance and a contingency plan in the event of death.

"I'd be on them," she says. "You really need to at least address what happens in the event of a death and, as soon as you can afford it, you need to at least buy some policies on each other."

Giving In To Clients

Among the biggest mistakes an advisor can make, it seems, is to forget that the job of an advisor is to give clients advice-not the other way around.

That about sums up the view of some advisors, who say the biggest mistakes they've made in their careers is to let clients walk them down a path they knew in their hearts was wrought with pitfalls, landmines, dead-ends and doom.

It took Stephan Quinn Cassaday, president and founder of Cassaday & Company Inc. in McLean, Va., a few years to learn that he was falling into this trap. When Cassaday started his business in 1993, he thought his biggest mistake was spending 17 years working at wirehouses. He left the wirehouse business because he wanted to give his clients objective advice without conflicting pressures.

"What ended up happening is that being objective and impartial isn't the whole deal," Cassaday says. "You can be honest and have integrity and still be a knucklehead."

Also, he found that wirehouses aren't the only ones that can exert wrong-headed pressures. Clients themselves, he found, were also having an influence on what he was doing as a planner-often in a destructive way. Cassaday, in fact, looks back and sees a planner who was often pushed and pulled by clients in directions from which he normally would have steered clear. The result was muddled portfolios, peppered with a potpourri of limited partnerships, closed-end bond funds, technology stocks and Internet stocks-investments Cassaday got involved with just to placate clients.

The end result: a lot of pain after the market started going south in March 2000.

The turning point for Cassaday was the day a client was giving him hell about the plummeting value of Cisco stock. This was a client who had been adamant about overloading on the stock, against Cassaday's advice. Yet he looked Cassaday straight in the face and said, "You should have been more persuasive."

Cassaday decided that this client was absolutely right. That led to big changes. Among the most notable: If a client didn't want to follow the firm's advice, he or she was shown the door. The firm also clarified its investment policy and put more focus on comprehensive planning, including dealing with insurance and estate planning needs.

Finally, the firm built a client profile and stuck to it. Generally speaking, the firm sticks to "nearly affluent" clients whose net worth falls between $700,000 and $2.5 million.

"The niche is a good one because the banks, which are usually wrong, are going after the wealthy and people with $5 million or more," he says. "We found uniformly that those people are like spoiled super-models. Everyone is after them, they're finicky, they're arrogant and difficult to work with."

John Kvale, president and founder of JK Financial Inc. in Dallas, found himself in the same boat during the go-go 1990s. It was like there were two voices running the show, Kvale says. There were clients, exerting inexorable pressure to invest more and more into large-cap growth investments. Then there was the little voice in the back of Kvale's head, saying, "That's not a good thing, and we shouldn't be there."

In the 1990s, Kvale had a tougher time resisting client pressure because the investments he was telling them to go easy on kept going up, up and up. "It would have probably been better to allow the clients to go," he says.

Many of his clients felt the brunt of the market slide, and the firm has since made a pledge to not back down on its investing philosophy, Kvale says.

"I've been in the financial planning world for 14 years, and over the past four years learned more than the previous ten," he says. "It's a constant learning process, and that's where I wish I had been more steadfast."

Compromising with clients isn't just limited to investment decisions. Mary H. Durie, a financial advisor with Quest Capital Management, a Raymond James affiliate in Dallas, says the mistake that "keeps me up at night" happened several years ago. Durie was working with a female physician, who at the time was in her thirties. As part of the woman's overall financial plan, Durie strongly suggested life insurance with cash value, partly as a tax-deferred savings vehicle. The physician, however, resisted the idea. Because the client was single without any children at the time, Durie didn't press the issue.

Three years later, the woman got married, and she and her husband adopted a child. The woman was the family's primary breadwinner, and she finally did agree to limited life insurance coverage.

Recently, the woman was diagnosed with cancer, but there is some question about how much the family can expect from her life insurance policy because it was signed only six months before the diagnosis.

The situation has Durie reliving her initial planning decisions with the client several years ago. "Knowing that she wanted to get married and have children when she was younger and healthier, I should have forced the issue of buying the coverage," she says. "I should have made it more of an issue."