April 4, 2005
Investing in sync | Northeast Bank's Jim Delamater on the need for improved relationships in the financial world
By Michaela Cavallaro
Jim Delamater says he didn't set out to write a book. Instead, says the CEO of Auburn-based Northeast Bank, he simply wanted to make sure the values he learned from his father, Roland Delamater, were retained by his sons. After a few revisions, though ˆ and a read by son Chris, who works in Northeast's marketing department ˆ Delamater was convinced to release The Great American Mismatch in book form.
The "mismatch" of the title refers to what Delamater sees as the disconnect between consumers and sellers of financial services. The latter, he says, often are motivated to learn just one or two products and pitch them to everyone they meet, regardless of their suitability for a particular client, while the former are often overwhelmed by the many choices available to them and make no decision as a result. The solution, as Delamater sees it, is for sellers to adhere to a strict code of ethics, and for buyers to think ˆ and act ˆ carefully when choosing a financial advisor.
Mainebiz recently talked to Delamater about the landscape of the financial services industry for both buyers and sellers. Following is an edited transcript of the conversation.
Mainebiz: The world of financial services is so overwhelming in terms of the range of choices that are available, whether in service providers or investment options. So I think a lot of people just throw up their hands when faced with the welter of choices and don't do anything. How do you deal with that?
Delamater: Most of the people I would meet [as a banker], as you said, would do nothing because they were overwhelmed. They just didn't know where to turn ˆ maybe they had heard some pitches from different folks, and all of it left them wondering what to do. And the easiest thing to do is nothing. That in itself is a huge mismatch, because if you've done nothing, chances are you've greatly minimized your opportunity to grow wealth.
Then the people that did things often did them without doing their homework ˆ so they took the first sales pitch that came along and said, "Oh, that sounds good, let's do it." And that creates a whole other series of mismatches, where maybe you have a product that may be a great product, but is not at all suited to what your goals are.
So as I got more experienced in this business, it just floored me how constant this was, and how nine out of 10 people I would meet with would have these horrible mismatches. I tried to bring those values to Northeast. It was such an honor to me, because then I could say, I'm going to take these ideas that my dad pounded into me and make them part of the fabric of our company. And our whole mission has been to get to know your clients, figure out what their needs are, find the right fit even if you don't deliver it.
And for years that was real easy ˆ we were so small that we didn't deliver much, so we were great referral sources for other people. As we've gotten bigger, we've been able to do more ourselves ˆ but we still send an awful lot of business to folks throughout the country, because we can't deliver everything.
The education system lets so many of us down, particularly at the lower grade levels, where people even coming out of high school really have not been exposed to much of anything when it comes to financial issues. They don't understand life insurance, they very rarely understand the markets, banking ˆ [all] they know [is that] they need money.
I think that's a major contributor to some of the issues we face, because people are not only overwhelmed by the sheer number of products and choices, but they don't even have the knowledge to discern how the whole process works. You put the two things together and you end up with a lot of apathy, and a lot of situations where people just don't do anything.
There's also a disconnect for business owners, some of whom know how to run business finances but then don't apply that knowledge to personal finances. It seems that even people who do get the knowledge tend to compartmentalize it.
They really do. Plus, aside from the educational shortfall are the sheer numbers. When I first got into the business in 1972, there were nine mutual fund companies, probably 200 stocks you could look at and maybe a few bond investments, but you were pretty limited even in the investment world as to what your choices were. Today, there are hundreds of thousands of choices, so the sheer number in terms of what you'd have to do to start to learn this stuff if you want to do it right is just overwhelming.
I go back to the fact that people really have to work hard today to make the budget work and pay the bills. Even in families, people are working two jobs or both of the spouses are working, and you run out of time and energy. So that's why I tried to build in the book that no matter how you slice it, you've got to end up finding somebody who has the skill, who you can trust will work in your best interest, so you can work together. Because even if you're well intentioned and have all the right educational background and knowledge, you're not going to have enough time in your day to do the research. It goes back to finding the right partners.
The disconnect with business owners has always been amazing to me, being a business banker for the most part. Those are my best financial planning clients, because every one of them is in desperate shape when we reach them, because they haven't done anything. They might be running a multimillion dollar business quite successfully, and their personal balance sheet is horrible. That is so normal.
You mention that you invested most of your own wealth into Northeast, because you know it, and you understand what the risks are and how it operates. Is that a strategy that you would recommend to a client or a more junior employee within your own company?
No, I wouldn't. In fact, perhaps with hindsight and not being a professional writer, maybe I misspoke a little. But let me show you the context. Normally, for a basic investment plan, you want people to be diversified, you want people to have a good mix of different asset classes so they can still grow their balance sheet but not ever be exposed to undue risk.
For me personally ˆ maybe I'm getting a bit cynical ˆ I'm much more comfortable investing the dollars I want to put in the market into a company [in which] I know the facts, I know the management and I know the information I'm given is accurate, versus some analyst that's telling me numbers that turn out to be false.
It became very disenchanting for many of us in the business in the last 10 years. In the old days, you could really rely on an analyst to give you the truth, because the doctrine of being an analyst was so sacred that it was almost unheard of to think that an analyst would say anything just to promote a stock. They were charged to be like doctors in that they had a doctrine to protect, and that sort of went away over the years.
So now when you read an analyst's comments, you really can't trust that information is accurate. Of course, the legal halls are now full of lawsuits; the analysts are being sued, and firms like Merrill [Lynch] have had their top guys even admit that you were right, we were just trying to promote the stock. Well, for people like me that were in the business, that was the cardinal sin. All that credibility goes out the window.
So now the only way you can make sound judgment is to test the waters yourself. So you almost have to go visit the company yourself, touch their financials, because you can no longer trust, like we used to be able to, that the analyst's opinion is accurate.
Do you really think it was so much more aboveboard several decades back? Or is it just that the scrutiny analysts and publicly traded companies are under these days reveals more?
It's always been around ˆ clearly, today the media and the technology is so superior that word travels faster. The only thing I would say is that when I got licensed years ago, you weren't allowed to even take your test to be awarded this right to sell until you had spent a fair amount of time learning the industry, and proving to yourself and the people that sponsored you that you had the skills and the talent and the integrity.
Nowadays there's none of that anymore. It started going away in the early 80s, and now it doesn't even exist. Anyone can get licensed and all the sudden you're anointed and go sell financial products. It's pretty scary, and then you put a commission schedule on top of it and say, "You only get paid if you sell something" ˆ now it's doubly scary.
Are you advocating against commissions in financial services?
No. I don't have a problem with a commission schedule ˆ I have a problem with the failure to review the people that are paid the commissions to make sure that they honor their code. Because if you're going to pay only commissions, you'll tend to attract real top talent, because the top talent doesn't want to be hamstrung by a salary. They want to know that if we work hard and serve a lot of people, we can make whatever we deserve. So I don't want to turn those folks away, and say, "Sorry, we don't pay commission here."
At the same time, I don't want the person to be so driven by commissions that they forget to do the right thing. So it's really a balancing act. What we try to do is teach people before we hire them how we do business, then once you hire them you spend a lot of time checking over them to make sure that they're representing your values. And occasionally it happens that you say, "Oops, this isn't working," and you say goodbye.
You mention that banks in the past were almost paternalistic, and weren't going to give consumers credit cards unless they thought they were responsible enough to use it. Whereas now the responsibility is on the part of the consumer ˆ if you don't think you can handle the credit, then you shouldn't accept it. Where do you think personal responsibility plays in?
You can't be a lender if you don't hold dear the value of being paternalistic, and trying to make certain that you never lend somebody money who can't pay it back. So that has not changed; I haven't seen any change on the part of the banking industry, which still says, we've got to be careful to lend money to people that can pay you back.
But what dramatically changed in the credit card world is the banks got out of that business. So suddenly the people that are offering you the cards are in fact saying, it's your problem whether you want it or not. We don't care about credit risk anymore because we've factored in a [loss] number that's so high that unless it's crazy we're going to be all right. So we're going to give these to everybody we can give them to. It's almost a game that they play. It puts all the burden back on the consumer.
I think we've got to do a better job at educating people. We've spent time and money trying to educate people that this doesn't work, that when you overleverage yourself, particularly with credit cards, the cost is incredible. I don't know, beyond education, how to legislate that responsibility away from the consumer, other than I would welcome some sort of legislation that would slow down these companies that are proliferating this rampant growth, because that's basically a deregulated industry. The credit card companies, for the most part, aren't banks.
I think in the future historians are going to look back and paint this episode as one of the saddest in our country's history. But unfortunately we don't sometimes do things until disaster strikes.
You take objection to the idea of fee-based financial planners, and I have to say that previously I'd bought the idea that if you're paying a flat fee to a planner you don't have to worry about conflicts of interest. But you use some pretty strong language to describe at least a subset of that group.
My point there was that if I'm going to convince you to do business with me by saying, "Look, I'm going to take you out from under the worry of how much commission I make ˆ I'm going to charge you a fee and no matter how much we trade, you're going to pay the same fee, therefore you can trust that I have your best interests at heart." That's basically the sales pitch. Then I have a real responsibility to make sure that I live up to that code, and many people do. In fact, there's a lot of wonderful people out there that do really well.
But when you run across the fee-based planner who gives you that wonderful sales pitch, then abuses the heck out of the client by charging them 10 times what they would have ever charged if they were paying commission, then that's not right. And that's what we see too darn much of. When we see the family that we meet with and say, "Jeez, how did you justify paying $30,000 to this planner? If you had run this stuff through the worst commission schedule on the planet, you'd have spent three grand." And they go, "Really?"
We see that so much.And that's the part that really upsets me ˆ that's just stealing. I've heard people in the trades laugh about it ˆ part of the sales pitch is "convert your book from a commission business to fee-based and you'll triple your income." Think about that a minute.
Say you do establish a long-term relationship based on trust in the people who are advising you. What do you need to do as the relationship continues?
As I crafted those five rules [for choosing a financial advisor], my intention was to convince people that the rules are not just for when you make that initial pick but for use throughout your career with this person, or throughout your life. People change, situations change.
I advocated to my clients, "I'd like to think you can always trust me, and that I'm never going to ever slip over the edge, but my advice to you is it never hurts to get a second opinion at any stage, so do it. So if I come here and tell you this is what you should do, and internally you kind of wonder ˆ go get a second opinion. Or even if you don't wonder, go get a second opinion." It's a good thing to do. If somebody told me I needed surgery, I'm pretty well trained to get two opinions. I don't always do that, sometimes I say, "I'll trust you, Doc. It's not life-threatening, so what the heck." But if it's life-threatening, I'm probably going to get three opinions.
I think we have to hold our finances as dear to ourselves as our health, because usually the two go together. That's why I'm a believer in a [financial] plan, because a plan gives you a roadmap to make decisions by. If nothing else, you can turn to your plan and say does this decision or this product fit?
The "mismatch" of the title refers to what Delamater sees as the disconnect between consumers and sellers of financial services. The latter, he says, often are motivated to learn just one or two products and pitch them to everyone they meet, regardless of their suitability for a particular client, while the former are often overwhelmed by the many choices available to them and make no decision as a result. The solution, as Delamater sees it, is for sellers to adhere to a strict code of ethics, and for buyers to think ˆ and act ˆ carefully when choosing a financial advisor.
Mainebiz recently talked to Delamater about the landscape of the financial services industry for both buyers and sellers. Following is an edited transcript of the conversation.
Mainebiz: The world of financial services is so overwhelming in terms of the range of choices that are available, whether in service providers or investment options. So I think a lot of people just throw up their hands when faced with the welter of choices and don't do anything. How do you deal with that?
Delamater: Most of the people I would meet [as a banker], as you said, would do nothing because they were overwhelmed. They just didn't know where to turn ˆ maybe they had heard some pitches from different folks, and all of it left them wondering what to do. And the easiest thing to do is nothing. That in itself is a huge mismatch, because if you've done nothing, chances are you've greatly minimized your opportunity to grow wealth.
Then the people that did things often did them without doing their homework ˆ so they took the first sales pitch that came along and said, "Oh, that sounds good, let's do it." And that creates a whole other series of mismatches, where maybe you have a product that may be a great product, but is not at all suited to what your goals are.
So as I got more experienced in this business, it just floored me how constant this was, and how nine out of 10 people I would meet with would have these horrible mismatches. I tried to bring those values to Northeast. It was such an honor to me, because then I could say, I'm going to take these ideas that my dad pounded into me and make them part of the fabric of our company. And our whole mission has been to get to know your clients, figure out what their needs are, find the right fit even if you don't deliver it.
And for years that was real easy ˆ we were so small that we didn't deliver much, so we were great referral sources for other people. As we've gotten bigger, we've been able to do more ourselves ˆ but we still send an awful lot of business to folks throughout the country, because we can't deliver everything.
The education system lets so many of us down, particularly at the lower grade levels, where people even coming out of high school really have not been exposed to much of anything when it comes to financial issues. They don't understand life insurance, they very rarely understand the markets, banking ˆ [all] they know [is that] they need money.
I think that's a major contributor to some of the issues we face, because people are not only overwhelmed by the sheer number of products and choices, but they don't even have the knowledge to discern how the whole process works. You put the two things together and you end up with a lot of apathy, and a lot of situations where people just don't do anything.
There's also a disconnect for business owners, some of whom know how to run business finances but then don't apply that knowledge to personal finances. It seems that even people who do get the knowledge tend to compartmentalize it.
They really do. Plus, aside from the educational shortfall are the sheer numbers. When I first got into the business in 1972, there were nine mutual fund companies, probably 200 stocks you could look at and maybe a few bond investments, but you were pretty limited even in the investment world as to what your choices were. Today, there are hundreds of thousands of choices, so the sheer number in terms of what you'd have to do to start to learn this stuff if you want to do it right is just overwhelming.
I go back to the fact that people really have to work hard today to make the budget work and pay the bills. Even in families, people are working two jobs or both of the spouses are working, and you run out of time and energy. So that's why I tried to build in the book that no matter how you slice it, you've got to end up finding somebody who has the skill, who you can trust will work in your best interest, so you can work together. Because even if you're well intentioned and have all the right educational background and knowledge, you're not going to have enough time in your day to do the research. It goes back to finding the right partners.
The disconnect with business owners has always been amazing to me, being a business banker for the most part. Those are my best financial planning clients, because every one of them is in desperate shape when we reach them, because they haven't done anything. They might be running a multimillion dollar business quite successfully, and their personal balance sheet is horrible. That is so normal.
You mention that you invested most of your own wealth into Northeast, because you know it, and you understand what the risks are and how it operates. Is that a strategy that you would recommend to a client or a more junior employee within your own company?
No, I wouldn't. In fact, perhaps with hindsight and not being a professional writer, maybe I misspoke a little. But let me show you the context. Normally, for a basic investment plan, you want people to be diversified, you want people to have a good mix of different asset classes so they can still grow their balance sheet but not ever be exposed to undue risk.
For me personally ˆ maybe I'm getting a bit cynical ˆ I'm much more comfortable investing the dollars I want to put in the market into a company [in which] I know the facts, I know the management and I know the information I'm given is accurate, versus some analyst that's telling me numbers that turn out to be false.
It became very disenchanting for many of us in the business in the last 10 years. In the old days, you could really rely on an analyst to give you the truth, because the doctrine of being an analyst was so sacred that it was almost unheard of to think that an analyst would say anything just to promote a stock. They were charged to be like doctors in that they had a doctrine to protect, and that sort of went away over the years.
So now when you read an analyst's comments, you really can't trust that information is accurate. Of course, the legal halls are now full of lawsuits; the analysts are being sued, and firms like Merrill [Lynch] have had their top guys even admit that you were right, we were just trying to promote the stock. Well, for people like me that were in the business, that was the cardinal sin. All that credibility goes out the window.
So now the only way you can make sound judgment is to test the waters yourself. So you almost have to go visit the company yourself, touch their financials, because you can no longer trust, like we used to be able to, that the analyst's opinion is accurate.
Do you really think it was so much more aboveboard several decades back? Or is it just that the scrutiny analysts and publicly traded companies are under these days reveals more?
It's always been around ˆ clearly, today the media and the technology is so superior that word travels faster. The only thing I would say is that when I got licensed years ago, you weren't allowed to even take your test to be awarded this right to sell until you had spent a fair amount of time learning the industry, and proving to yourself and the people that sponsored you that you had the skills and the talent and the integrity.
Nowadays there's none of that anymore. It started going away in the early 80s, and now it doesn't even exist. Anyone can get licensed and all the sudden you're anointed and go sell financial products. It's pretty scary, and then you put a commission schedule on top of it and say, "You only get paid if you sell something" ˆ now it's doubly scary.
Are you advocating against commissions in financial services?
No. I don't have a problem with a commission schedule ˆ I have a problem with the failure to review the people that are paid the commissions to make sure that they honor their code. Because if you're going to pay only commissions, you'll tend to attract real top talent, because the top talent doesn't want to be hamstrung by a salary. They want to know that if we work hard and serve a lot of people, we can make whatever we deserve. So I don't want to turn those folks away, and say, "Sorry, we don't pay commission here."
At the same time, I don't want the person to be so driven by commissions that they forget to do the right thing. So it's really a balancing act. What we try to do is teach people before we hire them how we do business, then once you hire them you spend a lot of time checking over them to make sure that they're representing your values. And occasionally it happens that you say, "Oops, this isn't working," and you say goodbye.
You mention that banks in the past were almost paternalistic, and weren't going to give consumers credit cards unless they thought they were responsible enough to use it. Whereas now the responsibility is on the part of the consumer ˆ if you don't think you can handle the credit, then you shouldn't accept it. Where do you think personal responsibility plays in?
You can't be a lender if you don't hold dear the value of being paternalistic, and trying to make certain that you never lend somebody money who can't pay it back. So that has not changed; I haven't seen any change on the part of the banking industry, which still says, we've got to be careful to lend money to people that can pay you back.
But what dramatically changed in the credit card world is the banks got out of that business. So suddenly the people that are offering you the cards are in fact saying, it's your problem whether you want it or not. We don't care about credit risk anymore because we've factored in a [loss] number that's so high that unless it's crazy we're going to be all right. So we're going to give these to everybody we can give them to. It's almost a game that they play. It puts all the burden back on the consumer.
I think we've got to do a better job at educating people. We've spent time and money trying to educate people that this doesn't work, that when you overleverage yourself, particularly with credit cards, the cost is incredible. I don't know, beyond education, how to legislate that responsibility away from the consumer, other than I would welcome some sort of legislation that would slow down these companies that are proliferating this rampant growth, because that's basically a deregulated industry. The credit card companies, for the most part, aren't banks.
I think in the future historians are going to look back and paint this episode as one of the saddest in our country's history. But unfortunately we don't sometimes do things until disaster strikes.
You take objection to the idea of fee-based financial planners, and I have to say that previously I'd bought the idea that if you're paying a flat fee to a planner you don't have to worry about conflicts of interest. But you use some pretty strong language to describe at least a subset of that group.
My point there was that if I'm going to convince you to do business with me by saying, "Look, I'm going to take you out from under the worry of how much commission I make ˆ I'm going to charge you a fee and no matter how much we trade, you're going to pay the same fee, therefore you can trust that I have your best interests at heart." That's basically the sales pitch. Then I have a real responsibility to make sure that I live up to that code, and many people do. In fact, there's a lot of wonderful people out there that do really well.
But when you run across the fee-based planner who gives you that wonderful sales pitch, then abuses the heck out of the client by charging them 10 times what they would have ever charged if they were paying commission, then that's not right. And that's what we see too darn much of. When we see the family that we meet with and say, "Jeez, how did you justify paying $30,000 to this planner? If you had run this stuff through the worst commission schedule on the planet, you'd have spent three grand." And they go, "Really?"
We see that so much.And that's the part that really upsets me ˆ that's just stealing. I've heard people in the trades laugh about it ˆ part of the sales pitch is "convert your book from a commission business to fee-based and you'll triple your income." Think about that a minute.
Say you do establish a long-term relationship based on trust in the people who are advising you. What do you need to do as the relationship continues?
As I crafted those five rules [for choosing a financial advisor], my intention was to convince people that the rules are not just for when you make that initial pick but for use throughout your career with this person, or throughout your life. People change, situations change.
I advocated to my clients, "I'd like to think you can always trust me, and that I'm never going to ever slip over the edge, but my advice to you is it never hurts to get a second opinion at any stage, so do it. So if I come here and tell you this is what you should do, and internally you kind of wonder ˆ go get a second opinion. Or even if you don't wonder, go get a second opinion." It's a good thing to do. If somebody told me I needed surgery, I'm pretty well trained to get two opinions. I don't always do that, sometimes I say, "I'll trust you, Doc. It's not life-threatening, so what the heck." But if it's life-threatening, I'm probably going to get three opinions.
I think we have to hold our finances as dear to ourselves as our health, because usually the two go together. That's why I'm a believer in a [financial] plan, because a plan gives you a roadmap to make decisions by. If nothing else, you can turn to your plan and say does this decision or this product fit?
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