SVB Bank Failure is Wake Up Call for Advisors – Start Asking Questions

I wrote an article in InsuranceNewsNet Magazine recently that discussed the failure of SVB bank and how it impacts agents and advisors, click here to see the article.

This is week's newsletter is a slightly different version of that article, Click here.

How often do you get prospects on the phone, and they insist they are fine, their portfolio is managed well, they’ve got the right amount of insurance in place and their retirement planning is taken care of?

Their voice inflection telegraphs confidence and assurance they don’t need you or your services.

As a result, you back off, you don’t follow your process and you don’t ask those questions that would cause them to think, to question, yes even justify the confidence they are projecting, right?

Well, Lloyd, why should we question them, they know their finances and we don’t want to offend them.

That’s exactly why you SHOULD question them, your job is to disturb them, to disrupt the status quo, to uncover the issues they haven’t thought about, and to install dissatisfaction, and here’s why.

As a consumer and advisors reading the news surrounding the collapse of Silicon Valley Bank, we should all be appalled.

How many of their clients heard from an advisor in the last year and said the same thing, “I’m fine”, “No problem here”, or “I’ve got an expert who handles this for me”, so why should this story appall every one of us?

1.??????Top execs sold millions of dollars of shares in the weeks prior to the collapse.

2.??????They went without a Chief Risk Officer for 8 months during one of the fastest rate-rising environments on record.

3.??????Their Chief Administrative Officer was the CFO at Lehman Brothers before its collapse in 2008.

4.??????Their business was concentrated heavily on startups financed by venture capitalists which is extremely risky in itself.

What’s even crazier?

They purposely invested billions of dollars of deposits into long-term fixed-rate investments when rates were near 0%, leading to a massive mismatch on their balance sheet. This mismatch created serious risk in a rising rate environment resulting in large unrealized losses jeopardizing their capital should those losses have to be realized.

Fast forward 12 months and interest rates have now greatly increased, those long-term fixed-rate bonds have dropped in value.

How does a $200+ billion-dollar bank recently rated as one of the top banks in the country by Forbes explain this horrible lack of risk management?

How can anyone say this bank wasn’t operating in a manner that created catastrophic risk on their balance sheet?

The bottom line of why they collapsed was because they had poor risk management. Instead of just buying short-dated T-bills or depositing them with the Federal Reserve they bought long-duration fixed-income securities.

This caused an asset-liability mismatch —> liquidity issues —> bank run —> collapse.

They then failed to manage their interest-rate risk by simply not hedging their exposure at all, they had $120 billion worth of securities. When interest rates went up, they took a massive $1.8 billion loss on their available-for-sale (AFS) bond portfolio.?They had $80 billion in bonds with an average yield of 1.5%.

Nearly half of all US venture capital-backed startups did indeed hold banking relationships with SVB. Over 95% of SVB's deposits are NOT insured by the FDIC (due to being over the $250,000 limit). That is over $160 billion in uninsured customer deposits. This is awful for early-stage companies that were simply just looking for somewhere to hold their cash for operations.

It’s highly unlikely this will spread to the biggest banks. SVB collapsed because they had the highest-risk deposit base among U.S. banking peers. The big banks are in way better shape than in 2008 due to regulation and capital buffers. They actually stand to ‘benefit’ from this by taking market share.

The two most important aspects of selling are asking questions and listening.

The listening part should be easy, though we all need more practice; it's asking the proper question that we salespeople must master. The proper question will make your prospect tell you everything you need to know to help them buy.

Remember questions “gather” information while objections “disclose” information.

Your job is to always sell the problem people have, NOT the product or service you market!