Why the SVB failure is a wake-up call for advisors – Insurance News

How often do you get a prospect on the phone and they insist they are doing well, their portfolio is well managed, they have the right amount of insurance and their retirement plans are taken care of?

Lloyd Lofton

The inflection of their voice conveys confidence and assurance that they don’t need you or your services. As a result, you back down, you don’t follow your process and you don’t ask questions that will make them think, question, or even justify the confidence they project – right?

You may ask me, “Why should we ask them? They know their finances and we don’t want to offend them.”

That’s why you should ask them! Your job is to annoy them, disrupt the status quo, uncover issues they haven’t thought about, and put up a punch. Here’s why.

As a consumer and advisor who read the news surrounding the Silicon Valley Bank collapse, I’m sure we’re all left in shock. How many bank clients have heard from an advisor in the last year and said the same thing to the advisor: “I’m fine.” “No problem here.” “I have an expert handle this for me.”

Why should this story shock us all?

  1. The bank’s top executives sold millions of dollars of stock in the weeks before the collapse.
  2. The bank went without a chief risk officer for eight months during one of the fastest rising interest rate environments on record.
  3. The bank’s chief administrative officer was chief financial officer at Lehman Brothers before its collapse in 2008.
  4. The banking business is highly concentrated on start-ups financed by venture capitalists, which is very risky.

What’s even crazier?

Banks knowingly invested billions of dollars of deposits into long-term fixed rate investments when interest rates were close to 0%, causing a massive mismatch on their balance sheets. This mismatch poses a serious risk in an environment of rising interest rates resulting in large unrealized losses that jeopardize their capital if those losses are to be realized.

Fast forward 12 months and interest rates have now increased tremendously, and those long-term fixed rate bonds have depreciated in value. How is a $200 billion bank, recently rated as one of the top banks in the country Forbess, explain this egregious lack of risk management? How can anyone say this bank is not operating in a way that poses a catastrophic risk to their balance sheet?

The bottom line why they collapsed is because they had poor risk management. Instead of just buying short-term T-bills or holding them in the Federal Reserve, they buy long-term fixed-income securities.

This causes an asset-liability mismatch —> liquidity problems —> bank run —> collapse.

SVB then failed to manage their interest rate risk by not hedging at all. They own securities worth $120 billion. When interest rates rose, they took a huge loss of $1.8 billion on their portfolio of available-for-sale bonds. They have $80 billion worth of bonds with an average yield of 1.5%.

Nearly half of all US venture capital-backed startups do have a banking relationship with SVB. Over 95% of SVB deposits are not FDIC insured (for exceeding the $250,000 limit). That’s more than $160 billion in uninsured customer deposits. This is terrible for early-stage companies that are just looking for a place to put their cash for operations.

It is very unlikely that this will spread to the biggest banks. SVB collapsed because they had the highest risk deposit base among their US banking counterparts. The big banks are in much better shape than they were in 2008 due to regulations and capital buffers. The banks are actually benefiting from this by taking market share.

The two most important aspects of selling are asking questions and listening. The listening part should be easy, although the rest of us need more practice. It asks the right questions that we as salespeople have to excel at. The right questions will let your prospects tell you everything you need to know to help them buy.

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

Lloyd Lofton is the founder of Strength Behind Sales. He is the author of Saleshero’s Guide To Handling Objections, voted 1 of the 11 Best New Presentation Books to Read in 2020 by BookAuthority. Lloyd can be contacted at [email protected].

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