The Butterfly Effect: How Bad Partners Can Crash Your Firm

Reputation is as delicate as a butterfly’s wings. It follows that a small event distantly related to your business can have a huge impact on your reputation and even create errors-and-omissions insurance problems. You may recognize this as the “butterfly effect”—named after the possibility that a butterfly flapping its wings in Belize can generate a tornado in Texas.

Advisors are always launching their own unintended consequences. They make decisions about what products to sell, which FMOs or broker-dealers to affiliate with, what selling systems to use, etc. According to chaos theory, which underlies the butterfly effect, one such decision can produce potentially devastating consequences. Here are three events relating to advisors hiring lead-generation firms, each with unforeseen negative effects on their reputation:

Case #1:  A direct-mail firm suggests the end is near for Social Security in a business-reply card mailer to the senior market. Butterfly effect: the consumer is actually a retired professor of healthcare finance. He knows the postcard is fraudulent, but agrees to an appointment to confront the advisor. He does more than that . . . he reports the person to the state insurance department, which issues sanctions. The action gets posted to the department’s web site, picked up by local media, and sent aloft by Google . . . forever.

Case #2. A vendor telemarkets to non-English speakers. Consumers say “yes” just to get the telemarketer off the phone.  Butterfly effect: an agent arrives at the appointment to find an elderly non-English speaking Hispanic woman with early-stage dementia. She becomes anxious about the unknown visitor, calls her son, who summons the police. The police arrive to investigate and the agent’s name gets mentioned at the station, triggering a damaging rumor in his close-knit community.

Case #3. An Internet quote sells leads generated by another lead firm.  Butterfly effect: the first lead firm collects confidential information from the consumer, then sends the lead to a second firm, who sells the lead to the advisor. Now the advisor’s sale is potentially non-compliant because he got the lead from a firm that wasn’t technically authorized to have the client’s personal information.

Here’s our point. Butterfly wings are fragile, but they can also unleash tornadoes. Similarly, the people you decide to partner with can easily destroy your reputation if you let them. How to prevent this? The National Ethics Association, sponsor of EOforLess.com, recommends you…

1. Affiliate only with marketing partners who share your ethical values. Your reputation is only as good as the reputation of everyone you work with.
2. Do your due diligence before you decide on who to partner with. Never take verbal promises on faith.
3. Use the power of the Internet to check out potential partners before you do business.

In short, be protective of your fragile business reputation. Yes, with the right sales and marketing programs, it’s not hard to fly high. But one flap of a butterfly’s wings can trigger a mighty downdraft.

For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center at ethics.net. For information on affordable errors-and-omissions insurance for low-risk financial advisors, please visit EOforLess.com.