The Modern Advisor's Dilemma: Why Investment Discussions Are Being Neglected
“The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms, greed for life, for money, for love, knowledge, has marked the upward surge in mankind, and greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”
As a youngster, my view of financial services was straight out of the movie Wall Street. Ironically, the movie is a cult classic among money managers, who totally miss the point of Oliver Stone’s attack on 1980s business culture. I still love it though. The message isn’t lost on me but it was one of my earliest introductions to investing and led me down the rabbit hole to learn more about the business of investing.
Fortunately, the industry has made significant progress since then— although it took a near-collapse of the financial system. The commission-based brokerage business is being replaced by fee-based compensation with more appropriate client-advisor alignment. The modern advisor has expanded their services, offering more comprehensive financial planning in addition to classic portfolio management.
But something else has happened - many advisors have significantly reduced and, in some cases, eliminated their focus on investing.
Comprehensive planning is excellent, but investments must remain a key cog in the wheel of financial services.
Why is the modern advisor so hesitant to talk about investments?
To Avoid Fault:
Advisors want to protect themselves from “fault” when client portfolios lag.
This mentality leads to avoiding investment conversations altogether, focusing solely on progress towards goals. Goal-based planning conversations are essential, but they aren’t enough. This shift has occurred under the guise of creating better client service models, but it’s a copout.
To Conform:
Jim Hightower wrote:
“the opposite for courage is not cowardice, it is conformity. Even a dead fish can go with the flow.” (Source)
It’s easier to sit back and follow the industry’s lead, but that’s not what top performers do. Top performers seek to do better, to improve constantly, and they don’t allow a fear of being wrong to dictate their actions.
The famous basketball coach John Wooden said, “if you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.” (Source)
But what do clients want?
Despite having many topics to choose from, clients declared investments as the number one subject they most want to discuss with their advisor, according to a Spectrem Group study, “Communicating with Advisors and Providers.”
Investors seek advisors for investment expertise, and it’s the advisor’s job to demonstrate the role of investments in the client’s broader financial plan. It’s not fun reviewing client portfolios after a correction or pullback, but that’s why clients pay advisors.
Suppose I can convey an understanding of the investment strategy and the philosophy driving the portfolio. In that case, the client will be more comfortable with the strategy and better equipped to handle volatility.
A Short Term Focus Hurts Long Term Investments
Investment management has succumbed to similar trends. The willingness of advisors to step out and accept the possibility of trailing the market has declined.
Short-term, quarter-to-quarter performance reporting puts pressure on advisors to invest passively so as not to underperform. Of course, this all but eliminates the opportunity to outperform. Many allocators resort to creating portfolios that essentially track the broader markets while charging fees more appropriate for an actively managed strategy. They want their cake and to eat it too.
Having courage comes with risk, but the industry was built on risk management.
Waiting for Confirmation
Recognizing macro trends and having conviction is difficult when most of the industry is on the other side. Many advisors and managers wait for the broader sentiment to change so they don’t have to support their positions.
This creates an echo chamber of research, price target modifications, strategies, and a lack of original thought.
I’m hopeful the financial advice, investment management, and planning fields will continue to advance — thanks to doers. I hope to have the courage to do - even when it doesn’t align with the newest fads. Having courage will grow my business and generate better outcomes for my clients.
Here’s the aforementioned monologue about greed:
https://www.youtube.com/watch?v=VVxYOQS6ggk
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
