“From time to time,” we all “circle back,” “touch base,” go for “deeper dives” and, of course, get views “from 30,000 feet.” The financial industry has its own specific set of clichés, featuring such chestnuts as “buy low, sell high” and “don’t try to catch a falling knife.” Long gone are the days of “a penny saved is a penny earned.”
Over the past several years, an even more specific set of clichés has invaded the independent financial advisory industry. Some of these, such as “open architecture” and “fee-only,” are useful for communicating complex concepts to clients. Others, however, have been abused to the point of becoming problematic, even obfuscating some truths. The worst offenders are the subject of this article.
QuoteKeep an ear cocked for independent advisors who are playing by the book of bad clichés.
This cliché has been perpetuated not only by advisors but also the consultants, custodians and others prone to glorifying the advisors they serve. Of course, independence is a virtue among advisors, who as a whole work vigorously to ensure their loyalties are owed first and foremost to their clients. Truly independent advisors are not subservient to a bank, a brokerage or another controlling entity, and are instead free to serve their clients without encountering loyalty conflicts with third parties.
Yet, while independence is unequivocally good, is “fierce” independence? It can be, provided it is taken to mean that the advisor would never compromise him or herself. In practice, however, some advisors use this notion to justify their unwillingness to collaborate with others — collaboration that might otherwise improve their services (e.g., with an estate planning attorney); ensure their sustainability; and provide their clients the peace of mind that comes with workable, dependable succession plans. Some advisors have actually taken such notions of independence to extremes, often in a conscious or subconscious effort to retain complete control of their personalized businesses. Consequently, they may inadvertently place their own interests above those of their clients. This type of “fierce independence” may serve to insulate or protect the short-term personal interests of the advisor, but it generally disserves clients, who are likely to benefit from an advisor who is more collaboratively minded.
The bottom line: Independence is good, but “fierce independence,” not so much.
‘BEST OF BREED’
Advisors increasingly turn to third-party managers, such as separate account managers, as the primary investment vehicles for their clients’ portfolios. This practice seems especially popular among advisors who purport to offer “open architecture” (another cliché) on their investment platforms.
QuoteIndependence is good, but “fierce independence,” not so much.
This approach certainly has potential benefits for clients. Advisors may claim, however, that since they offer open architecture, they in turn offer clients investment management services of only “best-of-breed” managers. That’s a nice concept, and one that may occasionally be true. Nevertheless, clients should be aware that advisors who consistently offer access to best-of-breed managers require substantial levels of resources, expertise and experience to make such claims.
Merely having an open-architecture platform is not enough to deliver on the best-of-breed pledge. Given there’s no standard or litmus test being administered, advisors may have different levels of access to managers, and different notions of what that access looks like. Open architecture for one advisor may mean a universe of 100 managers, while another advisor may call on a universe of 1,000 managers.
If an advisor who managed individual equity portfolios claimed that he or she offered portfolios of only the best stocks, compliance professionals everywhere would rightly cry foul. How, then, can some advisors freely make the same claim about their ability to select only the best managers?
The bottom line: While it’s possible to offer the services of “best-of-breed” managers, clients should ask the right questions to determine the legitimacy of such claims.
‘YOU CAN’T BE EVERYTHING TO EVERYBODY’
Like most clichés, there’s some wisdom behind this one. Objectively, it is a true statement. Yet in the independent advisory world, it might be used as a defense by advisors who do not offer extensive services to their clients.
Clients increasingly expect more of their advisors, and while certain advisory functions inevitably get outsourced, some advisors may use this cliché as an excuse to limit their services and not invest in expanding their offerings.
Advisors who offer extensive services such as financial planning, tax compliance, trustee services and deeper investment management are not necessarily trying to be everything to everybody. Rather, they may be expanding their offerings in a strategic way to meet client needs and complement existing services.
A client with an investible net worth of $10 million or more is likely to need estate planning services, income tax planning and compliance services, risk-management advice, cash-flow planning, philanthropic planning and investment management strategies that go beyond a simple allocation between equities and fixed income. While not every client needs all of these services, striving to offer what a client does need is not overly ambitious. Indeed, it’s what the client expects.
The bottom line: No one can be everything to everybody, but clients expect more from their advisors, and advisors should not rely on worn-out excuses for limiting their offerings.
‘COMPREHENSIVE WEALTH MANAGEMENT’
This is probably the most pervasive of all clichés in the independent wealth management industry. Many companies provide comprehensive wealth management services to clients, but those companies are providing detailed, targeted, regular planning advice about their clients’ estates, taxes, retirement, cash-flow management, philanthropy, risk management, education and, of course, investments and asset allocations.
Some advisors are incapable of providing this depth of service, while others are capable but cannot make the economics pencil. Yet such advisors may still use the term “comprehensive wealth management” when discussing their decidedly more limited offering. Some advisors, for example, will supply some basic, one-time planning such as a retirement projection and call that “comprehensive wealth management.” It is not.
The bottom line: Many advisors claim that they provide “comprehensive wealth management” services. Few actually follow through. Clients should examine the true extent of so-called comprehensive service offerings before choosing an advisor.
After all, In the end, “actions speak louder than words.” Keep an ear cocked for independent advisors who are “playing by the book” of bad clichés.
Michael J. Nathanson, JD, LLM, is the Chairman, Chief Executive Officer and President of the Colony Group.