Dear Valued Clients and Friends,
I debated all week between a few topic ideas for this week’s Dividend Cafe (have I mentioned we take requests?) and not really getting to a place of resolution. There is a Dividend Cafe I want to write that looks at 2023 Nvidia and 1999 Cisco and draws some parallels between the general artificial intelligence topic today and the dotcom moment of my young adult years. That Dividend Cafe needs to happen, but I have more thoughts to crystalize before putting pen to paper so this is not the week for it.
Thursday afternoon, I received an inquiry through the “questions” portal whereby a reader asked, “How is one supposed to go about selecting a financial advisor?” – attaching the appropriate sub-questions around trust, qualifications, needs, and services to the question. I know I have addressed this topic over the years, but I think it has been at least five years, if not longer, and it is a topic that you may be shocked to hear I have many opinions on. There is a fair amount of nuance required because those in search or need of an advisor are, themselves, quite nuanced. The complexity of needs for the ultra high net worth may be different than the needs of one looking for basic, true, fundamental financial planning. Yet in answering this question properly there exists a common ground I will explain that actually connects all categories of investors – certain components that ought to be there for the whole spectrum of clients – complex and simple, large and small, experienced and new.
This week, the Dividend Cafe will address the subject of what matters in a wealth advisor and how one should think about evaluating such. These are only opinions, but they are the right ones. =) In all seriousness, I am completely transparent about the fact that many of my opinions on what to look for in an advisory relationship conveniently match The Bahnsen Group’s story. But might I suggest that there is a chicken or egg fallacy potentially involved here. Did I form my opinions about what a wealth advisor should be to match what The Bahnsen Group is? Or, did I form The Bahnsen Group to match what I believe a wealth advisor should be?
I know the answer to that question. I hope you do, too. Let’s jump into the Dividend Cafe.
The easy cliche first
Most cliches came to be cliches for a reason. But yes, I am very happy to start with the most obvious statement about who one works with to advise them on financial matters. Trust is paramount. The difference between my answer and most platitudes is that I believe I can offer a better basis for defining a rationale for trust: You trust someone when they are trustworthy, and people demonstrate trustworthiness by telling you the truth even when it is not what you want to hear.
I believe the investing public should not trust people who re-shape their answers to investor questions around what investors want to hear.
“Hey Mr. Advisor, I really like ABC stock – do you?” – investor
“Oh yes, we really do think that stock looks great the more I think about it.” – suspicious advisor
“Mrs. Financial Consultant, I think this market is garbage and is about to drop 25% and I should wait to invest until it does. Are you ok with that?” – investor
“That sounds smart. Let’s open an account together so I can help you enter the market after it is done going down.” – sleaze ball consultant
“I hate Chinese food and think McDonalds is gross. Don’t you?” – investor
“Yes, I would never touch all those carbs and saturated fats. I am practically a vegan to be honest with you.” – insufferable financial liar
You get the idea.
Trust is, of course, primarily established outside of quantitative criteria. I know people will always desire a more specific answer here but I have never come across a better way to evaluate trust than judgment, wisdom, and instinct. I think we all ought to make our judgments and instincts as informed as possible, but I do not believe one should ever resist the idea that trust is established in a human relationship out of vulnerability and risk because all human relationships entail risk and vulnerability. We de-risk through greater intimacy, communication, and instinct. It is why I truly believe that a person considering The Bahnsen Group is doing the right thing to take their time in that evaluation. Some of our longest-standing and deepest client relationships came about after really extended diligence and “courtship.” If an organic and patient process is required to establish trust, so be it!
Trustworthiness is more rare than you think
The key proposition I am suggesting behind trust is different than the demonstration of competence, something I will address more in a moment. I am suggesting that telling people the truth even when they do not want to hear it is the basis for trust. Of course, some of the “truth” I refer to may be chalked up by some as “opinion” and that actually doesn’t negate the point I am making. If someone told me that the market was about to jump next week by +5% and I ought to jump in real quick for a one-week +5% jump, and then it ended up happening exactly like that, I ought to have less trust in that person than almost any person on the planet. Someone who dares to predict something that cannot be predicted cannot be trusted because of luck or coincidence. They lied, even if the event in question happened – and the lie was not what the market would do in one week – it was in claiming to have the foggiest idea what the market would do in a given week. There is one “trustworthy” answer about market conjecture, ever.
“I don’t know. Who do you like in the football game tomorrow?”
I suppose there is an even more sophisticated answer a trustworthy advisor could give to such inquiries (that is, anything in the category of clearly and empirically unknowable):
“I don’t know. And neither does anyone else. Now, who do you like in the football game tomorrow?”
It is important to understand the point I am making. I do not see this as merely a reference to market timing or market speculation or short-termism, all things I am happy to condemn and happy to include in your criteria of what to avoid in an advisor. If your advisor says they can time the market or offers short term speculation in trading stocks (in quickly, out quickly, by design) then yes, avoid that advisor. But I am saying something more than that these are foolish investment ideas – I am saying they are key elements in establishing trust or a lack of trust.
It has to be authentic
I am quite confident I have lost a client or two over the years because of my political or theological or economic opinions. But I am not sure what choice I would have had – I am who I am and I decided a long, long time ago that transparency trumped being a chameleon (see what I did there). I have upset people on the right because of criticism of the former President. I have upset people on the left because of criticism of the current President. All I can say is that I have never, ever intended offense, but where my own opinions are different than that of a given client it is not something I feel should be avoided, covered up, papered over, or lied about. I see advisors on a daily basis who couldn’t find an opinion on a controversial subject with both hands, and I do not believe that is more trustworthy.
“Do you like chocolate or vanilla better?” – investor
“Truthfully, I like them both, or neither, or whichever one you like better. I don’t know actually. Really, we try to never let our opinion of ice cream get in the way of telling clients what they want to hear.” ~ Squish Wealth Management
I recommend people looking for an advisor find someone who they can trust, and I recommend they define trust in the context of someone who will tell them what they may not want to hear. Let’s get past Chinese food, sports, politics, and ice cream and color this in a little more.
“Don’t you think I can spend 500k per year on my $5 million of assets and never run out of money?”
“If I hang in there another year with this stock trading at 200x earnings, don’t you think it will double again and then we can sell?”
“Since I am only 53 and healthy isn’t it fine if I put off my estate planning for another few years?”
“I am fine to begin implementing this thoughtful portfolio you have recommended for me but can you just promise me it won’t go down after we get started?”
There are hundreds of questions like this. If I were in the market for a financial advisor I would make up five questions that I knew had unpopular answers, and see what my potential advisor said. I have done a gazillion real estate transactions in my life and never once picked the real estate professional on the “highest” estimate of sale value.
The truth shall set you free. In truth, you establish trust. Period.
You mentioned competence
Now, I do believe a trustworthy moron is a bad idea for a financial advisor, as is a trustworthy painter who hates numbers. The subject matter expertise is important, but in this case it involves a lot of different categories. I believe one’s due diligence in evaluating advisory options must include some consideration of the person and the people’s (a) General acumen, (b) Passion for financial markets, and (c) Intellectual curiosity. That third item is quite important because a very smart person who learns everything they need to know at age 25 and basically stops learning is going to be a very practitioner in the advice business at age 50 (or by age 26). Financial markets are dynamic and very often investing is the process of very good ideas getting arbitraged away. The specifics of what works in one period can change (not the principles, the application) because market prices are brilliant conveyors of information, and they catch up quickly. Intellectual laziness creates an obsolete habit in investment management and is a huge disservice to clients.
But this point should not be focused on only smart people who stop learning. It should also be focused on those who don’t much care for financial markets at all, or who see the instrumentation of their job as a nuisance, or a source of boredom, or something to entirely outsource. I truly believe that one engaged in a career in financial services should care about financial markets, even if they do not directly run money (many advisors utilize outsourced portfolio managers or passive strategies like model-ETF portfolios). What products and solutions they use is not my top priority – but having a passion for the markets that are integral as a solution to the needs of one’s clients, well, that seems like table stakes to me.
I have written a lot over the years about how strongly I feel about “first principles” – about some belief system when it comes to the advisory profession. I start with the belief that the business of financial advice is one of attaching solutions to objectives, problems, and needs. A planning-approach that seeks to define what needs to be solved, and then seeks out the right solutions towards doing so is the business of wealth management. If that first principle is not understood, you do not have a financial advisor, you have a salesman.
But beyond the basic foundation of what the profession is all about, I will never stop saying that I care more that someone has a belief system than I do what the belief system is. Don’t get me wrong – I care what it is. But I think what has become systemic in the advice profession are people with no North Star guiding clients merely along the lines of what is popular and sellable, and not along the lines of a definable process and set of core principles.
If your advisor takes pride in their philosophical shallowness, be concerned. See that there are time-tested principles at play that are cogent, defensible, sensible, and consistent across the platform of the firm.
Depth and Breadth of Services
This has become a major issue in our business, and that is the fact that investors increasingly need integrated services in their wealth management experience. A solid financial plan requires various accounts, portfolio solutions, and strategies that are appropriately attached to it. But it also requires tax efficiency, estate planning, asset titling, flexibility based on life circumstances, and a wide array of services that come up throughout the ebb and flow of one’s personal and professional life. An account filled with a few ETFs and a printout showing you the date you run out of money is no longer considered “wealth management” in this profession. Consider if your advisory options offer the breadth and depth of services you need for maximum value. A lack of integration of the key ingredients in wealth management costs investors money and opportunity. This need for greater sophistication in the resources of a firm is not going away.
The firm should be organized, proficient, technologically capable, and well-resourced. A small firm can do that with limited people and good technology. A large firm may need more people and more resources. But operational excellence should be a cornerstone of the culture with which you engage or no matter how smart the advisor is at stock-picking you will encounter multiple frustrations in your client experience.
Alignment of interests
Simple proposition: If your advisor is a paid salesman who receives compensation you do not know about, there is a conflict that you need to know about. If your advisor is held to a fiduciary standard of care and is paid by you, then they work for you and not someone else whose interests are at odds with you.
This is really quite simple. Your advisor should work for you and have daily incentive to serve you. There is no better way to reinforce this: for the compensation the advisory firm receives be from you, the client, and for it to be terminable at will.
Say more – content as a service
A strong bonus in an advisory relationship is content – that is, real thought leadership or intellectual capital that drives trust in the relationship and that helps the investor understand markets, their portfolio, and the broad economy in a more useful way.
I say this is a “bonus” because I know firsthand that some clients adore the service they get from their advisory team and yet do not read, listen, or watch anything at all their firm (i.e., ours) puts out. On the other hand, point #1 (trust) can be quite reaffirmed by content and perspective and analysis and information, so many rightly find such to be a vital part of an advisory relationship. My only caveat – beware of those who only distribute content created by others and either (a) Claim it as their own, or (b) Disavow it whenever it goes against them. Cowardice is worse than silence.
In a nutshell, my big six with a bonus item for those looking for good criteria for advisor selection:
- Trust (coming from trustworthiness – a blend of gut/instinct and their willingness to tell you things you do not want to hear)
- Competence – rooted in intellectual curiosity and passion for financial markets
- Guiding principles – there is a process that drives how things are done, rooted in real beliefs
- Depth and breadth of services – integrated wealth management that goes into all elements of financial needs and solutions, including tax, estate, and more
- Operational excellence – the experience should be pleasant and easy for you, the client
- Alignment – the advisor should be paid by you, should work for you, and should not work for those who are counter-parties to you. A fiduciary standard of care is a must.
BONUS – thought leadership, intellectual capital, and a strong focus on content as a service
Quote of the Week
“Hurt me with the truth. But never comfort me with a lie.”
~ Erza Scarlet
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I will be back in the Dividend Cafe next Friday with something more economic, markets, and investment-focused. But it won’t be outside my first principles or a relentless desire to earn and keep the trust of those who pay me. To that end, we all work. Every single day.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet