Telling the Truth to Those Who Want the Truth

Telling the Truth to Those Who Want the Truth

April 15, 2024

I recently heard a quote from Jason Zweig, a finance blogger with the Wall Street Journal. He said, “Lie to people who want to be lied to, and you’ll get rich. Tell the truth to those who want the truth, and you’ll make a living. Tell the truth to those who want to be lied to, and you’ll go broke.” I think it perfectly sums up the current state of the financial advising business.

This statement resonates with my experience transitioning from discount brokerage firms to the local, independent side with Boyd Wealth Management, and I feel compelled to clarify the confusion the industry has caused retirees and investors.

Misperceptions

The distinction between wealth managers, who deliver genuine advice, and investment salespeople, who sell products, has deliberately been blurred by large brokers who adopted advisor-like job titles for their sales force, implying a position of loyalty and competence. Research has shown that individuals trust professionals with titles, such as “Financial Consultant” or “Investment Consultant” more than “Stockbroker” or “Investment Salesperson”, which is essentially the roles they are playing. See chart below:


Consequently, due to this misperception, individuals whose professions are outside of finance increasingly rely on salespeople for financial “advice.” Since most people do not have the will or time to look elsewhere for counsel, they often settle on firms with the most prominent brand name.

The objective of asset managers at these large firms is to increase client assets under management, often using proprietary funds and costly novel products. Yet, sufficient evidence indicates that an overwhelming majority of active managers and/or active funds cannot regularly outproduce their benchmarks in the intermediate to long-term. As the chart illustrates below, two-thirds of domestic active fund managers underperform their relative benchmarks over a 10-year period:

If we were to include capital gains taxes, since active managers engage in more frequent account turnover, the number of underperforming managers would be notably higher.

Furthermore, salespeople intentionally avoid allotting adequate time to client’s tax returns, real estate holdings and legacy plans, as these matters do not directly contribute to compensation. Oftentimes, this is due to a lack of deep planning expertise.

So, what exactly are investors paying for if proprietary products are not reliably exceeding the market and essential aspects of their financial lives remain neglected?

Truths

With the abundance of accessible market data, financial professionals no longer serve as the gatekeepers of finance. Now, average investors possess the capability to create diversified, model portfolios or low-cost strategies that track an index with minimal expense and/or effort. Alternatively, they can delegate investment management to robo-advisors for fees as low as 0.25% per year.

Investment management has become a commoditized resource, a concept wealth managers embrace by demonstrating expertise in topics not directly reflected on client’s monthly statements.

A few of the primary services a proactive wealth manger should deliver are:

Cohesion: A wealth manager will collaborate with your attorneys, CPAs, 401(k) and pension plan administrators/recordkeepers, heirs, etc. and provide a refuge to consolidate all financial and account information. Filling the gaps in communication between your investments, taxes, business, and legacy plans.

Crystallization: A wealth manager will have a well-defined process that helps individuals articulate their short, medium, and long-term goals. An often-overlooked practice that ensures a client’s capital (time, energy, and money) is appropriately allocated towards their values and objectives.

Behavioral Coaching: Investing evokes strong emotions, making it tricky to stick with a disciplined investment strategy when faced with market or economic uncertainty. A wealth manager will help with detaching emotions from decision-making, bringing objectivity to the process, and maintaining a long-term perspective.

Asset Location and Spending Strategies: A wealth manager can implement optimal portfolio construction and efficient withdrawal strategies, whilst considering the tax-advantaged (retirement accounts) or taxable (brokerage accounts) account structures. The goal is to reduce the amount of lifetime taxes paid, while increasing portfolio longevity.

Asset Selection: With consistent market outperformance unlikely, wealth managers often use low-cost ETFs to reduce the costs of market participation for their clients.

In their landmark study, Vanguard illustrates that a conscientious advisor can add up to 3% (300 basis points) per year in net returns for clients. Not by trying to pick the best funds, but by monitoring investment costs, guiding clients through market downturns, and minimizing the impact of taxes on portfolio returns. True wealth management. See chart below:


*Source: Vanguard

Conclusion

The finance industry has a vested interest in perpetuating the belief that reliance on market pundits and frequent trading activity is required to be successful, thereby generating significant fees and commissions. However, as demonstrated above, success is attained by implementing wealth management practices, exercising discipline, and keeping investment costs low, not by engaging in account turnover.

Yet, salespeople still serve a purpose in finance as individuals at times simply need to buy a product. But the distinction between genuine advice and sales pitches needs to be clear, so clients can make informed decisions for themselves and their families.

Nonetheless, it remains a challenge to improve investor expectations, while distinguishing ourselves from the sea of salespeople and aggressive, misleading marketing tactics employed by large corporations.

As advocates for truth, we aspire to avoid financial ruin as Jason implies in the opening quote. While our candor and unwillingness to overpromise has resulted in the occasional missed opportunity, our commitment to these principles remains unwavering.

Ultimately, if an investor’s needs go beyond simply allocating their brokerage accounts, they should seek a fiduciary wealth manager, not a salesperson.

While those with simpler circumstances, limited to investment management, should strongly consider a robo-advisor to reduce fees paid for a commoditized service.

(Robo-advisors are automated, algorithmic-driven investment management services with minimal human interaction, hence the “robo”. A great low-cost option (typically 0.25% per year) for individuals that purely need investment advice, not counsel on complex matters such as tax, estate, insurance, etc.)

 

Colby

For more information on how we can assist with your wealth planning, you can schedule a 30-minute introductory call here. Our team of experts is dedicated to providing tailored solutions that align with your financial objectives.

Sources/Further reading:

  1. https://www.kitces.com/blog/salesperson-exemption-dol-xypn-public-comment-letter-department-labor-retirement-security-rule/#:~:text=Such%20a%20%22Salesperson's%20Exemption%22%2C,marketing%20that%20they%20offer%20any
  2. https://www.spglobal.com/spdji/en/spiva/article/spiva-us/
  3. https://advisors.vanguard.com/insights/article/putting-a-value-on-your-value-quantifying-advisors-alpha