Here are some of the wacky things I’ve heard financial advisors say to clients:
#1 – Our fees put us on the same side of the table
This is laughable. If you pay your mechanic to fix your car, does that put you both on the same side of the table? No.
Many advisors charging the typical 1% of assets under management (AUM) fee will argue that they have an incentive to increase your returns and grow your portfolio so they can earn more money. But this is simply not true. Financial markets provide returns, and it’s up to your advisor to help you harvest your fair share of what’s available.
The true incentive in an AUM fee structure is right in the name… assets. Your advisor has an incentive to gather assets. I mean if they improve your investment returns, that’s great for you. It’s also great for them because it will help them gather new assets from clients. But it’s likely that those improved investment returns were the result of luck, not skill. And it’s also likely that your advisor’s luck will run out at some point.
#2 – We only invest in the highest quality stocks
Many advisors talk about investing only in “blue chip” stocks. Basically, these are household names that have been around for a long time and have a decent track record of earnings. However, investing exclusively in blue chip stocks can lead to missing out on some major market winners. Amazon, Google, Tesla. None of these names were blue chip companies when they first went public (and arguably still aren’t even today). But if you owned a broad based index fund, it’s likely you earned your fair share of returns from these companies’ market performance.
Another argument against blue chip companies is that they can suffer from a lack of innovative thinking and willingness to address significant business challenges. Kodak would be one example. Faced with the development of digital camera technology, Kodak’s response was to stick with their massive film photography business lines, and the investors in Kodak paid a high price for that.
Better to stick with a passive, “whole of market” investment approach. As Jack Bogle used to say, “Don’t try to find the needle in a haystack, just buy the whole haystack!”
#3 – We have a “negative” conflict of interest
I’ve heard advisors claim that by recommending a Roth IRA conversion, they have a negative conflict of interest. That is, the advisor will lose money if the client follows their advice, which proves they are truly looking out for your best interests.
For example, if you withdraw $100,000 from a pre-tax IRA for a Roth conversion, then you’ll owe +/- 25% or $25,000 worth of taxes. If you pay the taxes from your portfolio, then the advisor has fewer dollars to manage, and thus generates a lower fee.
But here’s the rub… your advisor may be taking a lower fee now, but if their advice works out, they’ll earn a higher fee in the future. After all, a Roth conversion really comes down to minimizing your total lifetime tax bill. So if your advisor gives you good Roth conversion advice and lowers your total tax bill, there will generally be more money in the portfolio to manage over time. And those additional assets can benefit the advisor.
It’s important to note that anytime an advisor charges you a fee, they are creating an inherent conflict of interest. And when working with an advisor, there’s no such thing as a “negative” conflict of interest.
#4 – We have ice water in our veins
Advisors are not robots. They may have more experience and familiarity with capital markets, but at the end of the day, advisors are still subject to the same emotional and cognitive biases as everyone else.
Here’s another way to think about it. If you were seeing a therapist, would you want to talk to a robot, or someone with empathy, understanding, and a willingness to understand your fears and emotions? Well, working with a financial advisor is akin to having a therapist for your financial life.
If your financial advisor proudly touts the ice water in their veins, it’s likely they won’t be able to understand why you get so upset during a market crisis or help you find a way through to the other side.
#5 – Your portfolio is unique to you
Some advisors will try to convince you that they can create a super special portfolio with some hidden investments or asset classes that nobody else knows about. Often this results in an advisor pitching some sort of complex financial product such as a variable annuity or equity linked CD.
“Uniqueness” is also one of the core tenets behind custom indexing. Remember, there are no free lunches in investing. And the truth is that most investors will be best served by holding a plain-old, boring basket of passive index funds.
#6 – You didn’t hire us to beat the benchmark
I’ve encountered financial advisors that use their active investment philosophy as a selling point when meeting a new client. They’ll claim they can “personalize” the client’s portfolio (see #5 above) and invest only in the “highest quality stocks” (see #2 above).
But when the advisor’s handpicked portfolio underperforms a passive benchmark, that same advisor will then tell the client that “you didn’t hire us to beat the benchmark.” Well, what exactly did they hire you for? Bad performance with a side of high costs? Of course not! Any client engaging with an active investment approach is attempting to outperform a relevant passive benchmark. After all, if they didn’t want to beat the benchmark, they could always just match it using passive index funds.
#7 – I need to trade so the client knows we’re working
Has your financial advisor ever traded for the sake of showing activity on your monthly statement? It’s likely that they have. Some advisors feel a need to justify their fees, and this can result in irrational trading activity merely for the sake showing the client some sort of evidence of their work. After all, if the advisor isn’t trading, then they aren’t doing their job, right? Give me a break!
Your financial advisor should be able to justify each and every trade done on your behalf. Trading activity should take place only rarely and for valid reasons such as:
- Handling cash flows into or out of the portfolio
- Rebalancing
- Harvesting tax losses or gains
Have you heard any other wacky things from financial advisors? Feel free to let me know and I’ll add it to the list.
