Do You Want a Financial Advisor or Investment Manager? (Hint: They are not the same thing)
I took one liberty with the title of this blog post, which is leaving out the term, “financial planner,” because in my opinion, a financial advisor should be a planner as well. I also chose the word, “want,” quite purposely vs. using the word, “need.” Many, if not most, people could benefit from a relationship with a good financial advisor, but that does not mean they need one. Similarly, other people may want a relationship with a financial advisor for any number of legitimate reasons, but it still doesn’t mean they need one.
Back to the topic at hand. I come at this from a different vantage point than many, “advisors,” because I spent a good portion of my career as a professional investment manager. At one point, I ran portfolios totaling almost $4 billion. I very much enjoyed being an investment manager, and I was quite good at it (if I don’t say so myself), having outperformed my respective benchmarks just about every year. I was part of strong teams, and we had or developed expertise that allowed us to do research & analysis to appropriately match investments with client or corporate needs and risk tolerance. Importantly, because we worked for large investors, often moving tens of millions of dollars at a time, we had full access to corporate leadership and performed on site due diligence. This genuinely did give us some advantage over small “independent” investment managers, but mainly in rooting out fraud. I can proudly say that my team was one of the few who avoided making an investment in one of the biggest swindles in structured finance before the financial crisis because company executives couldn’t (or wouldn’t) answer our due diligence questions.
We spent all of our time studying our portfolios, looking for new investment opportunities, speaking with industry and economic leaders, and all that kind of fun (for me) stuff. We did not spend time worrying about client cash flow needs, their businesses, their lives, or anything like that. Other professionals took care of that, giving us the information we needed to do our jobs to match assets with liabilities and risk tolerance. Our sole responsibility was to hit the portfolio return targets. But managing investments for inanimate companies to achieve their objectives is very different than working with people, and all the complications that go along with living life as a human being.
It’s those complications that a financial advisor should mainly be helping with, not investments.
The advisory aspect of the job is much more difficult for the advisor, and more valuable to the client, than the investment management portion, and it’s also the reason why most “advisors” focus on the investment management side, and why many clients are ill served by their advisors. S&P Dow Jones Indices published a scorecard called SPIVA (“S&P Indices Vs Active). The data clearly indicates that actively managed funds (never mind advisors’ attempts to stick their hands into the mix as well) underperform their benchmark indices over time in the vast majority of cases. If you want an investment manager for your personal savings, more power to you. The statistics on the small number of investment managers who consistently outperform the markets, and the impact of their fees on investment portfolios, clearly argue against going that route, but if that’s what you want, have at it.
How, then, can true advisors add value to their clients’ lives, if not by somehow magically causing their investment portfolios to outperform the markets?
True advisors are mentors to their clients. They are sounding boards. They become a part of important life decisions, adding an objective viewpoint when circumstances make that all important objectivity almost impossible for those directly involved to achieve. They work hard to control what can be controlled - to take action where action is warranted, such as tax planning and preparation, and to leave what should be left be alone. They should work to ensure that their clients capture as much of market returns as possible, at as little cost as possible, and to ensure in every way that as much of their clients’ money remains in their clients’ pockets as possible.
Above all, the advisors’s presence in their clients’ lives should make a material positive impact, even if not always measurable by investment returns.
If you understand that investment managers don’t typically add value to personal investment portfolios, kudos to you, but if you then tell people that financial advisors are a waste of money because people don’t need investment managers, that’s where I take issue.
