28 Aug How Do You Like Your Brussels Sprouts?
This excellent piece was published on Epsilon Theory’s website a month ago, and I’ve been pondering it on and off ever since. I knew I wanted to write a post about it but hadn’t quite crystallised my thoughts. Until this morning (Tuesday 27th August).
The point that Rusty Guinn is making in his piece is this: That (IMHO) revolting vegetable the Brussels sprout has been dressed up with fancy pants ingredients in recent years to hide the fact that “Brussels sprouts are objectively gross”. Similarly, for years financial advisers and wealth managers have got away with dressing up their ‘investment expertise’ as providing value for the fees their clients pay.
“If you think that the edge in your advice service is performance, you are probably wrong. If you think that the edge in your advice service is investment selection, you are probably wrong. If you think that the edge in your advice service is investment insight, you are probably wrong. If you think that the edge in your advice service is uncovering new investment ideas, you are probably wrong.”
I completely agree with this statement. However, Rusty then goes on to say:
“And yet, if prospective clients don’t believe that we can do each of these things, we will almost certainly fail to build a business. What’s worse, those prospective clients will do business instead with someone less scrupulous.”
And I think there’s a lot of truth in that statement as well.
In our initial meetings with potential new clients, we have no items on our agenda that deal with our ‘investment expertise’, and our pre-meeting call will have filtered out anyone who is just looking for an investment management service. So, anyone coming into our office knows that our primary focus is on financial planning and helping our clients achieve their life goals.
And yet, in answer to the question we ask at all of these meetings “If we were meeting three years from now, what would need to have happened for you to feel that our relationship has been a successful one?”, the response invariably includes variations on “My portfolio will have increased by x%/£x / beaten the index”.
Why is that? It gets me every time, especially as although our website contains a wealth of information about our investment philosophy and we have a comprehensive guide which explains both that and our investment process, we make precisely zero mentions of our ‘expertise’ in generating returns or ‘beating the market’.
It seems to be down to years of high level of conditioning. A drip, drip, drip which insinuates itself into the minds of investors somehow convincing them that a firm is only as good as its investment spiel. I would be prepared to put money on the fact that by choosing to emphasise the benefits of a financial plan we have lost potential new clients to someone else whose firm’s pitch centred much more around what Rusty refers to as “the cartoon of expertise”. The cartoon that celebrates “some expertisey-sounding thing about our firm that really has nothing to do with expertise or the odds of any investment outcome”:
We tout the home office’s resources.
We talk about the depth of our teams and resources.
We talk about team credentials.
We talk about our access to unique investments.
We talk about our ESG framework.
We talk about our research, our data, our analyst team.
We talk about our process.
We turn ourselves into a talking head. An expert.
So much sexier a proposition than “We will invest your capital in line with your risk profile to capture the market returns that are available to everyone, at the lowest possible cost”, right?
So, what was it that made this piece suddenly spring to mind today? A headline in the Financial Times:
‘World’s top wealth manager urges clients to sell stocks’
UBS Wealth Management has moved to an “underweight” equity position due to fears surrounding the US/China trade war and signs that global growth may be slowing. UBS believes that these two situations increase the risks of holding equities.
Reading the article tells you pretty much nothing that is of any practical use. What is the point of articles like this? Why should we believe UBS is right any more than we should believe anyone else? Even a stopped clock is right twice a day. And if UBS is right in its opinion that markets are likely to fall (at some unspecified point in the future), what does that mean for investors and what can they sensibly do with that information? If you’re currently invested in a 60/40 portfolio, should you be reducing that to a 50/50 portfolio? If so, why? Is this what UBS’s advisers are doing for their private clients? If so, why?
I’m not picking on UBS specifically, they just happened to be the subject of that article. You can read countless opinions on where markets are (apparently) headed from well-respected firms if you care to look for them. The weird thing, in UBS’s case, is that it – quite rightly – makes a good case on its website for the benefits of having a financial plan to guide your investment decisions. But I guess the headline ‘UBS plans to maintain its clients’ exposure to risk assets in line with their financial objectives and risk profiles’ doesn’t have quite the same ring to it.
For those of us that don’t want to build our businesses on this “cartoon of expertise”, how should we combat the effects on the people who find their way to us of those who do? I hate to use the word ‘educate’ as it sounds intensely patronising. On reflection, I think it’s just a question of continuing to emphasise (in what we say and what we do) what’s important in giving our clients the best possible chance of having a successful investment experience. Rusty lists his top six as being:
Identifying and consistently re-evaluating and delivering the right level of risk.
Delivering a nuanced, real understanding of diversification.
Really influencing household expense management.
Financial, estate, tax and philanthropy management.
Business consulting for entrepreneurs and business owners.
Structuring investments to properly complement existing illiquid holdings.
The thing is – bottom line – us doing the things on the above list, while laudable, is not where we add the most value. With a bit of effort, an awful lot of people could do a lot of the above themselves. It’s THIS which adds value (emphasis mine):
“When risk appetites are high, restraining exuberant behaviours. When risk appetites are low, restraining fearful behaviours. And in all cases, working constantly to ensure that when these times arise, we have the kind of relationship and trust with our clients that will make them listen.”
It’s ALL about the relationship. We know this as a fact because we regularly ask our clients to take part in Dimensional’s Investor Survey, and when asked “How do you primarily measure the value received from your adviser”, here’s what they repeatedly tell us:
It’s amazing how little value our clients (and all 22,938 participants) attribute to their investment returns, but no matter how much people like Rusty and firms like ours talk about this, it seems that maybe you have to experience the service before you can truly value it.
I haven’t quite worked out how to square that circle yet.