1. Performance is important - just not as important as you think
Coming out of school I thought the formula for success in wealth management was simple; do your best to generate Buffett/Soros-like returns and watch the money roll in. Of course you'd still need people with the skills to manage relationships with clients, but if you keep beating the market your reputation of formidable investing prowess would be enough to generate new business almost automatically…right?
Not even close.
While no clients are going to stick around if you're losing their money year-on-year, most (if not all) don't give a rats ass about how you did relative to some index they've probably never heard of. They care about having enough money to meet their financial goals; be that having a comfortable retirement, having enough to send their kids to college or buying a boat once they pack in their jobs. Meeting these expectations is far more important than generating that ever elusive alpha.
2. The robots are coming but don’t write off the Human Adviser just yet
Every week there seems to be a new article written about how automated advisers like Wealthfront or Betterment are going to make the majority of financial advisers a thing of the past. While it’s undeniable that there’s a secular shift underway towards automated adviser’s, I don’t think this spells the end for your typical FA.
Why? People like talking to people. While Wealthfront might be the economically smart way to invest your savings, some people just love calling up their trusted adviser to have a chat about whatever’s going on in the markets. On top of that there’s the behavioural side. When the market is jittery/collapsing, your average Joe investor is a lot less likely to sell out at a stupid time if he has an actual human he trusts reassuring him that long-term it’ll all work out.
3. The incentives between Advisers and Clients aren’t always aligned
Jason Zweig has talked about how messed up the fee structure is in the asset management industry; clients are charged a % fee for portfolio management services which are basically a commodity (think of how many people are lumped into a medium growth portfolio strategy), while real value-added services like financial planning are free!
As advisers are paid a commission on all fees they generate, they’re incentivized to maximize the $ amount of assets under management, as opposed to adding value to clients they already have. Something tells me this won’t last – perhaps the shift to robo-advisers will force the current players to put more emphasis on the things that really do add value.
Spot on. The industry will have to undergo a fundamental shift and that's going to start with the under-40 crowd of advisors. I'd presume the FA will morph more into a 'Personal Financial Concierge' role with small teams running client money and partnering with their accountant and legal contacts to cover things holistically as opposed to a single advisor an their assistant selling mutual funds and annuities or painting the tape with solely transactional business.
If there is one thing that is certain about this business however, it is this: it's a relationship business. Completely eliminating the relationship part (the human element) is contradictory to the nature of building trust, and as you mentioned, trust is all that keeps a client from blowing up their portfolio when things get dire or the talking heads start spouting economic apocalypse.
Performance is indeed important, but realize most clients can't tell blue chips from potato chips and thus can't properly benchmark their advisor. As long as they see they're making money YOY, (sadly) they're content. People are very private about their finances (and returns) and unfortunately enough, this is actually why crappy wealth managers/fund companies can and do thrive. Also couple that with the fact that each client portfolio is going to have a different risk profile (and thus different projected return based on efficient frontier) and benchmarking advisors or identifying alpha becomes even more cumbersome. I'll be the first to admit I wish there was more transparency here.
thebrofessor , the pro to chime in. Do you agree with this?
more or less. what dinganddong15 said is somewhat true, but I take issue with it. any FA worth a damn knows about estate planning and can share meaningful insights. we don't pretend to be greg englund and be able to essentially draft documents, but to claim that something like this is a "secret weapon" is a bit disingenuous. now if you put a top PB team against your local ed jones guy, of course they'll look like Einstein by comparison, but more often than not, PB teams are in competition with other PB teams, top wirehouse teams (which do have estate planning expertise), and trust companies, so it's a relatively level playing field.
regarding performance, absolutely true. I spoke to this in another thread (http://www.wallstreetoasis.com/forums/how-can-am-survive-the-move-to-pa…), go there for my thoughts on that. clients won't allow you to underperform forever, but they're more forgiving than the seeking alpha keyboard warriors and jack bogle disciples would otherwise have you believe.
I talked about robos in my AMA (http://www.wallstreetoasis.com/forums/ask-a-bro-thebrofessors-ama-2016-…) but the tldr version is they'll cause the industry to shrink but humans and robots will peacefully coexist long term.
regarding fees, that's an interesting one. sidebar: zweig is overhyped. he wrote the commentary to ben graham's intelligent investor and fucking butchered it. the king of value investing would not want someone paying homage to indexing every other page. jason also falsely believes (at least the writing I've read) investors mostly act rationally and don't need to be protected from themselves. some of his stuff is intriguing, but I think he's a gasbag by and large.
to expand on the point, since the advent of managed money (started in late 70s, en vogue beginning in the 90s, now pretty much industry standard), clients pay an annual percentage that is not standard. broker A may charge 1% flat, while broker B may charge 50bps on bonds, 2% on option writing accts, 1% on active stock managers, and 75bps on "other bets." so someone with 1mm paying 1% pays $10k, and someone with $2mm pays $20k. does the 2mm person get twice the amount of attention, twice the quality of service, a vastly different experience, or any significant value over and above what the 1mm person gets? maybe, but maybe not. you can think of it like this: broker makes you a dollar, you keep 99 cents. the vanguards of the world rightly calculate that those pennies compound and add up, but the behavioral economist in me realizes that those most benefitted by an advisor would end up giving up quarters without some guidance in the markets.
what are the alternatives, you may ask? well, the only two I can think of are hourly/retainer, or a la carte/transaction. there are inherent problems with each, and I think you'll get a sense of why I don't think they're good models.
hourly/retainer: all else held equal, time is not an indicator of work quality. put two employees on a job, pay one by the hour, one by the job, and you'll see what I mean. attorneys are guilty of this, and maybe consultants to some extent. the advisor is incentivized to take more time with issues, and provides a tangible disincentive to clients (they don't want to call and ask for advice because they know they'll be billed). this is a negative for me that shows up with legal work. many times people don't want to pay for legal advice because they know the clock starts as soon as the attorney answers the phone, so often times their estate plans or other legal plans are outdated purely because of inertia. annual retainers might work, but it gets complicated when you add in investment advice. if I'm being paid purely on advice, not on managing investments, how do you assess my value, and what's your true cost? if you pay me say $5k/year for planning/other advice but you end up paying say 50bps all in at wealthfront to manage your assets, have you really saved any money? probably not.
a la carte/transaction: huge conflicts of interest. the broker is incentivized to generate activity, regardless of whether or not that activity generates value. if I sell you 100 shares of ABC, and then I call you 6 mos later to encourage you to sell that stock, it makes no difference to me if you made money on it, the commish is the same. same thing with other products. if insurance policy A pays me 1% and would be fine, I still might put you in policy B that pays me 5%. also, if my planning services are a la carte ($1000 for financial plan update, $2000 for estate planning meeting, $4000 for IPS development & implementation), it encourages too much activity. furthermore, it's a sunk cost. you pay me 5% of $5k up front for something, you're stuck, you have to see it through with me, whereas with the %fee on AUM model, you're not locked into anything. schwab wasn't the first to do this, merrill morgan and ubs have done it forever. if I quote you 1% and you're unhappy and leave, you only pay the fees for the time you were a client, nothing more. but if I do a financial planning update for you and you pay me $1000, I don't care if you're happy after the check clears.
there's no perfect compensation model but I think %fee is better than others.
Interesting thoughts thebrofessor . How about a third option; a flat fee per annum with different tiers for different AUM as opposed to a % of AUM? EG you pay x on the first $1m, but then 2x on $1m - 10m. I admit it's going to be a bit arbitrary no matter where you draw the line, but I think this would align incentives better than the current system.
This would usually result in lower fees for the client, but with the caveat that they would have to pay extra for financial planning that adds value as opposed to it being part of the % of AUM fee.
Agree especially on fees. I work for a PB and we have an in house "wealth strategies" advisor who is a former practicing estate planning attorney and he is the secret weapon to our model. He's helped win several massive relationships through helping them with estate planning ideas that most if not all FA's and brokerage guys would be clueless about. We've had clients ask him what they owe him for helping them and are shocked that it's included in their AUM fee. That's what a true private bank, HNW/UHNW PWM experience should be like.
Yep, I wish we had someone like that on our team. In an age where professional designations are too numerous and don't necessarily equate to alpha-generating knowledge, a previous legal, consulting or accounting discipline can really be the competitive advantage when landing new clients.
To White Collar's point, well...excellent point. PWM, IB, PB, VC/PE are still very lucrative professions, but far and few between will ever make a million/year consistently and many will wash out onto bigger and better things. Most of our really big dollar clients come from oil, old money, farming/ranching, and the science/tech fields. Those who have big money who* do *come from finance backgrounds are usually ex-Wall Street folks that leveraged their financial contacts and/or seed-funded their way with Street money and really exploded their net worth from there. I'm sure it's different in NYC/LA/SF/Seattle, but while finance is certainly a way to make a comfortable living better than many you'll meet, you'll likely never be Yachts-and-Shots at Port de Monaco on the regular.
Gordon Gekko rich is for the creators and producers of society...and for you delusional self-righteous wall streeters out there, we don't actually produce anything--we just make the economy more efficient.
Xiiixiii thoughts?
One thing I've learned that would be helpful to reiterate on WSO - there are a ton of different ways to become quite wealthy ($5-10mm in liquid assets) other than finance.
List top alt routes!
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