Some Notes On The Financial Services Industry and the Investor Experience

Most investors do not want a professional to help them. They are afraid they will be sold to and are happy avoiding that awkward situation. They are comfortable managing their accounts online and are just as happy to avoid a salesman when managing their investment affairs. There is an inherent skepticism toward the industry, its institutions and the representatives of the industry.

Parts of the investment advising function are getting commoditized by technology, including risk assessment, asset allocation, account aggregation, rebalancing, tax optimization and reporting. Parts of the investment management function are also getting commoditized by technology including, security selection, portfolio construction, evaluation, performance measurement, and portfolio attribution.

The key to success in investment advisory is creating a great customer experience. This requires not only problem solving skills and the development of financial solutions, but education skills, communication skills, and listening and empathy skills. 

***inspired by an article in CFA Institute Magazine

Solving the failure to deliver problem!

The financial advisory industry has a problem. For years it promoted active management and beating benchmarks. To wit, it is slowly but surely realizing it cannot deliver on those implicit contracts. And to make matters worse, the industry is promoting performance based outcomes when it has no control over the performance or the outcomes. The marketing gurus are going to have to put their thinking caps on and come up with a solution. And this is what they are doing! The solution from what I hear is to redefine success from beating a benchmark to being on track to meet a long term goal and to focus on process. I think the focus on process is a positive (along with tax & estate planning). But the redefinition of success seems to be a fudge or smokescreen for underperformance. Something along the lines of "the greatest trick the Devil ever pulled was convincing the world he didn't exist" translated to "the greatest trick the financial advisory industry ever pulled was convincing investors that underperformance was overperformance" or when in doubt redefine the benchmark.

Ultimately I think the industry will paint itself in a corner again. The irony is that Charlie Ellis has been pointing in the right direction for years (putting asset management outcomes in the context of educated investment counsel). The problem is the industry cannot adopt his suggestions because it means losing a lot of money. This is how deeply entrenched systems work. Vested interests cling  to the old ways even as the foundations are eroding all around. Eventually a catastrophic collapse takes place and the foundations are rebuilt anew from the rubble.

Smart Investing Is Smart Business

It amazes me that people who have been phenomenally successful in creating and building valuable businesses - people we call "good businessman" - are often bad investors. And not just bad investors in the sense that they make lousy investment decisions (they do that also, but that is a post for another day). But bad investors in the sense of not knowing the price they pay for financial services and not knowing the pros & cons of the strategy(ies) they have hooked their 'barrow to. Quite simply, when it comes to managing their financial wealth, they leave their business brains at the door. When in their business would they not carry out the requisite due diligence to not pay more for something than they need and when in their business would they not want to understand the rules of the game. For whatever reason (usually social norm because they are friends and run in the same circles) they trust their advisor is doing the best thing for them. That is a false assumption that has cost a lot of people a lot of money over the years.

A little bit of education and a little bit of knowledge can go a long way to minimizing those kinds of mistakes.

The State of Financial Consultant Direct Calls

Just received a call from a TD Ameritrade Consultant who had taken over my account (I didn't know I was part of someones book) from a guy who has moved on from TD...It was not particularly compelling.

She had recently come over from Schwab having been at Schwab for six years prior. Doesn't inspire confidence when you see the revolving door of financial consultants.

Several things she said left me incredulous:

• In the first instance she mentioned they were doing a sales promotion - ding! ding! ding! I don't like being sold to - that would reward me with $100 for every $25,000 I moved over (0.40% - you've got to be kidding me). 
• In the second instance she tried selling me on some management program (forget the name I have seen it advertised before) explaining how it uses independent research house Morningstar to construct portfolios from the best 37,000 mutual funds (emphasizing twice that 37,000 number to highlight how difficult it is to navigate the financial marketplace). I asked whether that included Schwab and Fidelity funds which she had dished previously as implying their programs were biased by including them, and she was not sure. And when I asked if any Fidelity and Schwab funds might rate well, she unbelievably said she didn't think so (remember, this is someone who has been selling Schwab funds for six years).
• She indicated the fees for the managed program ranged from 0.3%-1.25% with an average of 1%. Ouch. 1% for a little bit of automatic tax harvesting. That can't end well. 
• She spoke about Tony Robbins new book that raved about TD Ameritrade as though he were an authority upon the subject.

If that is the state of Fidelity, Schwab, TD Ameritrade direct sales then they really need to sharpen their pencils. They are in pole position with their existing clients and it really shouldn't take much to upsell additional services.

Jumping the Shark in Financial Advisordom

I am inundated with financial advisor magazines. I could have sworn there were only one or two a couple of years ago. Now there seem to 10 to 20 different magazines all trying to do the same thing - sell services to advisors.

It reminds me of the technology bubble and all those technology magazines I use to get back during that blow-out.