If you are happy with the quality of service you’re getting from your financial adviser, you can skip this article. If you believe that you’re getting a reasonable amount of value for the fees you are paying, you can skip this article. If you’re not sure, or if you answered no to either question, read on.
This is not a hit piece on financial advisers. I was an adviser for many years, and most of the people I worked with were smart, hard-working, and sincere. They were also naturally gifted at the art of sales. Of all the skills required to succeed in the advice business, salesmanship is far and away the most critical for survival. It’s a simple fact of life that investment advisers who excel at investing and advising, but have difficulty with sales and marketing, will wash out of the business within the first 18 months.
So, what’s the problem with that? Why should you care about how good your adviser is at marketing, as long as he knows what he’s doing in the more important areas? The answer is found in the way the traditional advice industry is organized. Specifically, under the traditional advice model, advisers don’t have enough time to properly service their existing clients. Furthermore, the financial incentives for traditional advisers make it difficult for them to offer completely unbiased advice.
For new advisers who are still in the process of “building a book” of clients, prospecting is a full-time activity. It’s a matter of survival. A new adviser typically has 6 months to prove himself worthy of continued employment by meeting his or her initial quota of “assets under management.” After that, there are progressively higher hurdles to reach – at the 1 year mark, and possibly at the 18 month mark. If the newbie fails to reach any of these sales targets, he washes out. It’s very Darwinistic.
If you happen to get caught in this whirlwind of survival-of-the-fittest marketing, you shouldn’t expect to receive the undivided attention of your new adviser. Well, you can expect it, but you probably won’t get it. New advisers spend just enough time with prospects to get the account. After that, they turn the paperwork (and there’s lots of it) over to an assistant. They farm out the actual investment work to another assistant – a specialist who is trained to quickly and efficiently match your goals to one of several prepackaged portfolios. In some ways, it’s sort of like a financial assembly line.
When your paperwork is approved, and your portfolio is selected from the menu, the adviser will call you back and do what you’re paying him to do – advise you. He will go through the details of the portfolio, ask you if you have any questions, and once you give him the green light, he will turn the portfolio over to yet another specialist to execute the necessary trades.
For an experienced adviser, things work a little differently. He or she doesn’t spend very much time on the phone prospecting for new business. He delegates that responsibility to an assistant (a “booker.”) The experienced adviser spends about 30% of his time on back-office and compliance issues. He spends another 20% of his time out of the office on prospect meetings that were arranged for him by his booker.
He spends another 30% of his day attending outside events, like business lunches, golf outings, charity fund raisers, and the like. That leaves just 20% of his day for advising his existing clients. In other words, experienced advisers only spend 1 day out of 5 actually advising their clients. It’s not that they don’t care about their clients. That’s just the way the traditional advice business is structured.
Once again, you might be wondering what’s the big deal? You’re happy with your portfolio and you like your adviser, so where’s the problem? Let’s run through some numbers to find out.
The average adviser has about 400 clients. For most advisers, about 80% of their fees come from the top 20% of their clients. Who do you think gets the attention of the adviser? Are you one of your adviser’s top clients? Unless you’re pretty high up in the pecking order, don’t expect to get much attention from your adviser. Take a look at your last statement and find out how much you’re paying each year for advice. If the quality of service you’re getting doesn’t match the amount of money you’re spending on advice, maybe it’s time to look at some other options.
One option to consider is a fee-only advice model. In this model, you only pay for the time the adviser actually spends on your account. It’s calculated by the hour, using an agreed upon rate. If you’ve been paying a percentage of your account balance each year to an adviser who doesn’t have time to advise you, maybe it’s time to switch.