The Seven Dumbest Mistakes I Made As An Advisor

June 16, 2015

by Robert J. Martorana, CFA

PDF | Page 2

After 30 years in the advisory business, I’ve made plenty of mistakes. It is my hope that this article will help others avoid following in my errant footsteps.

I put together a list of cautionary tales for the interns at my firm. It starts with the big picture and works its way down to more granular issues, and it includes references to best practices I have observed as a consultant.

1. Clinging to a poor value proposition

The dumbest mistake an advisor can make is having a value proposition that is vague, uncompetitive or, at worst, nonexistent. I learned this the hard way, when a high-net-worth client complained that the firm where I worked charged a high fee, bought expensive mutual funds and kept the same asset allocation year after year. “I have an account with your firm and an account at Charles Schwab. Your firm offers a diversified mix of funds and so does Schwab. Your asset allocation never changes and neither does theirs. You charge a high fee and they don’t. Why am I here?”

Ouch.

The client nailed all of the key weaknesses in my value proposition: Premium prices, the lack of low-cost funds and an asset allocation process that did not respond to major changes in capital markets. The critique stung because it was true. (In all fairness, this firm did offer a full suite of wealth management services, but the client did not perceive value in them.)

Addressing these flaws eventually led me to start my own firm, and my value proposition was and still is based on four principles:

  • Maintaining a fiduciary mindset: This requires a fee-based compensation and fiduciary business model in every arena. Otherwise, conflicts of interest and vested interests arise, and the best interests of clients fall to the wayside.

The worst mistake is to have a value proposition that is not based on a fiduciary model. (It may be dumb to have a flawed value proposition, but dumb is fixable; dishonesty is not.) A fiduciary mindset requires:

  • Intellectual honesty: Only you can know if you have a fiduciary mindset. After all, even fee-based advisors can be lazy, misguided, stubborn or selfish. We all have our limitations as investment advisors. Honest advisors admit their flaws, learn from their mistakes and do their best to minimize the impact on clients.
  • Practicality: If an ethical appeal doesn’t matter to you, consider the practical consequences: Commissions are going the way of the dodo, and fee-based fiduciaries are the future. When you deviate from the fiduciary standard you will spend your time and energy hiding your limitations and covering up your mistakes, rather than honing your skills and improving client relationships. Either way, intellectual dishonesty takes its toll.
  • Using a goals-based and holistic approach to advice: Investment advice that is goals-based and holistic requires an ongoing process of assessing and reassessing client needs and the market structure. This is a continual challenge for a variety of reasons:
    • Client resistance: The client doesn’t always want to talk about goals or share information about their entire life. This is frustrating for advisors; you can’t help if you don’t know.
    • Aggregation of assets: Holistic advice is problematic if the assets are held at other institutions. You may be able to gather information and give advice on all of the client’s accounts, but if your firm does not aggregate assets your recommendations may not get implemented.
    • Economic viability: A holistic model is time consuming and may not be economically viable for small accounts. Your business model should never make a client feel small. (There are small accounts, but there are no small clients.) Some clients may be best served by target-date funds, a discount broker or automated solutions such as Betterment and WealthFront.
  • Being cost-effective: Solutions should be as cost-effective as possible and keep the all-in fee to the client as low as possible. Being a full-service advisor is very challenging for small accounts, so if the client wants a do-it-yourself approach, I’m glad to show them how. In that respect, I agree with Fair Advisors, that clients do not necessarily need an advisor, assuming they have the “time and temperament.” (Although that is a big “if.”)
  • Staying focused: You cannot serve everyone. The needs of clients vary and so do the value propositions of advisors. I have no problem referring a client to an advisor with a different philosophy, as long as the advisor is honest and a good fit for the client.

My value proposition leads me to use model portfolios with low-cost funds, plus selective use of liquid alternatives. I focus on clients with less than $500,000 and I charge 1% or less. I create model portfolios myself, and I use the Envestnet platform, which helps me customize while still providing scalable solutions. I spend a lot of time consulting, and this keeps me up to date on best practices.

This value proposition works for me, mainly because my clients like to speak with an advisor who has their “hands on the wheel.” Clients like the fact that I am willing and able to make changes in asset allocation when necessary. Many investors are uncomfortable with static asset allocations during retirement. They want active management of distributions and they are not satisfied with mathematical models that merely extrapolate the past. They are happy to pay a modest fee for strategic changes to asset allocation.

Advisors who are just starting in the business may be limited in their options, but they should be realistic about their bandwidth, their strengths and weaknesses and where their value proposition fits in the spectrum of wealth management solutions.

PDF | Page 2

Remember, if you have a question or comment, send it to [email protected].

Contact Us | Privacy Policy

© 2015, Advisor Perspectives, Inc. All rights reserved.