Saying No to the Validators

blind leading blind

The Parable of the Blind Leading the Blind – Pieter Bruegel the Elder, 1568

ValueWalk relays the results of a study carried out by J.D. Power that looks at the self-directed investors on its platform:

Self-directed investors are increasingly looking for their investment firm to provide advice and guidance, according to the J.D. Power 2016 U.S. Self-Directed Investor Study,SM released today.

Only 61% of self-directed investors in 2016 follow the traditional self-serve, or do-it-yourself (DIY), approach to managing their investments, down from 66% in 2015. At the same time, a subset of self-directed investors called “validators”—those who want to make their own decisions but still have access to an advisor for support and as a sounding board—jumps to 25% in 2016 from 21% in 2015.

I don’t consider this kind of relationship to be advice. It’s the kind of relationship I used to have as a broker to high net worth speculators and, in the end, it doesn’t work.

Investment advisory pioneer Ric Edelman once gave a talk about why his firm’s advice was of the take it or leave it variety. His advisors are very clear with their clients that what the firm recommends is not a la carte. “This is not Burger King, and you cannot have it your way.”

He’s right. Lawyers call the shots on strategy. Doctors are in charge of diagnosis and treatment. There may be choices for the patient to make along the way, but the professional’s job is to make the final decision based on those choices. Why should financial advisors treat their charges any differently? You’re either giving advice or you’re not. Suggestions are not as valuable as advice in a realm where there are infinite choices and so many opportunities to screw things up.

The only way to build to build a scalable, sustainable and valuable investment advice practice is to demand that your advice is actually adhered to. Turning clients down who cannot accept that is a must. Running 100 different portfolios and playing games with people’s day to day desires is not doing anyone any favors. Billing on an advisory account where the client is not taking your advice is borderline unethical, in my view.

I only came around to this way of thinking around five years ago, but it is the industry standard for great advisors. The brilliant financial advisor and author William Bernstein says that investors seeking his services have to write a letter to him explaining why they should be accepted as a client. Nick Murray regularly admonishes his audience of FAs who kowtow to the customer and devalue their own worth as professionals. Allan Roth once told me he has no compunction about telling prospective clients that they are not yet ready to work with him.

This is not about being a snob, it’s about only taking on work where you’re adding value. Life is short, the days go by fast and your true clients deserve your undivided attention.

Having a clientele of “validators”, who listen to the parts of what you’re saying that appeal to them and discard the rest means that you are not actually an advisor. You’re an order-taker. Anyone can be an order-taker.

The biggest problem with this sort of relationship does not become apparent until push comes to shove – in those wild moments near a market bottom or top, where a large number of people tend to lose complete control of their emotions. Those moments of pure fear or unbridled greed. If you’re on the other side of the table from someone who wants to despondently cash everything out, or drastically ratchet up their exposure to the latest can’t-miss asset class, you’d better be in control. You’d better have set the tone in advance.

Because if you’re merely in a “validator” relationship, where the client thinks they’re collaborating with you, you’re going to get steamrolled. And then you know what happens from there. The client will fail and you will be partly responsible. When push comes to shove in a validator relationship, the customer is going to get their way. See Give ‘Em What They Want for more on this.

It also strains the relationship on an ongoing basis in subtle ways and makes it impossible to deliver your value-add: “OK, give me that whole portfolio but leave out the emerging markets.” Why? “I read something that they are very risky right now.”

Forget about it, you’ve already lost.

We’ve forced ourselves to say no to clients looking for a validator over the years. I used to say yes and it was always a regrettable decision in hindsight. Not anymore. We have knockout factors designed to let a prospective client know in advance that we’d be a bad fit. Nothing personal, it’s for everyone’s benefit that we determine this in advance.

“What you don’t do determines what you can do,” says Tim Ferriss. Smart advisors all eventually figure this out. Usually the hard way. But once they do, there’s no going back.


At Ritholtz Wealth Management, we work with clients to determine their needs and select the portfolio that addresses them. This is our life’s work. Talk to us here if that’s what you’ve been looking for this whole time. It exists. 

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