Three Things That Will Never Change in Wealth Management

I think there are three big ideas in the wealth management industry that will never change. There may be others, but to me, these are the big three.

1. Financial advice is the only business where you are better off giving customers what they need versus what they want. 

Other businesses cannot afford to follow this path – nor should they. Packaged food companies and quick service restaurants would go broke selling fresh fruit, water and salads alone. Bars and nightclubs would close. So would all the fashion houses and luxury car brands. If everyone was only offering what people needed rather than wanted, the global economy would grind to a halt. Don’t worry, there’s no danger of this happening in free market capitalism.

In the advisory business, however, I think giving the clients what they need actually turns out to be a better model. If advisors were all out there selling clients what they want, they would be pitching the holy grail: All the upside of the stock and bond markets, with none of the downside. That’s the easiest sell on earth, “I can protect you by anticipating corrections, but it won’t cost you any gains on the way up.” Sure.

I know that this is what investors want. Investment strategies that purport to do this cost top dollar and garner endless amounts of press attention. But if that’s what you’re selling, it’s only a matter of time before your disillusioned clients are churned away and you’re hunting for new ones. That’s a bad model. Only taking clients who have reasonable expectations, set by you at the outset, is the better business.

Any idiot advisor can present potential clients with a proposed portfolio allocation that would have performed heroically over a prior three-year period and close the sale. But then that idiot advisor has to live with that client, and the disappointment that inevitably follows.

2. All things being equal, people do business with people they like. 

This will never, ever change. “I like this person. I believe in what they are telling me. I feel as though I can go to this person with my real-life concerns and questions. I feel as though this person is bright, attentive, hardworking and has my best interests at heart.”

The minute the customer stops believing this is the case, you have lost them. This is regardless of how good you think you are with their money, how much technology you throw in their faces, and how prestigious your brand or firm is. Throw it all out. No advisor has so much of an advantage over another advisor that lack of trustworthiness or personality can be overcome.

The human advisor is a forever thing. Technology will be used to allow that human advisor to scale up and take on more clients, offer more services, bring cost-savings into a practice and get better at their job. But, in the end, people want someone they can talk to, rely upon and even blame when things go temporarily wrong. A machine will not take the place of these relationship-related benefits. Unlikeable advisors, regardless of how smart they are or how technologically endowed, have no chance in the long run.

And it’s a very long run.

3. The two constants that transcend everything: Fear and Greed.

The human animal will never be free of the two constants, fear and greed. This is regardless of whether they’re investing in closed-end funds, mutual funds, exchange traded funds, hedge funds, private equity funds, venture capital funds, Real Estate Investment Trusts, Unit Investment Trusts, high-cost products, low-cost products, market-cap weighted products, smart beta products, rules-based products, faith-based products, socially responsible products, individual stocks, sectors, countries, regions, themes, Motifs, newsletter strategies, passive strategies, active strategies, alternative strategies, physical assets or digital coins.

The urge to avoid perceived downside and to be a part of bull markets and bubbles is undefeated, throughout all time and space. It applies universally, to people of all age groups and all over the world. It is a part of our DNA. Our ancestors who didn’t run from danger or run toward reward were not likely to have passed on their genes. Our ancestors who protected themselves and who were able to take the risks necessary to secure a mate and a shelter, have handed down the fight or flight instinct to us, through the millennia. There is a certain arrogance necessary in order to believe that this ubiquitous and permanent condition can somehow be eradicated by software or research or seminars or books or blog posts.

You are an animal. Your brain contains an almond-shaped mass of gray matter in each cerebral hemisphere that reacts to stimuli, regardless of what university you attended or how many articles you’ve read. Your brain also contains a hippocampus, which is responsible for the control (or lack thereof) when it comes to anxiety. Remember this during the throes of the next market correction, as you begin concocting desperate schemes to make the pain end.

When you are being stimulated pleasurably, such as during a heroin high, or a successful trade or an orgasm, you’ve got something behind your left eye called the lateral orbitofrontal cortex. It is the seat of reason and behavioral control and it’s evolved to turn itself off while you’re enjoying yourself. Your brain lights up with sensation and your sanity temporarily leaves you. Remember this as you scan your brokerage statement during a bull market, bathing in the glow of all that capital appreciation.

There will never be a Wall Street product created or a software program written that can override fear and greed, although awareness, vigilance and support from a caring professional may help a great deal.


This post originally ran here on May 1st, 2017

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