Once upon a time, when I knew nothing, I called myself a financial advisor. It’s true, I was giving financial advice. But when I look back to the caliber and quality of that advice from back then to now, it’s astonishing how much I didn’t know.
I was raised in this business to believe that stock and bond and fund selection was the most important aspect of helping investors succeed. We weren’t given a benchmark in terms of what a client succeeding even meant. Was it beating the S&P 500? Looking smarter than the client’s other broker? Hitting a grand slam in a technology stock? Generating the highest interest and dividend income? I don’t know. The client doesn’t know. “Lets emphasize whichever of these things went well in the next conversation.”
Twenty years have gone by and now I know a lot. At least compared to the original version of me as a financial advisor. I’ve surrounded myself with Certified Financial Planners. I’ve attended hundreds of industry conferences. I’ve written three books and ten thousand blog posts. I’ve done fifteen hundred hours of financial television. I’ve read a million words on the profession. I’ve sat in a thousand client meetings. Drank coffee, wine, beer and tequila with hundreds of financial advisors when their guards were down. I’ve been in the green rooms at all the events. I’ve seen the notes from the pre-interviews with producers. The private parties. The dinners (so many dinners). I’ve met the chief marketing officers and the PR people for every trillion dollar asset manager in America. I’ve been there for the bell ringings, the product pushes, the service launches, the beta tests, the branding exercises.
I know some shit.
Like finding my way up in the clocktower behind Big Ben, watching the gears turn. Everyone in London can look up and observe time going by from the outside. I can see how the big hand and the little hand got that way from the inside.
And some of the things I’ve come to learn have never been taught in any textbook or on any exam given industry-wide. These unwritten things are the key to everything. I’ll share a few today…
1. Every thousand dollars you help a client save on taxes is the equivalent of earning that client ten thousand dollars in returns, based on how grateful people are. I don’t know why it is that way. There’s something about “I saved you money” that’s ten times more emotionally satisfying than “I made you some money.” Probably because money made in the market usually continues to remain at risk in a portfolio, while money saved on taxes feels more kept and permanent.
2. The converse of this is also true: No matter how much money you make for someone, the worst thing you could do is surprise them (and their CPA) with a tax bill at the end. The profits become beside the point. They will not be pleased. This is why financial advisors who focus on long-term gains and tax sensitivity always win. More importantly, it’s why financial advisors who emphasize alpha or beating the market or frequently generated trading ideas will always end up losing. They cannot do any of these things with enough consistency to keep clients happy for long – and even when they do manage to crush it, short-term capital gains taxes spoil the party.
3. There’s no such thing as people buying “wealth management” from anyone. No one is selling “wealth management” either. Say the phrase out loud and think about how ridiculous it sounds: “Hi, I’d like to buy some wealth management, please. Yes, I’ll hold.” So what is it that people are buying? Answers to their questions and solutions to their problems. On-demand assistance with financial matters, expertise in managing the money they’ve accumulated, guidance on how new developments might affect the plans they have made for their lives, affirmation and emotional support – for some clients it’s some specific combination of these things and for others it’s the whole package.
I have learned that, in most cases, people don’t know what they want until you show them what’s possible. They might think they want stock picks, but that’s only because no one has ever asked them about their lives before, and gotten to what’s truly important to them. For half a century, Wall Street trained its financial salespeople to find them a product based on what they thought they wanted. It’s only in the last ten years that the entire industry has shifted to focus on the real questions they have, not “What small cap value fund should I buy?” Well, not quite the entire industry – the insurance guys will never change 🙂
4. When you see a famous fund manager who is normally press shy start doing a whole bunch of interviews, it can only mean one of two things – client redemptions and underperformance or someone owes someone a favor. Nobody who doesn’t speak all year just wakes up one day and says “I think I’ll give the New York Times a call…” I admire the folks who stay silent but then come out once a year and speak somewhere to help raise money for a charity.
5. When someone gives you two reasons or excuses for not doing something, neither one of them is true and both are invalid. You haven’t gotten to the truth yet. Imagine asking a friend to go to a baseball game and he says “I can’t, my in-laws are coming over tonight.” Then you tell him it’s actually a day game. “Oh, I’m also sick. Not feeling well.” His in-laws aren’t coming over and he’s not sick either. There’s something else going on. If you understand this aspect of human nature, you are equipped to talk to investors. You cannot invest properly for someone until you understand what they are really trying to tell you, and, in some cases, trying not to tell you. A good advisor can get to this information early, before a single dollar gets invested into anything. A shitty advisor checks boxes on a risk tolerance questionnaire and just gives the client whatever they say they want.
6. The top ten percent of mutual fund and ETF wholesalers are worth their weight in gold to the advisors they work with – given how tough their job is and how few of them are actually any good at it, they are probably underpaid by half. When advisors find a useful wholesaler who helps them become better at serving their clients, a true bond is formed. The bottom ninety percent of wholesalers are worth nothing. It’s usually not their fault. It’s hard to sell something you don’t believe in – to people who already know they don’t need it.
7. Who you take money from has a huge impact on your ability to invest successfully. Everyone learned this from Warren and Charlie, who invest rolling insurance premiums and have no need to worry about fund flows coming or going. They don’t have clients, they have shareholders. And whether or not the shareholders stay or leave doesn’t change the relentless inbound insurance premiums that continue to roll in, rain or shine. Dimensional Fund Advisors carefully selected the advisors they allowed to use their institutional share class mutual funds. Starting with this ingredient – a patient, disciplined investor base – helped improve the real returns of end clients during both the Dot Com crash and the Great Financial Crisis relative to the experience of investors in other funds.
Not being forced to sell because of redemptions during a panic is very helpful for an asset manager. Hedge funds have figured this out too. That’s why they’re all launching SPACs and reinsurance subsidiaries in the Caymans or public companies in Holland. The quest for permanent, market-insensitive capital. The stickier the money, the more freedom they have to make what they believe to be wise investing decisions – especially contrarian ones. If the money is capricious and can come and go without friction, they can’t make the tough trades. You know how you know when a hedge fund is really hitting its stride? When they start firing their clients and managing the money for themselves. “Get rid of the IR Girl too, we won’t be needing her anymore.” The most successful financial advisors I’ve met have been those who could say “No.” Most people working in our industry can’t say it – at least, not at the beginning of their careers. So they spend a lot of time consoling mismatched clients whose objectives are not a fit with what can actually be delivered. The sooner you can get out of this situation the better…but there are quotas to meet and bills to pay and the neighbors just built an extension onto their house. You know how it goes.
8. Analysts are often hilariously disgruntled because they know they’re smarter than their bosses. The externality of this is a lot of startup hedge funds (sorry, emerging emerging managers) and pseudonymous bitter twitterers. And because of the same power law governing virtually everything, most of the startup funds aren’t going to make it, thus increasing the bitterness on Twitter(ness…I like things that rhyme). Nothing makes a smart person angrier than the perceived success of those they know to be of inferior intelligence. It feels like they’re being cursed by the gods, to have to watch a complete moron making millions of dollars. When a moron makes a lot of money in stocks or real estate or startup investing, the most obvious accomplice to point to is the Federal Reserve, riser of tides, floater of boats. I believe this is one of the root causes of a lot of day to day Fed criticism. It’s not completely unfounded. I kind of get it. My friend the bankruptcy attorney is sitting at his desk playing with a Rubik’s Cube right now because nobody’s filed Chapter 11 in 16 months. Meanwhile, you could probably sell a talking horse on Broad Street this afternoon. Intelligence is overrated in this game, mostly because there’s too much of it to begin with. It’s a baseline in this business, not a road to riches. You’re smart? Great, everybody’s smart. What else ya got?
9. Nobody is happy with what they have and nobody can sit still. If there’s one human constant you could use, this is it. Ennui is an energy source that never runs out, it can power a thousand years of market activity and be harnessed on a daily basis. Get this right, and learn to turn it in your favor, and you will indeed become wealthy. The best part is, it will never change and we will never run out of this fuel.
10. Small talk is underrated. All things being equal (and they frequently are), people do business with people they like. Affability is more important than expertise, because expertise can be borrowed or rented for cheap and the internet has become an information equalizer. Relationships, in contrast to expertise, are expensive to build and maintain. Hard to fake and almost impossible to repair. That’s what gives them value. That’s what makes them a currency. Relationships are built on small talk. Remembering people’s names and their kids’ interests. Where they grew up and where they go on vacation. It matters. If this all sounds trivial to you, then you haven’t learned anything about this business yet. There are probably like one hundred people on Wall Street who are so brilliant and talented that they can skip this whole thing and be complete assholes. You probably aren’t one of them. Just in case, best to act as though you’re not. Read the Jim Simons book about the most successful hedge fund in human history. It’s not about math. The whole story is Jim building relationships with the people he needed to build Renaissance into what it became. Math was just the bonding agent. The relationships and personality management were the real secret. The code, sure…but the code had to change. You needed to be able to recruit from within the code community to do what Jim did. No one else could have done it. No one else had earned the trust.
Okay, ten is a good place to stop for now. I have more. We’ll pick up the rest some other time.