The Dividend Cafe - What to Look For in an Advisor

Episode Date: September 15, 2023

Today's Post - https://bahnsen.co/3r79obX Thursday afternoon I received an inquiry through the “questions” portal whereby a reader asked “how one is supposed to go about selecting a financial advisor” – attaching to the question the appropriate sub-questions around trust, qualifications, needs, and services. I know I have addressed this topic over the years but I think it has been at least five years if not longer, and it is a topic that you may be shocked to hear I have many opinions on. Links mentioned in this episode: TheDCToday.com DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to another week of the Dividend Cafe. I am excited today to be talking about something unrelated to the Fed, unrelated to macroeconomics, the normal subjects that often find their way into the Dividend Cafe. Today, I decided to go a different direction, and I think it's very practical, and I'm hopeful that a lot of you, both clients and non-clients alike, will get something out of it. Let me quickly tell you how we got to this subject. I am working through a study on comparisons to the current artificial intelligence moment, and the late 90s, different parallels, different similarities, we even using some particular companies

to contrast that where they were and behaving in 1989 versus how they're behaving in 2023, just to kind of lay out some ideas and thoughts and a framework for how to think about this issue. And I intend to write a Dimmick Cafe on that soon. It may not be next week. It may be, but I wasn't fully ready to kind of flush that out this week and I've been putting a lot of work into it. And so I debated with a couple other topics. And then on Thursday, I got an email through our inquiry portal. You know, we have the questions portal where people are able to send things in. And our communications team forwards most of these on to me after a little bit of purging and filtering and appropriate editing.

And I got a question from a non-client that I thought was really important about how one thinks about looking for an advisor, for a financial advisory team, that what are the criteria they ought to use? How do they know if they're making the right pick when they're engaging someone who has such an important relationship as it pertains to the person or people or whatnot that will oversee their financial well-being and help implement plans and strategies and be in relationship to them in something that is such a significant part of somebody's life. And I have written about it in the past and I've talked about it over the years,

but it occurred to me that I don't think I've really touched this subject in a little while, and I have pretty strong opinions on it. And so I thought it was worthwhile for me to kind of revisit that subject about what a good set of criteria may be when one is thinking about engaging a financial advisor. And there's absolutely no question, I'm going to put this right on the table up front, as you read the Dividend Cafe this week, or if you're listening to the podcast or video instead, you are about to hear some things that are absolutely aligned with the way we do things in our firm. And there is a certain bias that a person who runs an advisory firm being asked, what should I look for in an advisory firm, is very likely to say some things that are related to what that person does with their advisory firm. And that's about to happen right now.

advisory firm. And that's about to happen right now. However, I just would like to point out the little chicken or egg fallacy here in what might be part of an accusation that maybe, just maybe, somebody does not formulate what they think the answers to the question should be as far as criteria of an advisor around what their firm does, but maybe they set up what their firm should do around what the answers to the question is. So I will just go on a limb and say you can pick for yourself what you think is going on here. I am quite confident I know the answer I'm gonna start with the most cliche of all but it is cliche for a reason as by the way most cliches are obviously trust is the cornerstone of a relationship between an investor a client a person with a financial need in search of financial advice and trust has

to be that cornerstone I think the difference between the answer that I'm about to give and the cliche version of the answer is I do believe there's something a little bit unique or profound or useful and how I'm going to define that. If trust is something that is built when one has been trustworthy, the question becomes what builds trustworthiness? How can I detect trustworthiness in the person I may want to work with? And I've long been convinced, I'll give a lot of credit to one of my mentors, Nick Murray, on this, that trust is built by telling the truth, even when the truth is not what the person wants to hear. And I think that this is probably the biggest disqualifier of most people in the financial advisory profession who deserve to be disqualified

is their lack of capability of telling the client the truth. More specifically, their tendency to tell the client what they want to hear devoid of any truth or conviction. The convenience factor, the popularity factor, the ease versus the painful difficulty sometimes in telling people they don't want to hear. There's a sense in which it can be benign. If you pretend you like a food just because someone else says they like a food, it kind of might make you a weirdo, but it probably is not a damage done.

If the person tells you, I really think the market's about to dip 20% and I'd like to come into the market after that 20% dip and you go, that's great. That's exactly what I want to do. Let's open up your account and then we'll do that. Then I don't think that's benign. I think you're holding someone's hand as they fall off of a cliff. Even if you're not generating the idea, you are not trustworthy. You should not be trusted because you lack the conviction to formulate your own thought around something. But then there are even more malignant things. And obviously, I mean, I assume it doesn't have to be said,

like don't trust people who steal money or who have a bad record of criminal offenses or that type of a deal, who don't have any controls in place, don't sign over the rights for them to withdraw your money. You know, Things like that are just, I'm not even including that in this. It's so obvious to me. But I think the deeper level of trust comes from the person who seems willing to share unpopular truths,

who is willing to be countercultural, who's willing to say that I don't know what stock will do next week or what the market will do next month. And being able to add to that, I don't know and neither does anyone else. I think that that is a good example of where trust can be built. And there are a whole lot of things that are necessary to build trust. If somebody says, I have $5 million and I need to drop $500,000 a year, and I have 50 years to go, and I need you to promise me I'll never run out of money. You can't make that promise. And yet there are an awful lot of people out there on the investing

public that make their advisor selection based on who will tell them what they want to hear, and where often the exact opposite needs to be done. And that's not only because some people want things that are untenable or are ill-advised, unwise, but it's also because this is a real litmus test for trust. And trust is established by telling the truth even when it is what someone doesn't want to hear. Now, I'm going to parlay the trust point to the second point, which is competence. And a lot of people would say, well, I can trust those once I've seen them to be competent. I think that there is more to the trust category than just competence. But I also want to suggest there's more to competence than just smarts.

You can be a very bright young person who learns a ton about markets. But if that brightness, that competence, that intellect is not attached to an ongoing intellectual curiosity, to a perpetual quest for knowledge, to a commitment to being studious, I don't think it matters because markets themselves are highly dynamic. There are truths in the market. I don't mean principles that change, but I mean applications that change, that get arbitraged away. This is a key market fundamental that markets are constantly pricing realities in. And so what may be a really attractive application of a principle that it becomes unattractive over time because of pricing and a student of markets can detect this, understand it, look at it, where one who is bright, competent, but then lazy or intellectually disengaged going forward misses that reality. I think that the competence has to be not only just a broad general acumen, someone who has the kind of intelligence and wit to be a good problem solver, but also particularly around financial markets. Look, there are some advisors that do not

manage money themselves. And candidly, that's most okay. I'm our firm at the bonds and groups in the minority on this, where the there is direct portfolio management is such a substantial amount of what we're doing. Many people outsource the portfolio management, outsource the asset allocation. And many people don't even outsource it to the managers, but they go into a turnkey, passive, embedded models that are how they go about creating a client portfolio. I don't believe in it. I have an argument against it, but that's not what I'm critiquing here. I'm critiquing someone who chooses a strategy that way and has absolutely

no attachment to the underlying capital markets that are a vital ingredient in the solution set they've created for a client. Some form of passion about financial markets is necessary, in my opinion, for the right level of competence for one worthy of the advisory profession. level of competence for one worthy of the advisory profession. Now, number three is a really big disqualifier as well, guiding principles. This is also connected to competence when one's disengaged from markets, they're probably disengaged from principles

that help them think about markets. And when one is not trustworthy, they probably do not care to formulate, let alone operate off of first principles. But I again, want to make the point that we're not talking about everyone doing things the same way or doing things the way we do. And I'm not talking here about people believing the same things I believe, but I am talking about them believing something. And one of my favorite lines about a critique of a pastor, I think it was Spurgeon who said it. It may have been Moody. I can't remember,

but someone asked what they thought of a given pastor. And they said, I believe every word he said. I'm just not sure he did. And that is to me, I think with the advisory profession, so many people that lack a conviction about what they're doing and really their guiding principle when they would say they don't have one, there is

always a North Star. It's just unfortunately, their North Star is popularity is convenience is just going along with the crowd, whatever seems to be flavor of the month. It's very, very common. And I don't think it creates a good solution for clients. I think that it ultimately can do a lot of damage, that there ought to be first of all, I think that it ultimately can do a lot of damage. That there ought to be, first of all, the principle that what we're here to do is be a solutions provider, that the advice profession is not fundamentally about

anything other than matching solutions to needs, solutions to objectives and goals, and that in the art and science of doing that, that is the wealth management experience. But beyond that core understanding of what the profession is, there are a variety of things that one needs to commit themselves to, that they believe about markets, about capital, about investing, about risk and reward, about financial planning and whatnot, about certain priorities and portfolio construction, all of these different things. And so making sure that they have guiding principles is important. And obviously, as much as possible, understanding that they stick to them and have a

process in place. Number four has become a much bigger deal. I don't know that I would have focused on this many, many years ago ago as much as I do now. I always believed in a comprehensive or holistic understanding of wealth management. I was fortunate to have entered the business where the consultative approach that transcended product sales or stock trading was already becoming a bigger part of the business. was already becoming a bigger part of the business. And so I didn't grow up in the business in the 70s or 80s when I was a kid and high school student that it was really more just to generate a trade or a transaction. By the time I entered the business, it already was thought of as the advice profession and more consultative. But the integration of services. Now, myself as a

managing partner of a business, I am blown away at the depth and breadth of services that particularly more ultra high net worth and sophisticated clients need, want, and so forth. And I think it's a very healthy development. I don't begrudge it at all. I think that it is appropriate. I certainly have expanded my own needs in terms of my own financial picture and managing the stewarding affairs of my family. And I think that this is a really healthy development, but it is not merely true for ultra high net worth, very sophisticated, large, complex situations. true for ultra high net worth, very sophisticated, large, complex situations. But even some that may seem to be smaller, there's still a need to go beyond just a portfolio that has a few mutual funds in it and maybe a printout of a sheet showing when they're going to run out of money,

doing more sophisticated cash flow analysis, doing more useful scenarios that one can run about buying a home, about financing, about business credit. And then, of course, the basics that face everyone with death and taxes and being able to integrate real tax planning and estate planning into the wealth management process. I don't recommend a financial advisory relationship where there cannot be integration of services. Some do it at a more deep level. Some have just enough, but my point being that approach that guides a client holistically with an adequate level of services, I think is a very important thing. So trust, competence, guiding principles, depth, and breadth of services. Number five, can we be so quick because it ought to be so obvious, but it's operational excellence.

There ought to be, it can be a small outfit that has minimal operational resources, but again, is smooth, clean, efficient. It can be a larger operation that has more operational resources, technology, and whatnot. But all clients, first of all, demand, but second of all, deserve operational excellence, efficiency in just the ebb and flow of money movement, of account processing, of reporting, of all those kind of more administrative and operational elements of the client experience. And you have a right to kind of ask under the hood a little, what is operational expectations, the technology portal, platform, portfolio reporting,

performance reporting, communications, all of these elements to play into that experience, operational excellence. Number six, this ought to be table stakes. It's mind bogoggling to me how often it isn't, but that is an alignment of the client and the advisor, that their interests be aligned. And it's no more complicated to me than the advisor being held to fiduciary standard of care and fundamentally that they are paid by the

client, that they work for the client as opposed to being paid for someone else, meaning they work for someone else when they're paid by someone else, therefore are a counterparty to the client, not aligned with the client. This is not rocket science. And that general alignment, you can be aligned and not trustworthy alignment is a great hedge but ultimately trustworthiness is still number one and you could be not aligned in the structure the relationship but yet still have a lot of trustworthiness it's just that why not guarantee yourself or at least um uh offer yourself a much better predicament by having both the trustworthiness, the competence, and of course that alignment. And it's alignment of interest

to me is very important. And what exactly the advisor, who exactly they work for, it can always be answered by where the compensation comes from. I'm going to add a bonus element, then I'm going to let you go. I didn't put this in the list of six because I'm willing to say that there are some clients less interested in things like this than others. But I do believe that some content creation, thought leadership, intellectual capital, there are some clients that are totally pleased.

I know this firsthand with their advisory experience and they don't read a thing that we put out, listen to the thing we put out. And everyone's got different levels of engagement and interest. But I do believe that someone who has opinions, perspective, who shares them, who's not afraid to be accountable, I think it builds trustworthiness and I think it builds value. I think it adds value to the relationship. More information, reinforcing more confidence in the designated plan and solution set that you feed confidence in the solution when you are providing ongoing information perspective analysis. And when all an advisor does is be a third party mouthpiece for someone else, and then they'll even turn on that person and say, oh, once they're wrong about something like, yeah, yeah, it's a good thing I didn't say that. I just shared with you that they'd said it. I just, I believe there's a big merit in people providing that content. It's not necessarily very common. And so obviously in this case, we're big content

providers. I'm talking our own book. But I would suggest that there's a benefit in seeing the ongoing thought process of who you're working with. And sometimes there's a thought process, but just not content that comes from it. Other times, the reason there's no content is that there's no thought. But either way, I believe that that is a kind of bonus level of the advisory relationship you want to consider. So I'm going to leave it there. To the extent that this is beneficial for those of you who are not clients, I'm happy. It may vary. Not every advisor is a fit. The

fit matters. There are clients that may believe or investors that may believe we offer all these things I've said, but we're not a good fit for them for a variety of different reasons. There's a whole lot of other intangibles that I can't speak to. You know, if I were in Juneau, Alaska, where the bonds group does not have an office, and it was very important to me to be able to once a month or once a quarter walk down the street, go meet my advisor face to face, then I would have to disqualify a firm that wasn't in Juneau, Alaska. I get that. I think that a lot of communication is important. Some people want that in different ways. And

there's just a number of elements that could be disqualifying for some firms out there, even good ones. But as far as the basics of what I think the criteria ought to be fundamentally, qualitatively, trust and competence and guiding principles and depth and breadth of services, operational excellence, alignment, and then that bonus piece about intellectual capital and thought leadership. I think these are important elements. I hope it's useful. I hope you've benefited. And I hope you will rate and subscribe and say good things about us in the podcast sphere as you wish.

Thanks for listening. Thanks for reading. Thanks for watching the Dividend Cafe. We'll see you next week again from beautiful New York City. The Bonson Group is a group of investment professionals registered with Hightower We'll see you next week again from beautiful New York City. This is not an offer to buy or sell securities. No investment process is free of risk. There is no guarantee that the investment process or investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors. are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary

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