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June 01, 2006 at 04:00 AM
As financial advisors, you’ve undoubtedly found that a healthy skepticism is essential. You may have heard me say this before, but I truly believe that the role of advisors is to protect their clients from the financial services industry. Not that everything that comes out of Wall Street is wrong–only about half. Your job is to determine which half, and use that knowledge to your clients’ benefit.
Unfortunately, after long observation, I’ve found that financial advisors tend to be just about as human as the rest of us. That means, among other things, that about half of what you know to be true really isn’t. So I think it’s a good exercise to periodically examine the things we “know to be true” and explore why we think so. Here’s a list of possible misconceptions that I’ve found advisors to hold from time to time.
Misconception #1: Client portfolios need international exposure.
It’s true: investing overseas is hot–again. Again, because some of us are old enough to remember the last time “global” investing was all the rage in the early ’90s.
What did we learn in that experience that might benefit clients today? First, the risks are still higher overseas. It may be a global economy, but it’s not yet a global community. There’s political risk and currency fluctuations. Then there’s regulation, enforcement, accounting, reporting, etc.
The real problem is that most foreign economies are relatively small, which means they are easily affected by flows of investment capital. When institutional investors decide a certain country or region is “hot,” money floods in, boosting economies and stock prices. But, that money can cool, too, quickly moving on to another hot spot, leaving those economies and the investors still in them to crash and burn.
That’s not to say global investing is a bad idea–if you do it the right way. Smaller investors can get all the international exposure they could want by owning large multinational firms. Many big American companies (including financial services firms) derive a substantial portion of their revenues and profits from worldwide operations. And because they’re looking for business opportunities rather than investment opportunities, they tend to do their homework and take a long-term view. For even more international flavor, you could pick one of the non-U.S. multinationals.
Misconception #2: It doesn’t matter what other advisors do.
One of the indications that financial advice hasn’t quite emerged as a true profession is the trend among professional advisors to ignore what other advisors are doing. Their thinking seems to be that if they act professionally, with their clients’ best interests at heart, everything will be fine. Unfortunately, life is rarely that simple.
We all know that federal reforms can move glacially, but there does seem to be momentum building for a radical reorganization of the regulation of personal financial services.
Whether that happens sooner or later is anybody’s guess, but when it does, it’s likely to be a sweeping overhaul. It will be a minor miracle if financial planners avoid being categorized as either stockbrokers, insurance salespeople, or investment managers (and subject to their new respective regulators).
The problem for all independent advisors is how this group of financial planners will come to be perceived. Will it be as client-centered professionals with a fiduciary duty, or as the final link in the distribution chain for financial products and services? These perceptions are being formed as we speak, and the independent advisory community as a whole has yet to clearly demonstrate just which side it’s on.
Misconception #3: Your practice is worth more to institutions.
That advisory practices have a market value has become a widely accepted fact. We all know there are three ways to realize that value: sell to another advisor, sell to your junior partners, or sell to an institution. To date, the internal succession option, which is the preference of most advisors, has typically resulted in a far lower value devolving to the owner. I don’t believe that has to be the case, but that’s a discussion for another time.
