How Ritholtz Wealth Found, and Addressed, Its Blind Spots

Advisors need to be more aware of their shortcomings and do a better job of explaining the value proposition they offer to clients and prospective clients, according to Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management.

“It’s important for advisors and their clients to understand what their blind spots are — where they think they have a skill set that perhaps they don’t — and how to manage being wrong,” he said Friday during an online Riskalyze RIA Roundtable event.

After all, “the people who think they’re always right are cult leaders or politicians,” he said. “I think the closer we are as advisors and investors to critical thinkers and scientists, the better we are, the better our firms are and the better our clients are.”

The ability to rank one’s own abilities and skills is a skill in and of itself, he noted. “Let’s put it in plain English: Amateurs have no idea how mediocre they are,” he explained. In comparison, people who are experts “know they’re expertise” and, if  anything, “they tend to be more modest because they’re aware of complexity and they’re aware of their own shortcomings.”

Avoid what “has been called Mount Stupid” — when you learn a little and get confidence from that, thinking you know more than you actually do, he joked.

Blind Spot Examples

Ritholtz pointed as an example to a blind spot that he experienced in his career, recalling that after his firm was created in 2013, he and the other founders started growing and added staff as needed. But eventually, after a client pointed it out to him, he realized: “Hey, we’re a bunch of white dudes … We hadn’t really thought about it.”

“I was very late to recognizing this,” he admitted. Once he and the other founders realized that was an issue, they “made a concerted effort” to hire women and people of color as CFPs, he said.

Another thing that he has learned is that, during the hiring process, “if it’s not an obvious yes, it’s a no.” That took him a while to figure out, he conceded.

It also took a bit of time for him to learn the “80/20 principle: 20% of your time of your effort [for] your clients is probably responsible for 80% of your revenue,” plus or minus a few percentage points, he said.

But the flip side of that is also true, he explained: “80% of your headaches — 80% of your problems, 80% of your consumed bandwidth that you wish was not being frittered away … is driven by 20% of your clients.”

The “takeaway” for him and his firm was “let’s not have those folks as clients,” he recalled. When they launched the firm, there was a small percentage of clients who were “enormous headaches” and they decided to drop them. That “turned out to be a brilliant thing,” he said.

They now “disqualify” some potential clients — for example, those who are rude to the firm’s staff or who decide they don’t want a particular item in their portfolio and log into their portfolios on their own and sell it.

His response to a client like that is: “You hired us to be your quarterback. If you want to take the ball out of our hand, you can, but it’s not for a play…. So either we’re running this or you’re running it.”

If it’s evident that the client wants to run it, “we’re going to tap out and, man, does that save headaches.”

Clients’ Blind Spots

Clients, meanwhile, like getting things for free, “and I’m constantly telling clients and anyone who will listen, ‘cheap is great, free is bull—-, especially when it comes to financial services.’”

He pointed as an example to Robinhood, saying that company’s true clients are “high-frequency traders and big hedge funds that pay them for order flow,” while the average person using its app is merely “the product” — and “people have a hard time understanding that.”

Offering and Explaining Value

It is, meanwhile, crucial for all advisors to know their value proposition and explain that to clients, according to Ritholtz. Advisors are often asked what value they provide and many don’t know how to answer, he said.

When you’re dealing with clients or prospective clients who run companies or are entrepreneurs, “they don’t have the time, the energy or the discipline to do this themselves — and so you have to explain to those folks you provide a value add” with the $10,000 or $20,000 you may charge a client with at least $2 million in assets, he explained.

Advisors at his firm conduct quarterly calls with clients and often build those based on client questions, he noted.

Advisors must have the ability to demonstrate to clients why they should ignore what others are saying about investments, he said. What is the track record of those people offering advice?

When clients ask why they don’t own more tech stock, advisors must be able to explain that tech was an “outlier” in 2020 and had been “for the past decade.” It is important to explain to clients: “You never know what the winner the next decade or the next year or the next month is going to be,” and that’s why a diversified portfolio is so important, he said.

He pointed to Amazon CEO and founder Jeff Bezos, who Ritholtz noted has often tried introducing new products but knew how to cut his losses and drop them if they didn’t work out.

“That’s a great strategy for investors and advisors,” he said. “Do more of what’s working. Be aware of your blind spots. Be aware of what you don’t know or might not know and it will serve you well in the long run.”