Ben Carlson: How to Adapt When Clients Know More Than Ever

The guide combines the practical with global economic and financial history. In one chapter, he opines: "Volatility is only a risk if it causes you to overreact and make unnecessary mistakes."

In the interview, Carlson, a chartered financial analyst who developed Ritholtz's institutional and family office division, discusses heightened tax awareness, the "double-edged sword" that advisors are grappling with and why investors should refrain from listening to what legendary traders have to say. For one, they're "hardwired for thinking about the downside," Carlson maintains.

Here are excerpts from our conversation:

THINKADVISOR: What benefits do individuals realize from investment opportunities that were previously available to institutions only?

BEN CARLSON: There are so many strategies that in the past were just available to hedge funds. These were very tax inefficient; now the same strategies are in tax-efficient wrappers in many cases.

There's never been a better time to be an individual investor.

THINKADVISOR: How does the relatively recent availability of institutional investments to individuals affect advisors?

CARLSON: It's a double-edged sword: There are more solutions, but it's difficult because there's a temptation to constantly change the portfolio and move things around. So it's harder than ever to have discipline with your strategy.

Clients are now coming to advisors, saying, "I know another wealth manager that can do this [or that] investment." So having filters and limitations is more important than ever because it's like you're eating from a never-ending buffet.

THINKADVISOR: You joined Ritholtz in 2015 to develop its institutional and family office division. What trends are occurring among family offices?

CARLSON: One of the big things is how tax-aware everyone is because at that size, most of the money is taxable. The big trend has gone from people wanting outperformance alpha to being really focused on tax alpha.

THINKADVISOR: But didn't ultra-high-net-worth investors get tax breaks with the passage of the One Big Beautiful Bill Act?

CARLSON: People just hate paying taxes, especially wealthy people. They want to defer or offset them as much as possible. So taxes are something investors give a lot of attention to because paying taxes feels almost like a loss.

THINKADVISOR: "Volatility is your friend," you write. How so?

CARLSON: I like to reframe the idea of volatility from risk to opportunity.

Especially if you have savings or dry powder or income coming in, volatility can be a good thing because it allows you to buy stocks at lower prices.

THINKADVISOR: What's the role of the advisor in preparing retirees and pre-retirees for a bear market?

CARLSON: You need to have more contingency plans in place than when you're growing the wealth.

DIY investors are saying that now they need an advisor to help them understand how to spend down their portfolio and protect it against [negative] events.

THINKADVISOR: Should the advisor bring up to clients the inevitability of bear markets?

CARLSON: Yes. One of the jobs of an advisor is to build an investment plan that's durable enough to handle a lot of different environments. That could be upside volatility as well as downside volatility.

THINKADVISOR: Between 2000 and 2009, bonds, international, real estate and a few other asset classes performed "admirably," you write. So should advisors recommend that investors have that mix to be ready for the next meltdown?

CARLSON: It wasn't necessarily just those asset classes. Right now a lot of people assume, "Why would I own anything besides U.S. large cap or tech stocks? They've done so well for the past 10 to 12 years?"

But coming out of the financial crisis, emerging markets did way better; and bonds, small caps and value stocks did better.

So things are cyclical, and there's going to come a time again when U.S. stocks lag. You have to be diversified enough to ride that out.

Diversification matters most to retirees. You can't have a lost decade in retirement. You need asset classes to help see you through.

THINKADVISOR: Ignore what gurus and legendary investors say about the markets, you advise. Why?

CARLSON: You have to watch what they do and not what they say. Billionaires who predict crashes all the time, like Ray Dalio, Paul Tudor Jones and Stanley Druckenmiller, are some of the best investors of all time, but they have no idea what your time horizon is or your circumstances or goals.

And they change their mind [routinely] because they're traders. Their personality is hardwired for thinking about the downside.

Their portfolios could be nothing like what they're saying in public. I don't think you should be taking advice from them because their situation is far different than yours.

THINKADVISOR: So should advisors discourage clients from doing what such gurus espouse?

CARLSON: Yes. My colleague, Josh Brown [CEO and co-founder of Ritholtz Wealth], says that a good advisor is like a bouncer standing at the velvet rope outside a club and turning away the riffraff.

That's the idea of having filters and limitations to guide your actions. You have to be able to explain that to clients because they have more access to information than ever. And that will only [increase] in the future with AI.

THINKADVISOR: Looking ahead, what are the challenges for advisors?

CARLSON: They'll be dealing with a more informed client base because people can just look up what you tell them. So you can't have only surface-level knowledge anymore. You have to discuss the reasons behind your actions, for sure.

THINKADVISOR: Seems as if the advisor's job has become more difficult. It used to be essentially a sales job; now there's much more to it. Thoughts?

CARLSON: I totally agree. This decade has been the most challenging for advisors ever. In the past, clients mainly picked their advisor by finding someone in their town. Then the pandemic hit and people became comfortable doing Zoom calls and were able to talk with anyone anywhere.

The advisor pool is huge. Investors can work with any advisor in the world, potentially.

Now AI is going to level the playing field even more in terms of people being able to look up stuff and find decent answers using LLM [large language models].

So, yes, the challenge for advisors is big this decade.