Wealthier Clients are a Business Decision, not an Advisor's Ambition

"When last did someone here take a position that would be difficult to defend if it went wrong?" That's a question worth asking but every advisor and every business seems to steer clear of it.

Look across the industry and the portfolios begin to resemble one another. The same managers appear, the same funds, the same fee hurdles, the same allocations arrived at by the same reasoning. It is usually described as best practice but we suspect that it is largely something else. An advisor who does what the rest of the market is doing has an answer ready if the returns disappoint because the answer is that everyone else did the same thing.

What tends to follow is familiar. Performance lags, the manager gets blamed, and the client is moved into whichever fund, portfolio or asset manager is currently looking good. It is an easy conversation to have and it feels like decisive action, though very little about it is. The manager was appointed by the advisor in the first place, and the switch is being made on the strength of recent numbers rather than anything resembling a process. Few businesses have an investment philosophy rigorous enough to be worth holding, and fewer still have the conviction to hold one through a period when it is not working.

None of this is dishonest. It is entirely rational behaviour in a profession that has landed in a space where it organises itself around defensibility.

You just need to take a look at the incentives: compliance rewards the advisor who can demonstrate that he followed the accepted approach, providers reward volume and clients, understandably, ask why they are not in whichever fund performed well last year. Nobody in that arrangement is asking the advisor to be right, so much as asking him to be able to show his work, and those are not the same requirement. Being right occasionally means being alone, and being alone is the one thing the structure does not reward.

The cost of this lands on the client, who ends up with generic outcomes and rising fees, and it lands on the business in a way that shows up later and hurts more.

Wealthy clients are the least forgiving of it. Move up the wealth ladder and you meet people who are commercially literate, who built something themselves, and who are surrounded by professionals paid to agree with them e.g. their bankers and accountants. A great many of the people in their lives take orders and go no further. What they are short of is not another competent professional but rather someone prepared to step up and challenge their thinking, explore alternatives, solve problems and tell them that they are wrong when that is the thing they need to hear.

Those clients respond well to being challenged. They are not used to it, and they notice immediately.

So the profession finds itself in an awkward position. It has spent years perfecting a way of working that minimises the chance of being blamed, and now wants to serve clients who are specifically looking for the opposite: conviction, a position, a reason to trust that somebody has actually thought about them rather than placed them safely in the middle of the distribution.

That is not a training problem and it is not a product problem. It is a question of what a business rewards in its own people. An advisor who takes a considered position and is occasionally wrong is worth considerably more than one who is never wrong because he never decided anything, and most businesses are not set up to tell the difference.

The safest thing an advisor can do is what everyone else is doing. It is also the surest way to be worth exactly what everyone else is worth.