Lessons from an Old World Financial Advisor

Lessons from an Old World Financial Advisor

I really enjoy meeting other advisors, exchanging ideas and learning more about how they run their business.  I sponge up as much information as I can and use what I learned to improve myself in one way or another.  Whether I agree with the person or not, there’s something positive to be gained from every conversation.

Earlier this year I sat down with an advisor who was working for one of the biggest banks in the country.  He operated his business in a very “old-world style”.  Here are some highlights from our conversation (no embellishment necessary):

Mr. Old World: What products do you sell?
Me: I don’t sell any products.  I offer advice and manage assets.
Mr. Old World: I’m confused.


Mr. Old World didn’t understand how I could run an advisory business without selling products.  When I explained that I wasn’t getting commission and didn’t have any selling agreements his mind was blown.  He just didn’t get it.  Total blank stare.

Me: What products do you sell?
Mr. Old World: Mostly annuities.  People want safety.  Yeah, they’re expensive but people really don’t care.

Ok.  People do like safety.  But at any cost?  I don’t think so.   Annuities are good for a specific kind of investor but of course people care about cost!!  The fact that this guy was so blasé about cost is a big red flag for me.  I wasn’t shocked though.  Every annuity he sold he made a good commission on.  He didn’t have to look around for the least expensive or most suitable product, he simply gave his clients the standard “safety” sales pitch and sold them whatever annuity his bank offered.

Mr. Old World: Wait, your clients don’t mind if you have them invested in cash?
Me: No.  They pay me to manage their money, not keep them invested 100% of the time.

This is important to me.  I don’t think committing to being 100% invested at all times is a good idea.  To traditional asset allocators, this might be a sin but I prefer a more tactical approach.  With traditional asset allocation, you have to be comfortable with the potential of huge drawdowns (see 2008-2009).  If your advisor’s main method of controlling risk is reciting the mantra “don’t worry, things always bounce back”, good luck to you.

There’s another angle to consider though.  If you are working with an advisor who is paid by a fund company to invest clients in a product, do you think the advisor has an incentive to keep clients invested in that product?  You bet he does.  Fund company XYZ is only making money off client ABC if the advisor selling XYZ keeps ABC invested.  It’s an interesting dynamic.

Mr. Old World was a third generation advisor.  The old world mentality was ingrained in his DNA.  He didn’t know any better.  To him, the game is about pushing product and servicing clients.  Those objectives are tough to juggle.  I am not suggesting that the majority of old world advisors don’t care about their clients, but we have to acknowledge they operate in an environment where incentives can easily skew sound decision making.

In the new world, fee-only investment advice is gaining momentum.  Fee-only advisors are only compensated directly by clients.  The structure puts advisors in a better position to offer objective advice and won’t leave clients questioning whether or not their advisor is just trying to make a sale.

Much of the financial industry is stubborn and slow to change.  This presents a big opportunity for advisors who embrace a new-world way thinking.  I’m confident that the tides are turning.  The transition from old-world selling new-world advising won’t happen overnight but in its wake, the entire industry, and the investors it serves, will be much better off.

Tim Brennan

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