Do financial advisors practice what they preach?

If they don’t, then why should their clients be listening to them?


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Chuck Jaffe of Dow Jones, in a recently posted MarketWatch column, “The Most Important Question to Ask a Fund Manager,” outlines key criteria for selecting an asset manager. He sums up the research succinctly: “just look for a low-cost fund where the committed manager — and hopefully his entire family – has had their own money in place for a long time; chances are you’ve found a winner.”

I believe there’s an underreported corollary for financial advisors.

Even the smartest people can fool themselves into thinking they have more money than they actually do. This came into focus recently when I uncovered a pair of studies about the financial advice industry that raise two important and revealing questions: Do advisors truly practice what they preach? If they don’t, then why should their clients be listening to them?

One survey of 117 financial advisors, compiled earlier this year by CLS Investments, found that only 19 advisors had completed a formal succession plan for their own businesses. This lack of a long-term plan may explain why half of the advisors in the study say they will not retire until at least age 71, if at all.

The study also revealed that “most expect the sale of their businesses to fund the majority of their retirement, with 41 percent saying the sale of their business will be between one quarter to one half of their retirement assets, and another 14 percent expecting a sale to make up half of all of their retirement assets.” 

This suggests that prudent savings and sound investing during their careers may not have been adequate or didn’t occur at all.

Another survey of 771 independent financial advisors by FP Transitions found that “99 percent of independent financial services and advisory practices go out of business when their founder retires.”

In addition, the survey found that too many advisors were viewing succession planning as their retirement nest egg, and not a strategy for the future growth or investment in the business. Basically, they were all hoping to win the lottery.

I have previously raised awareness of the deals and financial incentives that financial advisors receive when changing firms. Though the self-regulatory body Financial Industry Regulatory Authority, or FINRA, is discussing greater transparency, little has been accomplished thus far, and the zero-sum game of changing firms does little but ultimately raise expenses for the swapping advisor’s clients.

Many advisors actually take advantage of the lucrative deals available from firm-swapping because they are either greedy or have failed to adequately manage their own resources. Like many, these advisors may have considered themselves immune from consequences of their own financial inadequacies, and hoped that a “big bonus” jump to another company or a sale of their firm will save the day.

I know that “hope” alone is an inadequate retirement strategy, and I hope that FINRA and others provide increased transparency for the investing public on this issue in the future.

A key distinction between “great” and just “mediocre” professionals of any type is often honesty and transparency. I’ve been asked over the years by our clients about my personal balance sheet, and don’t hesitate to discuss such a private topic. I have earned every cent of my nest egg and I manage my resources in the same fashion as I do for many of my clients. In many cases, our objectives are aligned perfectly.

My portfolio looks a lot like that of our clients. It is diversified, there is proper asset allocation, it is maximally tax-efficient, and it reflects my values on risk management. Basically, I do for myself what I do for my clients, which I believe is not only a sound policy, but the most honest one. Why shouldn’t we eat our own cooking?

It’s easier said than done.

A few years ago, a colleague asked me for analysis on her financial situation. What was fascinating, when she shared her table of assets and liabilities, was how she viewed the extent of her wealth. This is a hardworking, supremely ethical advisor who has rightly earned the trust of her clients over the years. Yet, she was less than honest with herself and her family when it came to assessing their liabilities.

Deferred compensation, restricted stock and illiquid stock options are examples where we are most prone to overstate values. Even 401(k) and retirement assets are often overstated, since an asset that is illiquid or deferred isn’t really an asset until it is sold and the taxes paid.

Today, the first discussion with any new advisor should begin with, “So, tell me – how do you manage your money, and how do you get paid?” With increased transparency, measurable client outcomes and success could be soon to follow. 

Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 603-430-8000 or thesedoricgroup.com.

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