This blog posting is in a response to an article by Kevin Noblet, A Power Shift Between Advisor and Client, posted on the Wall Street Journal Blog on 10/02/09. You can view it here

fabeetle's Response:

I think that this article is right on. This shift is happening but I think it extends beyond the role of being involved in the planning process. I think that clients are demanding more transparency all around. They have lived in an environment where the world of financial advising has been locked behind methodologies, statistics, and past performance hypotheticals. Clients now want to know what their FAs are going to do, why they are going to do it, and how others like them have resulted from such an engagement. In fact I think there are three demands clients are making of their wealth management relationships.

More transparency into the actual investments they put their money in.

The fall out from the events of 2008 have left investors wondering more than ever before what they are actually invested in. How do the actual investments they own work. What the risks are, etc. From CDO’s to auction-rate securities, investors were left holding the bag on complex instruments that were sold as something with a nominal risk. Client’s now want to know how they work...and they should. This actually demands more of the FAs they work with as well. Many financial advisors themselves didn’t completely understand these instruments. In some cases the blame can be shifted from FAs to their firms and research departments as they did a poor job of represented the inherent risk in these investments. That said, and no matter where the blame lies, FA, client, firm, clients are now wanting more insight into the mechanics of these vehicles.

More transparency into the decisions their FAs are making and why.

As mentioned in the article in the Wall Street Journal by Kevin Noblet, many of FAs had substituted their investment vision or philosophy, for a sprint in assets under management (AUM). Again, this is not to say the all the FAs did this, or even to say that is completely the FAs fault as many of their motivations are structured around hurdles that reward the acquisition of new business/clients, whether that be with compensation or with industry/firm stature. Partly because of this process and partly because of the commercialization of Modern Portfolio Theory, many clients were presented with pretty pie charts, historical performance, and hypotheticals based on assumptions that can be argued are unrealistic. The popular Monte Carlo analysis left many clients wondering how in 2007 they had a 90% chance of achieving there retirement goals based on capital market assumptions and some 2,000 - 10,000 iterations of their situation, and in 2008 they had a 50% chance of success with nothing but an unrealized loss based on the same assumptions. “Didn’t the initial analysis take into consideration a loss of this magnitude based on the agreed historical standard deviations?” was in many an investors mind as they received their updated financial plan. Clients now want to better understand how the advisors are coming up with those pie charts and are desperately looking for validation that a proposed strategy will avoid the events of 2008. They want to get beyond phrases that contain the phrase “on average.” They want to know how their FA is formulating those average and at the same time addressing the outliers. Which brings us to the last point.

More transparency into their financial advisors practice.

When clients choose a financial advisor they are making one of the most important decisions of their life. Often times, the need to make this decision, is aided by an event such as retirement, divorce, inheritance, etc. and clients have been deficient of good resources to do so. Most clients find their financial advisors by word of mouth. If we dig a little deeper into that last statement we find that this is a result of the trust that they have, either rightly or wrongly, in the individual making the referral. Furthermore, this helps the client narrow their consideration set which is important because to engage more than 3-5 financial advisors can be an arduous task. Each proper engagement should involve several meetings and an exchange of important information and can take some time. This decision, like any other purchasing decision, carries with it the cognitive dissonance of “...did I make the right choice...” For many clients they fail to ever accumulate enough information to totally eliminate or significantly reduce this dissonance, leaving them uncomfortable with their decision, and anxious to trade action for inaction whether warranted or not, which in investing can be as harmful as beneficial. Common practices to address this phenomenon include asking for references (which is an imperfect process in and of itself) and running FINRA Broker Check to search for past indiscretions. None of these solutions allow the client to identify someone else “like them” that is using the advisors services. Moreover, the process described above is not scalable and is subject to any inherent flaws that exist in accumulation of the consideration set. For instance, if the referrals that were given to the client in search of an financial advisor were based on factors inherent to the referrer and not the end client then you have a mismatch of strengths and needs. This last reason is why we created fabeetle.com.

I left my career as a financial advisor after 8 years of building a successful, 100 million dollar AUM practice in large part because of the reasons mentioned above, and partly because of the inability for “good” financial advisors to rise above the confusion the above creates and connect with people who need FAs just like them. As such I created http://www.fabeetle.com. A platform, currently in development, that will allow clients to rate, review and research financial advisors, the companies they work for, and the products and services they offer. And, in turn, allow financial advisors who provide the most transparency into there method of operation, and who answer the questions that so many clients are asking in search of good counsel, to connect with those clients.