Is finance a profession, akin to accountants, architects, lawyers and doctors? Or is it a mere salesmanship gig, akin to those whose jobs are to hawk as many autos, washing machines or insurance policies as possible that month?
I encountered this question during the recent debate over the Labor Department’s new fiduciary rules governing retirement accounts. This debate raised a fascinating tangential question: Should advisers do what a client wants, even when the adviser knows it is not in the client’s best interests?
In theory, it’s simple: Best interests come first. In practice, it’s more complicated.
Everybody in finance who is paid by clients will eventually encounter one who will insist on a service that an adviser knows defies common sense and works against his or her long-term interest.
What sorts of things? These, for starters:
• Taking on more risk than is prudent.
• Buying the hot new thing.
• Participating in an expensive, underperforming private investment (e.g., hedge funds, venture capital).
• Following the advice of pundits or talking heads.
• Speculating in commodities.
• Allowing emotions to steer investments.
• Market timing.
• Buying IPOs.
• Cherry-picking portfolio allocations.
My answer to all of the above is no. If you want to make an expensive gamble, enjoy a lovely vacation to Monte Carlo, but please leave your retirement plans out of it.
I invest through a broadly diversified set of indexes via a robust asset allocation model. It is global, inexpensive and primarily passive. It is statistically what is most likely to generate the highest returns for the least amount of risk over the long term.
It’s pretty simple: Either you buy into our belief that neither you nor I nor anyone else has any idea what part of the world market is going to do best next — or you don’t.
You can do anything you choose — just not with our firm. We don’t offer an a la carte menu. Either you drink the Kool-Aid or you don’t.
Hey, no hard feelings. Lots of people want to chase the dragon, playing the stock-picking/market-timing/hedge-fund game.
Now mind you, I won’t claim that the way I invest is the only way to do so; nor will I claim that other approaches cannot or will not occasionally do well over the short run. And if someone is fully committed to [insert alternative investment scheme here], we wish them the best.
We just say no, and we mean it. We have fired clients who insisted upon committing financial hara-kiri.
Not everyone agrees with our position.
Indeed, the other side of the argument is that when the public demands a certain type of investment or advice, it is Wall Street’s job to create a “thing” to satisfy that demand. Taking advantage of these desires — “satisfying the demand” — can be quite lucrative.
“Give the people what they want” is one of the oldest laws of economics.
At times, this has turned out to be a good thing — when Burton Malkiel, author of “A Random Walk Down Wall Street,” urged bankers to create an index fund so people could invest cheaply and simply, Wall Street made that happen. The exchange-traded fund is an example of a mostly simple, less-inexpensive product that has begun replacing mutual funds, a product that has been mostly more complicated and more expensive.
Other times, the Street creates a monstrosity — products that are expensive, opaque and pointless — liquid alts come to mind.
However, merely responding to the laws of supply and demand is not the same as providing good professional advice.
My colleague Josh Brown notes that accountants tell taxpayers what they can or can’t deduct; lawyers make decisions on legal strategy; doctors come up with a diagnosis and recommend a course of treatment.
Which brings us to the latest stunt in financial services: self-directed investors, who are now looking to hire “validators.” They are “using dedicated advisers as sounding boards but not as final decisionmakers,” according to investment news site ValueWalk.
Sounding board? That sounds like a recipe for only hearing what you want to hear. Confirmation bias is not the greatest basis for making financial decisions. It also gives the client the opportunity to blame the adviser for missed opportunities that work out, or for the positions that go against the investor. It seems like a lose/lose to me.
A financial professional should not be an order-taker or clerk; they should be trained professionals working on behalf of a client’s best interest.
Even if that means saying no to clients.
Barry Ritholtz is chief investment officer of Ritholtz Wealth Management. He runs a finance blog, The Big Picture.