How Financial Advisors Fail Their New Clients

A great deal of wealth in the United States is invested for the benefit of people who don’t give a darn about the stock market. Some data points bear this out, such as Abbot Downing’s internal survey that finds almost 70% of their clients fall into the classification of “financially unsophisticated.” This is perfectly understandable, given that successful investors usually want to pass a good chunk of their accumulated wealth onto their kids who may not share the interests. Also, having a high-earning career or running a small business doesn’t necessarily give you the kill set to recognize why a $5,000 investment in McCormick will create drastically more wealth than the same amount invested into Alcoa stock for half-a-century.

The big-picture question for every financial adviser with a disinterested wealthy client is: How do you get someone interested in the stewardship of their assets–not just in an academic sense that pounds required things into your head–but also in a way that animates the spirits?

I think the first mistake that gets made is a willful underestimation of an unsophisticated client’s ability to understand the asset allocation of their wealth. The consequence of this underestimation is that things like stock ownership get treated as “money” with the only care being the current liquidation value of the shares. When this is your measuring stick, trust fund recipients will wonder: “How come that guy gets to collect $25,000 per year to manage my money and the account value just went from $2.5 million to $2.2 million. What’s going on here???” When stock price volatility is the language you speak, you begin the trustee-beneficiary relationship by breeding the seeds of resentment that will burst into bloom during the next meaningful stock market decline.

My general view is that trust companies are ineffective in explaining that trust assets are invested in the businesses that make America run. Instead, there are just general bromides about stocks going up in the long run and volatility being a necessary tradeoff to achieve superior results.

I would do it differently. I would give a best effort to make it clear to a client that the funds are being to acquire business ownership. I would provide spreadsheets mailed monthly that would make this apparent. I would segregate the contributions of the holdings, making it clear that the client is a part-owner in every toothpaste that Colgate sells, every Tylenol that Johnson & Johnson sells, every Cherry Coke sold by Coca-Cola, every dash of paprika sold by McCormick, every chocolate bar sold by Hershey, every razor sold by Gillette, every pint of Ben & Jerry’s ice cream which is owned by Unilever, every gallon of gas sold by ExxonMobil, and every loan created by Wells Fargo.

My spreadsheet would break down the earnings and expected dividends from each security, and it would culminate by saying something like: “Your initial $2,500,000 trust was invested into fifty stocks and fifteen bonds, and these business interests of yours generate $138,800 per year. This month, your business interests earned $11,500 in profits. Your account received $6,250 of these profits this month in the form of cash dividends from these business interests, and is on pace to deliver over $75,000 to your trust account this year in the form of expected dividend payments. You will receive a $50,000 distribution at Christmas and the remaining $25,000 will be reinvested so that a $75,000 distribution will only be a few Christmases away.”

Would this guarantee any type of success? Heck no. The “shortsleeves to shortsleeves” phenomenon has existed since at least the Jamestown settlement days when, in 1645, the grandson of Jonathan Parker sold a 2,000 acre tobacco farm for a boatload of Spanish minerals that proved worthless. The grit required to actually build wealth when one still has lingering memories of the days when he had no such resources creates an attitude of husbandry that cannot automatically be transferred–it is quite difficult to cherish that which is unearned.

But my approach shifts the conversation to business interests. Something is unlocked when you can see Nike growing profits and dividends every year even while its stock price jiggles up and down $20 each year. It’s the Tom Lewis notion of great businesses being the equivalent of a man carrying a yo-yo up the stairs.

When a trust fund beneficiary receives monthly feedback on the profits generated from their investments and the dividends paid out by them, a defense mechanism gets built to combat the fearful flee from volatility. Seeing $2.5 million shrink to $2.2 million isn’t so bad when you see that those $11,500 monthly profits only fell to $11,000 and those profit-sharing plans we call dividends are still coming in at a rate of over $6,000 per month. Eventually, once you’ve been at it for a few years, you will have a track record that can demonstrate how the price declines provided the opportunity for reinvestment at lower rates that later turbocharges returns during a recovery.

My prescription is that clients shouldn’t be presumed to be dumb and shouldn’t be treated as such until it is conclusively proved, and significant efforts should be made to remove abstraction from the investment experience. My answer is to connect each investment with the fruits of business that exist beyond a rising share price value.

Sources Consulted:

Sudden Wealth

Northern Trust Investment Overview