Great Expectations

This is a another guest article by Jim Stark. Jim Stark is a pseudonym for a practicing Canadian financial advisor. The article is written to financial advisors, but we both thought that readers of this blog would appreciate it.

Take it away Jim…

Great Expectations

Of all the Dickensian references to choose, you’d think something more akin to Oliver Twist’s “Please sir, may I have another?” might be more apt in describing what people might reasonably be thinking about their current financial advisor. Still, it seems many financial advisors have difficulty in seeing eye to eye with the people they hope to serve and assist. My own view is that this is more accurately described by the more contemporary movie line of “what we have here is a failure to communicate”. In essence, most advisors are good people who have good intentions and most people working with advisors want nothing more than clear directions about what should be done and expected. Unfortunately, part of the miscommunication is due to expectations that are presumed, but not promised; implied but not codified. As in any healthy relationship (think of your marriage or your work life, for instance), a lot of trouble can be avoided if all parties can agree to the rules of engagement at the outset.

An obvious example here is the notion of making reliable forecasts. There’s simply no evidence that anyone can reliably “make the big call” about market tops or bottoms or when currencies will peak or when or by how much interest rates will fluctuate. Here’s an old Benjamin Graham quote that I’m fond of:

If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.

If any investor thinks an advisor can do this, that person is almost certainly deluding themselves with a false and unreasonable sense of security. Of course, if any advisor aids and abets in this sentiment, that would constitute a fairly clear signal that that advisor is less than reputable, too. When looking for someone to work with, it is likely most important to find someone who is aligned with your own values, philosophical approach and world-view. Questions to consider might include:

  • Does the advisor espouse active trading or a buy and hold approach?
  • Will the advisor contact me with ideas or is it up to me to initiate contact?
  • Are we going to do business over the phone, via e-mail or face to face?
  • Will we use individual securities, mutual funds, notes or other vehicles to build our portfolios?
  • Are we going to work together or will I grant the advisor discretionary trading authority?

In every instance, you could ask yourself those same questions, but think about your own answers. In other words, irrespective of what the advisor believes, what do you believe about those things? Here’s the important part: there’s no single, definitive right answer. Many elements of portfolio management are more art than science. That being said, you’re likely to be more compatible with someone who thinks similarly.

It might even be said that finding a good fit comes down to just two primary elements:

  1. What is the most appropriate modus operandi for doing business; and
  2. What are the most suitable levels and types of contact needed to do so?

The first question deals with value propositions and business models. If you’re an active trader who believes in fundamental and technical analysis, then look for an advisor who thinks and acts like you do. Speaking for myself, I believe both fundamental and technical analysis are a waste of time and money. I don’t believe in forecasting, fund picking, stock picking or market timing. If someone comes to me wanting to work with me because they heard good things from a colleague or relative, but who wants to do those things, I politely advise them to keep looking- no matter how much they have to invest.

Regarding the second question, there are many relationships that end up on rocky shoals for no other reason than having unreasonable expectations set at the outset, then not adhered to. Both parties can be guilty of this and neither constituency (advisor or client) can be said to be lily-white. What matters is that the two sides can come to a working accommodation of one another’s legitimate interests on an ongoing basis in order to reach reasonable and mutually-agreed objectives over long timeframes. What one client calls regular contact, another might call annoying and overbearing pestering.

The old saw about children comes to mind. You can ‘treat them the same by treating them differently’. As a result, for advisors, there’s really no substitute for keeping the lines of communication open and being adaptive. In the end, advisors have to ask clients what their expectations for contact are. Meanwhile, clients absolutely need to speak up if they’re feeling uncomfortable, too. Most elements of communication can be addressed if both parties are willing to listen with the intent of hearing and respecting the other side’s point of view. Perhaps the industry could develop a ‘know your advisor’ questionnaire and/or form to be completed upon opening a new account. Maybe the people at e-Harmony could branch out a little in their matchmaking enterprise. No matter what you think about the current level of communication, that sort of service could certainly be useful.

Another though provoking article from Jim Stark, with my thanks. I should have another one posted next week.

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