To attract some of the most desirable potential clients, financial advisors must be flexible about how they interact and invest, particularly for smart, young, high-earners who can be more exacting in their wishes.
Take, for example, Elizabeth (who wished to remain anonymous), a 36-year-old single physician in New York City who has considered hiring an advisor but so far hasn’t. Her major concern is she feels that most advisors offer a cookie-cutter approach: a diverse blend of stocks and bonds.
But Elizabeth knows that already. She prefers an advisor who will customize her accounts and construct a retirement portfolio that addresses her personal preferences. She fears coming up empty-handed in her search.
Elizabeth seeks an advisor who is current with market trends and who could recommend individual stocks, not just the typical 60% stocks and 40% bond portfolio. “I could get that advice from a robo-advisor,” she scoffs.
She is targeting a savvy advisor who could direct her, for example, to “clean energy stocks that are about to rise and robotics stocks that are set to jump.” Of course, most advisors don’t think like day-traders, predicting what sector is about to rise or fall.
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Though Elizabeth has only interviewed a few advisors and admits she’s no expert. “My hypothesis is that most advisors don’t actively manage retirement portfolios, except for high net worth individuals.” She would prefer someone actively involved, who calls with consequential updates, stock and sector recommendations, and who keeps her abreast of changing market trends. A recent survey by AIG Life & Retirement and MIT AgeLab indicates that younger clients and the wealthiest communicate most with their advisors.
Elizabeth says most of the advisors that she met didn’t mention individual stocks but instead offered a predictable age-appropriate blend of stock and bond index funds. She wanted more – an advisor who is knowledgeable about individual stocks “and not afraid of risk.”
Elizabeth has invested in index funds on her own. But you don’t have to major in accounting or investing to figure that out, she says. Most responsible investors can play it safe, choose index funds, and build their own portfolio, without paying an expert 1% or more on their retirement portfolio, she recognizes.
She acknowledges that self-directed investors can easily step into traps, such as falling in love with a stock. Advisors, she acknowledges, “are more knowledgeable about the logistics of making the investments.” Furthermore, as a physician, she is busy and concedes she lacks time to closely follow individual stocks.
Two things could spur her to hire an advisor. If she married and started to raise a family her retirement needs would change. And if a trusted friend emphatically recommended an advisor that managed their money, she’d play ball.
Her main takeaway is that advisors generally don’t customize investment recommendations but instead offer a predetermined portfolio for people in their prime.
Choosing individual stocks and actively managing portfolios “is the way it was when I started in the business 24 years ago,” explains Bud Sturmak, New York-based co-CIO and partner at Perigon Wealth Management, which oversees $2.2 billion in assets. Back then, “brokers and advisors saw themselves as stock jocks and investment gurus who brought those great ideas to grow their clients’ money,” he says.
But the industry has been transformed, Sturmak says, to the point where “everyone has the same information, trades from their desktop and there’s no informational edge.”
Moreover, compliance departments at the big wirehouses, not necessarily independent advisors, discourage stock picking and view it as too much of a liability.
Nonetheless, Sturmak says some “perceive their value as tied to investment acumen, or picking stocks, or getting creative with tactical calls in the market.” But they are rare.
At Perigon Wealth, for example, the emphasis is on creating a financial plan based on a client’s income, assets, lifestyle, and retirement goals. The plan “runs all the calculations in a Monte Carlo [simulation] and tells you whether you’re far behind where you need to be, need to take more risk or are well ahead of where you need to be,” asserts Sturmak.
If Elizabeth is so focused on owning stocks, why not portion off 10% of her holdings and let her invest on her own and choose her own stocks, he wonders?
One area has galvanized customized portfolios: impact and ESG (Environmental, Social and Governance) investing, Sturmak notes. Investors are increasingly passionate about “exposing companies and how they’re treating their workers, and want companies to disclose a whole set of metrics,” he says. Amid national protests and a sharper focus on justice, impact investing has gained resonance.
Finding a stock-picking advisor can be challenging, observes Andrew Head, a finance professor at Western Kentucky University in Bowling Green, Ky. and director of its Center for Financial Success, a financial literacy and coaching program. He partly attributes the decline to wirehouses, which shifted stock selection and asset management to wealth advisors so they can prioritize client relationships.
Compliance, too, discourages stock picking because of the reliance on fiduciary relationships, so “there has to be solid justification if you’re making certain stock recommendations,” said Head.
Head acknowledges that investors like the physician don’t have to pay 1% of their assets, and can opt for robo-advisers and certain funds, “if she’s not prone to making emotional decisions.”
Elizabeth may not know that most skilled advisors offer more than investment advice for retirement planning. Talented advisors treat clients holistically and “help maximize their tax considerations, recommend insurance policies, and in her case, malpractice insurance, and can discuss her contract with her hospital, her benefits and retirement plan,” Head states. Maximizing that hospital contract, for example, could yield sizable results.
Head, who moonlights as a certified financial planner, cautions that based on his own experience medical doctors aren’t always skilled investors. “They think they leave medical school with an MD, so surely finances can’t be so hard?” Head urges the physician to hire a financial planner who can offer comprehensive advice related to all of her finances.