Transparency is a Half Truth

There aren’t vast differences in your asset allocations. Despite what you say, you don’t customize your portfolios that much. How many permutations can you really come up with, for goodness sake? How many model portfolios can there be? 50/50, 60/40 70/30, 80/20. Is an 85/15 portfolio that different from an 83/17?

We know what the real reasons are:

• Laziness;
• Fear of not being able to validate your 1% fee; or
• Not understanding how the math of performance reporting works.

Yes, I said it. It just shows you how math-phobic and numerically incompetent so many advisors are! Many of you couldn’t calculate a time-weighted rate of return if your life depended upon it.

If you’re a portfolio manager, you should have basic math skills. Is it really that hard? Give me an Excel spreadsheet, and I’ll calculate your composite for you right now! I’m not scared; I know how to do math.

And now you know why the do-it-yourselfers don’t want to work with you. Many of them could do better on their own, and they’re right – because at least this way they know how skilled the person is managing their money!

2. AUM and number of clients on your website

Not just in your ADV, which nobody reads, but on your website you should state your AUM and number of clients. Clients should know how they stack up relative to who you normally work with. They should know in advance:

• If they’re going to be the biggest fish in the pond.
• If they’re going to be the smallest portfolio and won’t get much attention.
• If you’re starting out and have little experience managing money.
• If you’re not really managing assets and just selling whole life insurance policies instead!

Advisor: “I work with high-net-worth individuals.”

ADV: The advisor has 300 clients and $100 million in AUM.

Those aren’t high net worth people, are they?

Whatev.

Doesn’t stop you from virtue signaling on Twitter, though, does it?

3. Fees on your website

If there is one thing advisors are obsessed with, it’s how much they get paid. I’ve never seen an industry more obsessed with its own financial wellbeing. Yet, when asked to present basic information about how they are paid, advisors get sudden amnesia.

No businesses (other than health care) in America tries to get away with obscuring fees like this. When I go into the drug store to buy the Paw Patrol bubble bath, there’s a price tag on it. If not, I’m instantly annoyed and suspicious.

You have no right to call yourself transparent if your fees aren’t on your website. It’s not like you’re selling the Bugatti Chiron. If prospects see your fees and are scared off, good! Let ‘em go, by all means. Save yourself from taking them to steak dinner at Morton’s to find out they’re broke.

4. All the ways you get paid, not just some

In addition to your fees, disclose all the ways you get paid on your website.

Advisor says, “I’m a fee-only advisor.”

Advisor means, “I’m a fee-only advisor, except when my clients need a 20-year term policy – then I sell it to them on commission! Only happens once in a blue moon, though.”

My name is Sara Grillo. I always identify myself by that name except sometimes on my podcast when I call myself Sara G. I don’t call myself Maria Grillo, Bob Grillo, or Sandy Grillo, because it’s not who I am. One thing is one thing, and another thing is another thing.

I’m not sure where this concept is getting lost on people. I would love it if the CFP Board could step in and start policing it, however it seems to be busy giving out awards and planning the 2022 conference.

5. Firm debt-to-assets ratio

Don’t you think clients deserve to know if the firm handling their money is in worse financial condition than they are?

If your firm isn’t financially prepared to handle a recession – when your clients will need you the most – then your clients should know that. Your website should say, “We aren’t that financially solvent and we don’t manage risk that well, so you’ll be fine when in the bull markets but if there’s a recession we may go out of business.”

Like a bank, financial advisor firms should be required to disclose how well capitalized they are on their websites.

If you’re severely indebted, the clients have the right to know. Firms that are not well capitalized are more likely to go out of business, underpay employees, have higher turnover, or make aggressive business decisions out of desperation.

Look at 2020, when we saw multi-million dollar RIA firms applying for a PPP loan “just in case” the country slipped into a recession. You’re the ones touting the six-month emergency fund in every blog you write! And you have employees to take care of, and clients depending on you, and you didn’t set that up for your own company?

And then the market delivered double-digit returns. Phew! Good thing we virtue signal on Twitter – that’ll hide the fact that during the land grab we made sure we got the loan instead of the local hardware store who, by the way, went bankrupt.

6. Outside business activities that are significant and unrelated

Is it in the client’s best interest when an advisor has a significant “other business activity” that is unrelated to the discipline of providing wealth management services? You will never convince me this is a 100% good thing for the client. So let me get this straight. If I’m your client, I paid you $4,000 for a financial plan. And then I pay you $12,000 a year to manage my assets. Both of these you hand over to a less qualified person on your team. And then I have to look at you on Twitter and LinkedIn, talking about how you’re running an unrelated conference next month and getting paid for it?

I’ve seen advisors hawking everything from marketing services to software programs, serving a totally separate and unrelated client base – to other advisors. Even if you can manage it time-wise, how can you claim to be 100% mentally focused on your clients’ needs? You can’t serve two masters. How can you be focused on improving your profession, performance, skills, what you deliver, and any other aspect of being a financial advisor, if the minute the market closes, you’re on to the next thing?

Running two businesses means one of them is getting less attention and that’s not fair. If you want more dough, sell incremental services, like paid workshops, that deepen and enrich your client base instead of running off to sell accounting software to other advisors. It’s one thing if you are starting out and you need to pay your bills. I’m speaking to established advisors doing this when there’s no financial need. These are not the “evil brokers”; I’ve seen RIA firms doing this.

If you’re so much of a serial entrepreneur and the allure of shiny objects is too strong for you to turn away the opportunity to branch out, clients should know that upfront on the website not just the ADV. And in the first meeting with the prospect, you should look them straight in the eye and explain why you have a business brokering private jets on the side. Then they get to decide if they feel like paying $20,000 a year to be the sideshow.

Same as it ever was

People have all kinds of opinions about what the future of the industry is going to look like and how it’s going to be so different. I don’t believe any of them. I don’t think anything is going to change. The good advisors are still going to be losing out to the ones who know how to play the game.

Change will only happen when the industry adopts clear standards, established and enforced by a central authority that all participants must follow regarding fees, licensure and ethical behavior. When the lines are drawn, the half-truths will stop.

How is there anything solid to go on when people can just make up things left and right, like “my performance is good” with no scientific basis, no data to support what they’re saying? It’s even confusing for advisors – how do you think this beehive of fee structures, designations, proper behavior looks to the outside? Like a total hodgepodge! And they’re supposed to trust us?

Until standardization comes, the meaning of the work we do will continue to be compromised.

Sara’s upshot

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Sara Grillo, CFA, is a marketing consultant who helps investment management, financial planning, and RIA firms fight the tendency to scatter meaningless clichés on their prospects and bore them as a result. Prior to launching her own firm, she was a financial advisor.

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