Do You Have the Courage to Simplify Your Clients’ Portfolios?
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Many clients would be well served by a portfolio of two or three low-fee index funds or even one core fund. But I know only one advisor who routinely recommends a simple portfolio for his clients. The monthly statements his clients receive have one fund listed.
When asked how his clients respond, he said, “They love it. They say it’s the first time they’ve understood what they own.” He has mega-billions in AUM.
Why don’t more advisors recommend simple portfolios? I’ve done an informal survey, and the answer is always the same: “How would I justify my fee?”
All the advisors I asked charge based on AUM, so their fee income would be the same regardless of the number of funds their clients hold.
Your fiduciary duty
As an RIA, you are legally and ethically obligated to always act in the best interest of your clients. This includes providing unbiased advice, disclosing any conflicts of interest, and always putting your client’s interests ahead of yours.
I’m not suggesting a simplified portfolio is suitable for everyone, but if your primary reason for recommending a complex portfolio is justifying your fee, you have violated your fiduciary duty.
A stark inconsistency
Ask an RIA how they add value, and you will get a version of this response: “Managing your portfolio is a small part of the value we add. Behavioral coaching and comprehensive financial planning are how we make a real difference.”
If that’s true, find the courage to tell your clients you are putting them in a total-market index fund or ETF and a short-term Treasury fund or ETF because that portfolio will best serve their interests over the long term.
Justifying your value
According to Russell Investments, the primary ways you add value are unrelated to how many funds you recommend for an investment portfolio.
In Russell’s view, these activities are the primary drivers of value:
- Active rebalancing;
- Behavioral coaching;
- Customized experience and family wealth planning; and
- Tax-smart planning and investing.
This list doesn’t include your critical input on asset allocation, higher expected returns from a low-fee, index-based portfolio, or the other benefits of having a tax-savvy, trusted financial advisor as a source of ongoing advice.
An Australian study found that investors who received advice over four to six years accumulated 60% more assets than those without advice. When that period was stretched to 15 years, the investors with an advisor accumulated 290% more assets than comparable households.
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If your clients question your value when you recommend a simple portfolio, hand them this report prepared by Vanguard. Using case studies, it quantifies the significant value personalized financial advice can add to an investor’s portfolio, ranging from 0.83% to 2.85% annually.
Find the courage
Here’s what will happen when you simplify the portfolio you recommend to your clients (assuming you believe a simplified portfolio is in their best interest):
- You’ll sleep better knowing that you have fulfilled your fiduciary obligations;
- You’ll differentiate yourself from your competitors by demonstrating your confidence.
- You’ll emphasize your value where it belongs (behavioral coaching, tax, and financial planning) rather than investing, which is consistent with your messaging.
- Your clients will be grateful because they will feel more in control of their finances.
Dan trains executives and employees in the lessons based on the research in his latest book, Ask: How to Relate to Anyone. His digital marketing firm makes extensive use of artificial intelligence to help advisors increase their SEO rankings and improve their marketing and helps advisors integrate AI into their practices.
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