I recently returned from what I consider to be one of the best finance industry conferences around, the CFA Institute Annual Conference. It’s always an impressive affair, this year attending were over 2’000 of some of the finance industry’s most highly educated professionals, prominent finance journalists, industry thought leaders and yours truly! The list of speakers is always impressive and usually very wide ranging.

This year there were well known non finance names such as Daniel Goleman and Sir Bob Geldof as well as a host of leading thinkers speaking on various financial and strategy related topics. A lot of the content was excellent. Thought provoking and well delivered. Following a few exchanges over the last couple of days on Twitter it strikes me however that these sorts of conferences probably spend too much time focussing on things our clients care little about.

Designed to protect the illusion

The finance industry is obsessed with numbers and formulae, constantly seeking to find better explanations for market behaviour that we may never properly understand completely, looking to lower risk and constantly seeking to eek out a few extra percentage points of return. The vast majority of private clients couldn’t give a stuff about this finance industry bullshit. It’s largely navel gazing and designed to protect the illusion that we’re so much smarter than our clients when it comes to finance that they need to pay away an unsustainable amount of their investments in return for our services.

Trust me I’ve been there. I was basically told by my former employer that I had to go out and sell a fund they were launching but couldn’t deliver full transparency on the underlying managers they were using (it was a hedge fund of funds) due to various confidentiality agreements but that the managers were so large and exclusive that they need have no worries. What a pile of crap!

Big important stuff!

Most of our clients focus mainly on getting from point A to point B with their finances. They may want to ensure they have enough in retirement, they may want to provide for their children or grandchildren’s education, give to charity etc etc – big important stuff. Most of them couldn’t give a stuff about whether what gets them there does so with 16% standard deviation or 14% standard deviation. Most of them couldn’t give a stuff whether the funds we use have an active share better than their peers or whether the funds add value though a three factor of five factor model. All of that is to be honest a load of bollocks. The fact is we’re much further away from being as accurate in our assessments of what are our clients are really after than we are in our assessment of the sources of returns from our portfolios.

How often when you go to buy a car do you make a decision based upon a difference in fuel consumption of 3%, a difference in engine power of 15 brake horsepower? You look for something that will meet multiple goals. The last time we went through the exercise of buying a car eight years ago, we needed something big enough for three (hopefully four) people, luggage capacity for a Scandinavian style pushchair, good fuel consumption and environmentally friendly. We ended up with a Toyota Prius and have to say it has met all of our needs admirably, coupled with excellent aftercare from our supplier. We were in a decent position to be able to assess our own needs in that situation but when it comes to our finances, most of us struggle without guidance to properly assess what we need. If we spent more time focussing on ways and means of doing this and doing it well, differences in standard deviation, adherence to the benchmark etc would pale in comparison to our ability to get our clients closer to where they want to be in a manner they feel happy with.

The foundation of relationships

We need to get better at the people side of our business. How we understand and relate to our clients – empathy. This should outweigh any other focus within financial services. In his speech to the CFA Conference Daniel Goleman Goleman said there are three kinds of empathy:

Cognitive empathy: You understand how a person thinks about things.

Emotional empathy: You tune into the other person. You can build rapport or chemistry.

Empathic concern: That’s what Goleman calls “the Good Samaritan empathy,” or caring about people.

Empathy is the foundation of relationships, Goleman said. The better we get at these skills the better will be the results we produce for our clients.

Broaden your way of thinking

My recommendation therefore: forget that latest book about some new fangled portfolio construction model (it will probably do sweet FA for your results anyway) and read something that can help you relate to other people more effectively or broaden your way of thinking. Try looking anew at the sort of conversations you have with your clients. Are there ways in which you could get to understand them better? Together with my business partner I for one will be reassessing how we interact with our clients with a view to working out where they want to get to and how they’d like to get there and I’ll be talking as little as possible to them about how wonderful our investment strategy is. After all most of them would rather watch paint dry. All of this empathy and understanding is the big stuff. The numbers and formulae etc the little stuff. Only when we get better at the Big Stuff and actually use it properly will the public start to trust the financial services industry again.

I’d like to thank my friend Lauren Foster for her excellent write up of Daniel Goleman’s presentation which I blatantly cribbed from. Thanks to Ben Carlson, Philippe Maupas, John Bowman and Robin Powell for the recent exchange of Tweets on the ‘Big Stuff’ and apologies to any investment nerds I’ve offended (fear not, I like the techy side of our business and am happy to discuss it but this stuff matters more). And to all those offended by any of my language – do one! You’ve heard far worse on any drive to work listening to the radio when a rap tune comes on.

Av: Richard Stott, Founding Partner i Connectum

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I’m on the side of those who believe that the vast majority of people benefit from having a human adviser to assist them particularly in the initial planning phase and also when the markets start ‘misbehaving’.

This post isn’t about that debate. Plenty of other people have covered it extremely well in numerous other blogs and articles. This blog is more about why liking your adviser is a whole lot less important than the process they guide you through.

Over the course of the last few years myself and my business partner have come across a number of potential clients with portfolios managed by other advisers. Often the clients have talked about the very good relationship they have with the adviser and how they feel well looked after. When they show us how their portfolios have been constructed however, we’ve often been shocked by how poorly we interpret those portfolios to fit with what the clients want to get out of their finances and proper measures and discussions of their overall need and capacity to take and willingness to bear risk.

Indeed one well know brokerage house here in Norway had constructed a portfolio for a lady in her late 50’s with no other income, comprised purely of Norwegian equities. At the time we spoke to her the portfolio had had a good run but we pointed out how poorly it actually met her overall needs and how it was exposing her to a considerable amount of unnecessary risk. Whilst she appreciated the time and trouble we spent exploring the various issues with her she decided, after a period of reflection, to stay with her current adviser because he was so nice to her.

I hope that things have worked out for her ok but fear that she may have been through a rough time recently given the way the Norwegian market has behaved. Our job as an adviser is not to be a friend who bends over backwards to agree with you and please you. Yes we will always deliver the best service that we can but we’re going to do it combined with a disciplined process which will sometimes involve us disagreeing with you, getting you to reexamine your thinking on certain issues and from time to time flat out telling you that you’d be an idiot to go ahead with a certain course of action.

You need an adviser who can be honest with you, at times brutally so if you want the chance of having a financial plan that works successfully for you. I sometimes tell people that part of my job is to stop them being an idiot with their money and that they’re going to have to pay me for the privilege. That might put some people off – that’s fine with me. If it’s the case they’re probably the sort of people who might think twice about some honest advice when it’s needed most.

A good adviser will be able to demonstrate how their process serves you in terms of analysing your needs translating that into an investment portfolio and other related advice and how they follow up and reassess your plan on a regular basis. If they can’t document this and show you examples of how they’ve employed this process successfully, preferably with client references, then take your money and run elsewhere.

Av: Richard Stott, Founding Partner i Connectum

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