What Are You Worth? Assets Under Management Don’t Tell the Story

I have a client who had a wealth event recently that will change his financial life forever. In my preliminary conversations with him, even before we updated his goals and ran portfolio projections, I told him he likely had little need for ever taking risk again and that I would almost certainly be recommending that he invest the majority of his net proceeds from the event into short-term, high-grade municipal bonds.

His response? “Over time, equities always outperform bonds so why would we not put most, if not all, of the proceeds into a diversified portfolio of equities?”

Ah well. As a financial planner, one of my greatest challenges is to get clients to focus on defining their goals rather than discussing solutions that may be irrelevant to meeting their defined goals.

In this case, the client wouldn’t listen, even after we showed him how easily he could meet his goals with a hyper-conservative portfolio. The one that we modeled gave him more than a 99% chance of achieving every single goal he stated that he had.

The portfolio that we ultimately built was much more aggressive than I preferred.

The story is not unique, and the risk-takers always blossom in periods when equity markets have been recently strong, but it did make me reconsider how to approach such clients. Why was my client, who had enough money to last beyond his kid’s lifetimes, unconvinced by my argument to take as little risk as possible?

I suspect the reason has to do with a natural human desire to always feel like we are optimizing, that we are leaving nothing “on the table,” an attitude that leaves little room for considering the potential for losses that accompanies aggressive portfolios.

Of course, we can’t give up on doing our best to help clients understand the importance of defining goals and adhering to plans that allow them to achieve those goals with as little risk as possible. The purpose of this essay is to emphasize that this is the true value we provide, and it’s what should differentiate advisors from the standard model of brokers.

When I got into the business in the early 90s, all I was ever told by peers and managers was “grow, grow, grow. More, more, more.” If I was not growing, I was dying, they said. Many cohorts heard it, rose through the ranks, bought fancy cars, lived in expensive homes (and made big mortgage payments). There seemed to be no limits.

Financial success is the measure valued by our industry, and advisors are generally considered successful if they hit financial marks. Bring in the money and get all the perks and rewards of top producerdom! Manage the biggest clients (get the whale!) Get the outside glory by having the most assets under management. One need only look at lists of top advisors compiled by publications, such as Barron’s, to see that their criteria are ruled by quantitative, not qualitative, measures.

The work that advisors put into achieving CFP or CFA designations play little part in ranking them, and neither is the quality of work they do for their clients greatly valued. It is all about size and profitability to brokers’ firms and practices.

I am not suggesting that clients or advisors are wrong in aspiring toward growth or stupid to take some risk to get there. How much each person needs to feel valuable is rightly up to them to decide. Nor am I saying that all billionaires are like my client who overlooked conservation for continued growth. Just as many advisors with multi-billion dollar asset-under-management practices got there though clearly defined goals, so do many clients.

But I do think that many of us may measure success too narrowly. Advisors would do well to develop qualitative, three-dimensional goals for their practice. For example, I seek to the best of my abilities to give 100% of our clients a sense of well-being about their lives from a financial perspective. I strive to remember, and to convey to them, that accumulating assets is not an end goal but an aide to helping us feel healthy and relatively happy.

Our goal is to reduce as much client anxiety as we can by focusing on the best way to attain their financial goals. My team develops a financial planning checklist for each client, and we strive to attend to each checkpoint constantly. Over time, our clients begin to trust that we have their best interests at heart.

It takes time and training to develop a staff that can provide such care, proactively and responsively. I work very hard with staff members on their career development. I require everyone on my team to define what he or she wants out of a financial services career.

Working so closely with my staff keeps them engaged with our clients and their goals because I make them feel valued. We not only constantly talk about work/life balance, but embrace it. I am violently opposed to the 100-hour work weeks that characterize Wall Street culture. We may be less profitable than we could be, but we also have almost zero turnover among employees and clients. Ultimately, we may end up more profitable than those in a more go-go culture.

Of course, revenues and assets under management are important metrics of growth and our sense of value, and I need them to grow at a reasonable rate. I could not care less, however, where we rank on these metrics versus competitors. My greatest fear is not that our practice won’t be big enough but that it will be too big for me to have a deep relationship with each and every client.

There is nothing wrong with growing your practice to be as large as you want or to make as much money as you wish. Just make sure that you take time to enjoy your success and to define it. It should not be your peers or managers who define your sense of self-worth. Satisfying your co-workers and clients, however, can make you feel truly valuable.

– David Steele