Welcome back to the 216th episode of the Financial Advisor Success Podcast!
My guest on today’s podcast is Jason Zweig. Jason is a financial journalist who wrote one of the first books on behavioral finance and neuro-economics and writes the “Intelligent Investor” column for “The Wall Street Journal.” What’s unique about Jason, though, is his perspective on the financial services industry, having covered it for nearly 25 years, and why he sees the future value proposition of financial advice as being less of an ‘expert’ and more about the advisor as a ‘curator’ who identifies the best solutions and systems for clients to get the answers they need.
In this episode, we talk in-depth about the parallels between the fiduciary ethics of financial journalism and financial planning, the difficulties that consumers face in trying to determine who is a credible journalist or credible financial planning expert, and why being able to say, “I don’t know,” in response to a client’s question can actually be viewed as a litmus test for who is really a true expert in the needs of their clients.
We also talk about the evolving value proposition of financial advisors themselves, the behavioral value that advisors can add to their clients beyond just trying to get higher returns, why even the hand-holding value proposition of helping clients manage their behavior could eventually be replaced by technology, and Jason’s views on why the AUM model has been so stubbornly persistent, despite decades of naysayers calling for its demise.
And be certain to listen to the end where Jason shares why he doesn’t believe financial planning is yet a true profession and what it would take to get there, why he’s written a number of sharp, investigative articles about financial advisors and the CFP Board, in particular, over the past decade, and his guidance about where new financial advisors should focus if they want to be successful in the decades to come.
So whether you’re interested in learning more about how Jason views the “art” of giving financial advice, whether he sees advisory fee models changing, or his perspective on whether financial planning is a profession, then we hope you enjoy this episode of the Financial Advisor Success podcast.
What You’ll Learn In This Podcast Episode
- Giving Financial Advice Is The Art Of Telling People What They Don’t Want To Hear [08:36]
- How Saying “I Don’t Know” Can Actually Increase Your Clients’ Confidence In Your Expertise [19:42]
- The Investment Management Value Proposition That Advisors Bring To The Table [32:42]
- How Jason Anticipates Advisor Fee Models Could Change [35:13]
- The Services That Jason Anticipates Advisors Will Offer In The Future And The Advisor As A “Curator” [50:43]
- The Intersection Of Financial Advice And Behavioral Coaching In The Advisor-Client Relationship [57:27]
- Jason’s Perspective On Financial Planning As A Profession [01:11:10]
- What Surprised Jason The Most About The Evolution Of The Financial Advice Business [01:23:22]
- The Advice That Jason Has For Newer Financial Advisors [01:27:57]
- How Jason Defines ‘Success’ For Himself [01:33:55]
Resources Featured In This Episode:
- Jason Zweig – LinkedIn, Twitter, & Website
- The Wall Street Journal – Intelligent Investor (Investing & Personal Finance)
- The Wall Street Journal – Back In Business (History)
- Free Weekly Newsletter
- Your Money And Your Brain by Jason Zweig
- The Finance Industry’s Incredible Ability to Keep the Money Rolling In
Michael: Welcome, Jason Zweig, to the “Financial Advisor Success” podcast.
Jason: Great to be with you, Michael.
Michael: I’m really excited about today’s episode. You are – I think in 200-plus episodes that we’ve done – the first that has come from the world of financial journalism. I think most of our listeners are probably familiar with your “Intelligent Investor” columns in “The Wall Street Journal” or the book you’ve done, “Your Money and Your Brain,” which was, to me, really one of the first books that dove into, I guess, what we now call ‘behavioral finance’ and the brain science of investing, although I’m not even sure we were calling it that then.
You’ve done some really big stories on even our industry, including, from time to time, calling out the CFP Board on some of their practices. And so I know you have a really, I think, unique perspective on the world of financial advisors and on the industry, although I feel like you’re also a little bit of a kindred spirit in some way. I remember reading a few years ago that you had won a Loeb Award, which is one of the – for the folks listening – one of the really big awards in financial journalism and professional journalism.
And you had written this column where you had made the comment of how you defined your job and what you do, and you had said something to the effect of, “My job is to write the exact same thing 50 times a year in a way that no one ever realizes I’m just saying the same thing over and over again.” Because good advice is good advice and doesn’t really change that much, we just kind of adapt it to the current environment, but the point is usually the same. And to me, it just really resonated with me.
I feel like that’s a lot of what we go through as advisors as well. Good advice is good advice and doesn’t change that much, but we’re always trying to adapt it to current times and current circumstances and figure out what the right message is that will sink in and change a few minds, hopefully for the better. And so I see a lot of interesting parallels in what you do as a financial journalist and what we do as financial advisors in addition to the fact that, I don’t know, maybe we crisscross each other on opposite sides of the table sometimes as well.
Jason: Yeah, that’s a great intro, Michael. Thank you. I guess I would make a couple of very quick points. One is that a large part of my job is to tell people what they don’t want to hear. And, of course, the corollary to that is if you’re telling people something they don’t want to hear, it’s probably something that they need to know. And, therefore, if they don’t want to hear it and they need to know it, a large part of the success in that sort of communication is figuring out how to frame it so people don’t just spit it out. So this is part science, and it’s largely art, and I think people in any field spend far too much time sort of patting themselves on the back over the science of it and not enough time admitting that, really, it’s an art form. So that’s the first thought.
And then I guess the second thought is journalism and financial advice delivered by RIAs do have something in common, or they can, which is…I sort of also think of myself as a fiduciary, although not in a formal sense. But I feel that anybody who writes about investing and personal finance for a living has to take the approach that, “I would never recommend something to my readers that I wouldn’t do myself,” and that it’s very important to be skeptical and independent and do enormous amounts of due diligence to think about risk, and not just return, and to try to present all that in a responsible way. And, of course, I won’t always succeed, but I hope it’s not for lack of trying when I fail.
Michael: I love that idea and framing. I think there’s a…well, I suppose both financial journalism and financial advice have their share of people who aspire to higher standards and, shall we just say, “those who do not”. But amongst those who do, I think you have an interesting point that there is something about the business and ethics of journalism at its best that in a lot of ways mirrors the best of conduct standards amongst financial advice and that kind of fiduciary ethos.
And as you put it, the skepticism, the due diligence, and the independence which are really just other ways of talking about a duty of loyalty to those that you serve and a duty of care that what you’re telling them is thorough, accurate, and well researched, and the appropriate thing to say to them, and then the challenge that we all have of figuring out how you actually say it in a way that people will actually respond to it, and use it, and adopt it, and implement it, and not just hear it and move on with their days and their lives without moving forward with a change that you were trying to bring about.
Jason: Yeah, exactly.
Michael: So as you look at it, I am fascinated with just the idea of, I think as you put it, the ‘art form’ in how we deliver the message. You’ve been doing this for many years now. I think a lot of folks know you from your work at “The Wall Street Journal,” but before that, you were at “Money” magazine and have been doing this for a number of years now. So, I think, how do you think about, I guess, the art form of how to deliver the message? Like, what have you found works or doesn’t work when you’re trying to figure out how do we communicate this stuff to investors in a way that they’ll actually act on it?
Giving Financial Advice Is The Art Of Telling People What They Don’t Want To Hear [08:36]
Jason: Well, I wish it were easy and I could sort of write it all down on an index card or five bullet points. It’s not. I think it’s very situational. I think it varies on what the message is, who the receiver is, and who the person sending the message is. But, I would love the words “I don’t know” to become sort of a litmus test of what it means to be a professional.
What I can tell you is that one of my great, good fortunes in working for “The Wall Street Journal” is I can send an email to almost anyone or call almost anyone, and they’ll pick up the phone. They’ll answer the email. And so I’ve been blessed. I’ve talked with some of the smartest and wisest people in the world, not just in finance but in many other fields. And I’ve come up with a very simple definition of expertise.
I think the best working definition – the best operational definition – of what it means to be an expert is the willingness to say, “I don’t know.” And I think the tendency among professionals in many fields is to avoid saying, “I don’t know,” because it sounds frightening. But I think it sounds more frightening to the person saying it than it does to the person hearing it.
And I think one of the reasons we may be seeing such an intense, populist backlash against expertise – and over the past year, I think we can all agree – it has gone from being sort of a disturbing trend in society to a deadly trend. I mean, many thousands of people are dead because they did not listen to experts who gave them the best available public health advice on how to stay safe during a pandemic.
And I think one of the reasons people have become contemptuous of experts is because not enough true experts, and many pseudo-experts, were too reluctant to say, “I don’t know.” And I think if you approach every problem from the start from a position of ignorance, and then present what you’ve learned after you’ve learned it and tested whether your knowledge is accurate, I think that conveys a sense to people that you at least deserve a hearing, and with luck you deserve their trust.
Michael: I find that interesting framing. I think there’s certainly a challenge, I’ll say, from the advisors’ end that, yeah, I think we do feel a pressure when a client asks us a question and is paying us money for answers that it feels like there’s a lot of pressure to have the right answer. Saying, “I don’t know,” often – I think for some advisors – feels akin to saying, “I don’t know the answers. I don’t know how to earn the money that you’re paying me because you pay me as an expert for answers and advice, and I’m telling you I don’t know. Why are you paying me?” So there is, I think, a very implicit and often high-pressure environment on us to feel like we have to have an answer or say an answer.
Jason: Right. And let me interject, Michael. I appreciate that I’ve never worn that hat, and I’ve never walked in those shoes, so maybe there’s an irony in my saying, “I think I know what I would do.” Maybe I should say: “I don’t know how to handle that situation. But I do have a thought on it, and here’s an example.” I have sometimes proposed this to advisors who have said that they would try it in their practice. I haven’t actually followed up with any of them on it to see whether it worked.
But I have suggested that in a year-end portfolio review with a client – and I think it would work well if it were on a piece of paper and we were back to the world of face-to-face meetings, but there’s no reason why you couldn’t do it by email or on your website – I would ask people, clients, a set of really simple prediction questions.
I would say, “Today, the Dow Jones – which is the only index anybody knows – is at x-thousand. What do you think its value will be on December 31st?” Then you’d say, “The 10 year U.S. Treasury has a yield of y percent today. Where do you think that yield will be at the end of the year?” And then inflation, the oil price, gold price, Bitcoin, a couple of other things that would be common variables that they might expect you to be able to predict.
You would ask them to fill that out, and you can tell them, “It’s okay if you don’t have an answer, but please put an answer everywhere you think you’re comfortable making one. And I’m going to fill out the same form myself. And then we will swap.” And while they were filling out their form, I would fill out mine, but my pen would never touch the paper, and I would leave every answer blank.
And then we would switch, and I would look at their answers, but they would be staring at my paper. They would say, “You didn’t make any predictions.” And I would say, “That’s because I don’t know the answer, and my job is to construct an investment portfolio for you and provide financial advice to you that should help you prosper irrespective of what happens to any of these indexes or assets.” And I don’t know if that would work, but it would be interesting to try.
Michael: Interesting. I strongly suspect someone here who is listening is going to try this. If you have an interesting experience, feel free to send a message and let us know. I’m very curious to hear how it plays out. I do think…I’m struck by that as, I guess, both a thought experiment and literally something to try with clients. On the one hand, I do think it’s a powerful way to not just illustrate the “I don’t know” part. I don’t know what the Dow is going to be at the end of the year, or the yield on the Treasury, or the price of gold, or Bitcoin, or oil, or the rest.
But to me you followed it up, Jason, with something really interesting, which is this idea that “My job is to construct a portfolio and give you advice where you’ll prosper irrespective of what happens to any of those things.” It’s sort of a ju-jitsu shift in framing to say, “Yeah, I don’t know the answer to that stuff, but that’s not actually the part that you’re paying me for. The part you’re paying me for is actually to help deal with the fact that I don’t know that stuff more than anybody else because these are unknowable things.”
Jason: Right. The point I would interject here is to offer a criticism that sort of comes out of my experience and the conversation I’ve had with hundreds of advisors over the years, I think there are a couple of issues. One is that a lot of advisors think they do know the answer to those questions and actually spend much of their working day acting on their own predictions, which is fine if you’re good at it. But if you’re really good at it, you probably shouldn’t be running an RIA. You should be running an offshore hedge fund.
Michael: I was going to say, if you’re that good at it, 2 plus 20 is more lucrative than 1 – than 1% ongoing.
Jason: Right. And actually to take it to the nth degree, if you’re that good at it, you really should just launch either an investing newsletter or an SMA-model portfolio because you have zero…you have a business with zero costs and an infinite ROI. I don’t think a lot of people are likely to do that, which gets back to, I think, what we were saying earlier, which is it’s important to be intellectually consistent. You should think through the implications of your own behavior. Of course advisors are behavioral coaches to their clients, and that’s a vitally important function, but that’s a behavioral inconsistency in your own practice.
I mean, if you’re holding yourself out as having a competency in something, but there’s a bit of a logical problem in that, if you really were competent at forecasting markets, then you wouldn’t be an RIA. You would be a market forecaster. And you should think that through and maybe say to yourself, “Gee, am I earning my fees and holding myself out as a doing something that might be good marketing, I’m not actually that good at?” I mean, if that’s the decision you want to make, that’s fine, but I think if you’re a fiduciary in your heart, as well as by title, then that could be a little problematic.
Michael: So help me understand, though, this aspect that you said, that the words “I don’t know” become one of your litmus tests for someone being a professional. Because obviously there’s a flip side of this as well, which is the people who say, “I don’t know,” because they just really have no expertise and don’t know. What’s the difference between an expert’s “I don’t know” and a, “I don’t know, I don’t know, because I don’t know much about stuff.”?
How do we…what’s the distinction for us if we’re trying to be experts but are saying this? Or, what’s even the distinction for consumers between the expert version of the “I don’t know” and the, “Yeah, that person just really doesn’t know anything. You probably shouldn’t pay them for advice.”? What’s the difference between the good “I don’t know” and the run away “I don’t know?”
How Saying “I Don’t Know” Can Actually Increase Your Clients’ Confidence In Your Expertise [19:42]
Jason: So, the good “I don’t know,” it tends to be somebody who is highly specialized. Somebody who – to throw a few examples out – maybe somebody who runs an RIA that has really deep expertise in estate planning. So if I’m going to ask about trusts and I get an, “I don’t know,” then as the client, I should be very worried because somebody who specializes in estate planning darn sure should know everything relevant about trusts.
But if I’m asking my specialist in estate planning, who also happens to generalize in financial planning as a whole, a question about, “Should I lease this car or buy it?” Or, “Which mortgage broker should I use?” “I don’t know, but I’ll get back to you,” is a really good answer under those circumstances.
When I’m interviewing scientists, they will very quickly – like right upfront – will cut off a lot of questions and just say, “I don’t know. I’m an expert in fish behavior, and you’re asking me about mammal behavior, and I don’t know anything about mammals. I just know about fish.” But if I then ask a question about fish and the same person says, “I don’t know,” then we have a problem.
Michael: So it sounds to me like a piece of it is being able to say, “I don’t know,” about something…well, being able to say, “I don’t know,” about anything is clearly not good. Being able to say, “I don’t know,” about something because I’m really specialized in this other thing is simply a way of redirecting to say, “Yeah, I don’t know the answer to that, but let me remind you how expert I am at the thing I’m an expert at.” It becomes a…that becomes part of the ‘pass the positive’.
Maybe we…I was going to say respect. I don’t know if that’s the right word, but we respect specialists more who know the limits of their specialization because it sort of implies they really, really do know their area of expertise because they are consciously competent. They are conscious of their incompetence elsewhere, and that’s partially re-affirming to say, “Well, they must really know their stuff because they’re clearly focused there since they’re not trying to do everything. They’re just focusing there.”
Jason: Right. So maybe this is the easiest way to answer the question. It’s very easy for individuals and members of the general public who don’t know a lot about a field, which is why they’re getting the advice in the first place, to assume that somebody who has general knowledge also has specific expertise. And the great Tamar Frankel, who is sort of the modern founder of fiduciary law in the United States, talks constantly about the fact that to be a fiduciary literally means that another person has entrusted judgment to you. And the reason they do that is because they are in an inferior position of knowledge. They are trusting you to know what they don’t know.
And because of that, one of the things they don’t know is the right questions to ask, and part of the right questions to ask is, “How can I tell whether you’re an expert or not?” And the fact that we’ve seen people whose credentials might superficially indicate that they have expertise, giving bad advice to millions of people that may well have cost some people their lives with public impunity should tell us how important it is to communicate that stuff clearly.
Michael: There is an interesting parallel to this, to me, in our world of advisors. So on the one end, I think by and large we are moving more in the direction of expertise.
Jason: And specialization, yeah.
Michael: Yeah, of knowing enough to actually be able to say, “Yes, I have the expertise that you can entrust judgment to me.” Because again, when I look at it at just a general level, our industry standards of what it takes to write “Financial Advisor” on your business card are kind of embarrassingly low. It’s a high school diploma and a three-hour regulatory exam, and the diploma is technically optional.
Michael: You really just need a series exam, and…
Jason: Right. Probably the only thing that’s lower is what it takes to become a journalist.
Michael: Well, we’ve got you on one up there, at least. So we have this incredibly low bar that I think a lot of the people that aspire to move us towards a profession are trying to lift with things like CFP certification and what I call post-CFP designations, like the even more specialized ones that people are now starting to add after their CFP certification to get even deeper and more specialized. You know, RACP, RMA, and CPWA, and a lot of those.
But it strikes me, at the same time, I feel like the particular point that we’re at right now is frankly particularly not conducive to your being willing to say, “I don’t know,” and “I don’t know” framework because a lot of where I feel like the financial planning profession is moving itself right now is something to the effect of, “I have the CFP designation. I have covered 81 topics,” or however many it is on the CFP Board’s topic list. “This provides me an ability to give broad, comprehensive advice.”
A lot of firms literally market themselves as to why they’re distinct is they’re more comprehensive than anybody else’s comprehensive plan. And it is frankly the antithesis in many ways to me of what you are talking about, that when our differentiation is, “I know more about everything and anything related to finances than anyone else,” we leave ourselves no room to say, “I don’t know.” We have essentially created the expectation in the client’s mind of, “I know everything about everything because I’m the most comprehensive of the comprehensive financial planners.” Even during this discussion, I’m like, are we digging our own grave in this particular movement towards comprehensive planning?
Jason: Right. I totally hear what you’re saying, and I think there is a lot to that. I guess I come at it as a product of my own career experience. Although I’m the personal finance columnist at “The Wall Street Journal” I write more about investing than anything else, including financial planning.
Over the years, although I, by no means, have all the answers, I’ve certainly heard most of the questions, and I’ve been frustrated in hundreds of conversations I’ve had with advisors over the past two or three decades at the almost inbred tendency of a lot of advisors, particularly those who hang out a shingle that says “Capital Management” or “Asset Management”. Advisors who think of themselves as portfolio managers above all, they have, I think, a really bad and naïve tendency to think that they are incredibly good professional portfolio managers.
And 80% of Wall Street’s best and brightest are outperformed by the S&P 500 year in and year out, and they have massive quantitative and qualitative resources that small, independent RIAs don’t have and, frankly, never will have. You’re competing on a playing field that is completely skewed, and you should not have any illusions that you have superior skill in this area.
The industry needs a lot more humility about its portfolio management abilities. I think when it comes to financial advice, RIAs are increasingly doing a great job and performing an unquestionably powerful public service, but to the extent that you think of yourself as a portfolio manager rather than as a financial advisor, you really should be asking whether you’re kidding yourself.
Michael: Or as you said, alternatively, if you’re that good, the strange irony that 1% AUM fees is not actually the best way to monetize your expertise if you’re really actually that, that good.
Jason: Right. And the corollary to that, Michael, is if you were that good, you wouldn’t be an RIA. The mere fact that you still are one should tell you that you’re not that good at what you’re holding yourself out as doing. Because if you were that good, you would be running an offshore hedge fund or publishing a newsletter with an infinite ROI. You wouldn’t be a small, independent shop with a few hundred million dollars in assets. You have to ask yourself whether what you’re doing really makes sense.
There’s another element to this though, which is that being a professional portfolio manager who outperforms the benchmark is one of the most competitive and difficult jobs on earth. The odds are basically stacked four- or five-to-one against you before you even start. However, there’s a job that’s harder.
The job that’s harder is being a professional manager of professional portfolio managers. If you are an RIA who claims to be able to pick fund managers that will outperform in the future, you’re choosing a task that’s much more difficult than being one of those portfolio managers because they just have to find securities that will outperform. You have to find them. You have to somehow make sure they don’t get hit by a bus, their heads don’t swell, their assets don’t get so big that they can’t outperform, they don’t get caught up in some scandal.
It’s incredibly difficult, and I just remain baffled after decades of covering the industry why so many people build their practice around what, I’m sorry, in most cases is actually a false proposition that your track record itself is likely to prove false. There are people who can do it, but if roughly 80% of professional portfolio managers fail, what percentage of managers of professional portfolio managers fail? By definition, it’s a lot higher than 80%.
Michael: Right. So if I go back to your earlier point, though, we’re doing the piece of paper exercise. Put your predictions at the end of the year. You’re going to fill out yours. Mine is going to be blank because my job is to construct a portfolio and give you advice that will help you prosper irrespective of what happens to anything of these. What is that portfolio management value proposition that the advisor is bringing to the table? You kind of set up…there is something that we’re doing in constructing a portfolio and giving advice that’s supposed to still help in that environment. So what do you envision that value proposition is that we are supposed to be doing that does bring value to the table?
The Investment Management Value Proposition That Advisors Bring To The Table [32:42]
Jason: Well, I think there are a zillion things, right? What’s timely…I hope you won’t mind if I tell our audience what day it is while we’re actually talking as opposed to when this will air. We’re talking on January 29th. It’s the end of a week when trading in individual stocks, often by people who’ve never traded a stock before in their lives, has seized the attention of pretty much the entire world, as GameStop and all these other insane…what used to be small-cap stocks left for dead, have gone crazy.
One of the first things you can do is you can help people understand the difference between investing and speculating. You can coach them to…if they must trade, and perhaps they must because it’s fun, and they want the bragging rights, and they haven’t yet gotten burned, then at the very least you have to coach them on how to segregate that and put it in some kind of mad money account where it won’t infect the rest of their portfolio.
And that’s important not just for them but for you because if you don’t get them to agree to handcuff themselves, they could end up putting so much of their money into some wildly risky thing that, in the short term, outperforms so much that they’ll end up firing you because they think they won’t need you. And then when it all comes crashing down, they might not even have enough money left for them to be worth a client for you. So it’s really, that’s the first, and I think the easiest – like the really low hanging fruit.
The other thing is you’re going to advise them on the basic principles of diversification and asset allocation, of what it really means to be a buy-and-hold investor, the importance of rebalancing, designing a decumulation program – even just informing them that they need that 20 or 30 years down the road. It’s all the things that good advisors do every single day. Those things are incredibly important.
Michael: And so I suppose that raises the natural extension question to that, which is, does that mean you see the fee models and the compensation for models changing and turning into something different?
How Jason Anticipates Advisor Fee Models Could Change [35:13]
Jason: I hope so. I hope so.
Michael: So, not a fan of the 1%?
Jason: No, and I haven’t been for a long time. And as you know, Michael, of course, nothing makes people angrier than suggesting that maybe the way they’re compensated isn’t optimal. And my objection to AUM fees I think is often misunderstood by people who yell at me after I write about it. My objection is not that the sort of standard 1% AUM fee is ridiculously high, even though I frankly think it is too high. My objection is that it’s an AUM fee. That’s what bothers me.
Financial advisors are providing a service. Part of what it means to be a professional is to be compensated on a fee-for-service basis. That’s how accountants get paid. That’s how lawyers get paid. It’s more or less how doctors get paid, or overpaid. We can all quibble about how expensive those services are and how they all need to be disintermediated, which some of them are already are being, but part of what it means to be a professional is you’re performing a service and you get compensated for the service you’re providing.
And if you claim to be providing financial advice, then you should be getting paid to provide financial advice. And portfolio management is not advice, for the most part. And it’s also unfair because a $10 million client with a basket of five index funds who rebalances once a year should not be paying the same $1 million as somebody with less money or more money who demands more service or more customized service.
I think, to a thinking client, it’s really difficult to understand why flat AUM fees make sense, and not just in the fairness sense, but just what does it incentivize? I’m paying for the thing that is a commodity, but I’m getting the valuable stuff for free. I’m sorry, that’s idiotic. And the fact that the industry sticks to it is bizarre and, I believe, unsustainable.
Michael: But in your view, we are still separating out…the fee may or may not still add up to be the same thing. You just literally don’t like the mechanism of determining fees by this means, right? We can sort of separate out that there’s…
Jason: Right. Yes, exactly.
Michael: There’s charging 1% on $1 million, and there’s just saying, “My fee is $10,000.”
Jason: Yes, exactly. If I ask you to do 15 things for me or 5 things for me or to spend 23 hours working for me, and that adds up to $10,000, and I have $1 million, I’m fine with that because I’m getting an itemized bill, and I can see what I’m paying, and I’m getting what I paid for. But if you’re charging me 1% on AUM and giving me advice on the side, I’m not getting what I paid for because I paid for asset management, but I’m getting advice.
And there’s another problem with it, which is what you do is you train the public to believe that portfolio management, which is such a commodity product that you can get it from a robo-advisor for a few basis points, is somehow worth 100 basis points a year when it’s not only a commodity product, but it’s not very valuable. No one person does it that much better than anybody else. That’s the definition of a commodity product. So why should I pay a premium price for that?
Meanwhile, the financial advice, which really is valuable, which ought to be customized and individualized and time-intensive, you’re giving it to me for free, and you’re signaling to me that you’re giving it to me for free. So that trains me, as the client, to think that portfolio management is hard and expensive and that financial advice should be easy and cheap. And that just makes no sense.
Michael: So I’m curious then, from your perspective, why don’t you think that other fee models have taken off even further? You and I both know folks like Sheryl Garrett at Garrett Planning Network who have pounded the table around hourly fee models for upwards of 20 years and have made a wonderful network of advisors that do this hourly model. While they had some success, and there were a number of Garrett advisors, we measured the number of Garrett advisors in the hundreds, and we measured the number of financial advisors in the hundreds of thousands, even after 20 years of having a network established for this. Obviously, the principle of charging by the hour has been around for a lot longer than that. Why is AUM so persistent as a model if it’s so misaligned as a model?
Jason: Well, I think there’s a whole bunch of explanations. The first is what I was just emphasizing, which is that the public has been trained for decades to think that financial advice is the giveaway product and that portfolio management is like the secret sauce, that our proprietary computer model says we should do x, y, and z, and so we have to charge you 100 basis points. From a marketing point of view, the audience is not really receptive.
The other thing is there is historical momentum. I mean, the baby boomer generation, which of course still commands most of the assets, grew up in a world where everything about financial services was a lot more expensive.
Michael: Except for the advice, which was the free kicker because everything else was a lot more expensive.
Jason: Yes, exactly. But when I first started investing – I’m dating myself – in the late 1970s, a small, individual investor – as I certainly was in high school – could easily pay 4 or 5% or principle valued and make a stock trade. A mutual fund had an 8% load. You might pay an 8% load to reinvest your dividend on a mutual fund. Annual expense ratios could be 2%. So for people who come from that world, and especially those who aren’t particularly tech-savvy and aren’t up on the competitive forces that are sweeping the landscape, 1% might not sound so unreasonable.
And then the other thing is, 1% for 20 or 30 years has been embedded in high equity returns. One percent is roughly…I mean, it’s a rounding error. In a 10 or 15% equity return, people don’t even feel it. I think it’s all of those factors, and I think also there is a component of sticker shock. If the 1% is basically debited against your portfolio return, the human mind processes that not as a loss but as a forgone gain, which is much less painful, whereas if it showed up on a ticket, or you had to write a check, or it was debited as a line item in a dollar amount on your account statement, people would really feel it. So the whole electronic custodial revolution that was led by Schwab and Fidelity and Pershing and the like, the convenience that that has provided to RIAs has also, I guess, provided some cover for “protecting the point”, as I’m told some people call maintaining a 100 basis point fee.
Michael: Yeah. There was a fascinating study, though, that had come out. I remember seeing this, gosh, it was probably two or three years ago now, from an economist who had dug through 150-odd years of, basically, what it takes to turn a dollar of savings into a dollar of investment, sort of like the financial services industry aggregate ‘vig’ as the house for turning savings into investment. And the fascinating thing of it is the all-in aggregate cost of the financial system had basically sat between 1.5% and 2% for 150 years, up straight through the 20-teens. I forget when they ran their numbers through. It was 2015 or 2016 or something.
So through the online brokerage era and the discount brokerage era and the stock trading. I guess we’re not quite back to trading stocks under the buttonwood tree, but we’re closer to that than we are today by the time horizon. And just the all-in cost was amazingly, stubbornly persistent that we do it arguably more and better, and accomplish more, and do it with more scale, but in essence, the industry has spent 150 years figuring out how to do more to protect their point than actually bringing the point down. It never breached below 1%. I don’t even think it breached below 1.2%.
Jason: Yes. And I think, to make a bad pun, this is a really important point, Michael. Look. I first became the mutual funds editor at “Forbes” in 1995, and if you combine the weighted average sales load and the weighted average expense ratio of the typical U.S. stock fund then, I’m going to guess it was probably about 2.5%. Today, you can buy a total stock market index fund with no commission for three basis points. That’s basically almost exactly a 99% decline in the cost of owning U.S. stocks.
Michael: Oddly enough, the financial services sector is not smaller.
Jason: Yes. But here’s the thing. If you could find a fee-only financial advisor in 1995, and of course you could – there were a lot fewer of them, but they were out there – you probably would have paid roughly 100 basis points in annual AUM fees. And today it’s probably somewhat less. Am I right? But it’s not a lot less. It’s not 99% less.
Michael: It is slightly lower. I think if you look at a lot of the industry benchmarking studies that just look at aggregate revenue yield, which you just take all the fees that advisors charge and divide by all the AUM they have in the aggregate, which captures the breakpoints and the fee discounts and all the other stuff that we do. You typically come up with a number between about 70 and 75 basis points is what I’ve seen in most of those studies.
Jason: Yeah. Right. So, at the same time, that the cost of being an equity investor has come down 99%, the cost of getting financial advice has maybe come down 25%. And that’s not sustainable.
Michael: Does that mean you think advice fees sort of inevitable collapse further, or…?
Jason: They have to.
Michael: Or that we do some version of what the economist’s research was, which was we’ll just end up inventing a new value proposition to protect the point, which I feel like is sort of what’s happening, right or wrong, in real-time is we’ve gone from, “You hire me to put on the blinders and manage your pot of money,” to, “Yeah, we’ll take care of your money, but let me tell you about our comprehensive financial planning”.
Jason: Right. I think it’s going to be both. I think in order to justify the fee, advisors are going to have to do a lot more for their clients. They’re going to have to add a lot of technology. They’re going to have to create partnerships with other service providers and become a lot more creative, innovative, and broader in the services they provide. But the fee is going to have to come down also because there’s been massive deflation in the cost of professional services across the global economy for decades.
It’s driven by technology, and financial advice is a highly…I was about to say…I can’t say it. It’s a field that is highly conducive to improvements in technology, and as a result, it will be improved by technology, and the cost is going to need to come down or people won’t want financial advice, or they’ll get it from machines instead of from people.
Michael: So what are the things that you think hold onto this value proposition in the future? You had described earlier at least some of the…where is the value we add in the portfolio right now, and what it really means to buy and hold, and the value of rebalancing, and principle diversification, asset allocation. And I certainly agree there is value to those, although, in the context that you’re framing it, I feel like those are the most ‘commoditizable’ parts of portfolios and arguably literally the parts that robo-advisors have tried to commoditize. So what are we left with as advisors? Or what are the new and broader services that you would hope or expect to see the advising world go into in the future that substantiates the value?
The Services That Jason Anticipates Advisors Will Offer In The Future And The Advisor As A “Curator” [50:43]
Jason: Well, to be honest, I think a lot of it is going to be curatorial. I think, yes, you could do the hard work of modeling when is the optimal time for your clients to start taking social security. Or, you could identify the publicly available algorithms that do the best job of calculating that. Being a good curator of where the best technology is, is just wildly beyond your clients’ capability. That’s something they probably wouldn’t be able to do if they tried, but advisors who have deep expertise in a field should be able to do that.
I’m a firm believer that complex questions are best solved mostly by algorithms with some human input. And so if somebody out there has a really outstanding software package for calculating optimal social security timing, then I would have no shame in just using that and telling my clients, “I use the single best product on the market to determine this for you.” Rather than sitting there and calculating it on Excel myself, I think it makes sense to identify and use the best third-party providers.
Michael: I’m struck by this framing of the advisor as “curator”.
Jason: Yeah. I think it’s really important.
Michael: Because I feel like that’s actually where our roots have been for most of the past at least 20 or 30 years already. Once upon a time, we were curators of stocks. Through the ’80s and ’90s, we became curators of mutual funds. “I don’t have to sell you my stock from the boiler room inventory. I will find for you a professionally managed, diversified portfolio and the right mutual fund manager to do it.” We, ironically now, are sort of in this strange world of, “I will curate the best ETF for you”. Or, ironically, there are lots of index funds. “I’ll curate the best index for you”.
We’ve sort of been playing that game for a little while. I think there’s something actually very enduring about the advisor as curator, but what we’re curating is shifting because it was a lot of things around the best stock, or the best mutual fund, or the best ETF, or the best index. And now it may be the best program that figures out what the right social security timing is for you or the best provider to help you with something.
Jason: Right. And just to jump in for a second, it seems to me that it’s a logical evolution, and it’s also a positive one because you go, in the scenario you just laid out, the industry gradually would be moving from curating what I would argue are commodity products and services, like the best mutual fund 20 years ago to the best ETF 5 or 10 years ago. And let’s not forget, if you’re curating the best ETF, again, you’re telling your clients, “Pay me, let’s say, 75 to 100 basis points a year to find ETFs that charge you three basis points.”
And people aren’t stupid. I mean, eventually people are going to say, “Why do I have to pay you 30 or 40 times what I could be paying the ETF provider? I can do that. Even if I don’t do it as well as you, I might come out ahead, anyway.” But people can’t independently assess the quality of an algorithm that calculates optimal social security timing. They can’t independently assess which software is the best to…like tax-loss harvesting. That’s just not something that the typical client has either the ability or the inclination to do. So I think that curatorial function is hugely important.
I mean, I do a free weekly newsletter for “The Wall Street Journal,” and one week I wanted to leave out my favorite reading of the week. Each week I pick, like, seven of my favorite articles inside of The Journal and seven of my favorites outside The Journal. And my editor got very angry at me. He said, “You can’t do that to your readers because you are their curator, and they expect you to curate their reading for them.” And I immediately realized he was right because most of the email that I get is from people saying, “Thank you for telling me I should read x, y, or z.”
Michael: So, given all this context, I’m struck that one of the things we talked about it a little bit early on, it hasn’t really come up in this value of advisors discussion, per se, is…I’m just going to broadly call it “the behavioral stuff”. The ability of advisors, I guess both in the portfolio context, the infamous “to keep our clients invested during bear markets and volatile times”, and perhaps also to limit their temptation to speculatively invest on the greed side of the equation.
You wrote a book on the neuroscience of investing. There’s certainly been a lot of discussion in the industry over the past, I think, 10 years in particular as we try to protect the point and reinvent the value proposition of, “I play this behavioral coach role with my clients.” Do you see that as a value component for advisors? Should that be part of the discussion? Does that get solved other ways, by technology, or regulation, or otherwise? How do you see that intersection of advisors and the behavioral advice or the behavioral coaching elements?
The Intersection Of Financial Advice And Behavioral Coaching In The Advisor-Client Relationship [57:27]
Jason: I do think it’s important, and I think a good advisor who takes behavioral coaching seriously can do wonders. I have, I guess, a couple of qualms about it. One is I think, and this is increasingly true for younger clients, I think that is not necessarily something that people are better at than machines. I think if you are a Betterment client, for example – I’m spinning a scenario. It’s completely hypothetical, although I think Betterment does do something roughly like this.
But if Betterment’s computers wake up in the morning and notice that S&P futures are extremely volatile and are indicating a huge decline on the open, they can send a text to all their clients and say, “You may see somewhat disturbing news coming out of the market today. We just want to offer you some historical reassurance. This has happened 14 times in the past five years, and equity markets have gone on to generate 17% returns over the following month after that.” That’s a lot easier for a machine to do than for a person.
So the hand-holding proposition, which so often is cited as the “single most important thing that advisors do for their clients”, I think it is important, but I think it can be disintermediated and a lot more easily than many advisors seem to think. The second factor I would mention is that I think a lot of advisors need behavioral coaches of their own. There is some evidence in fund flows and other data, and it’s pretty consistent over the years that advisors themselves have a tendency to buy high and sell low to chase performance and to put too much money in assets when they’re hot and take too much money out of them when they’re not.
So, if you’re going to make that claim that hand-holding is sort of your most important value proposition, then you should also be looking in the mirror to make sure that when you hold hands with your clients, you are doing it counter-cyclically, against the current of the market rather than doing to pro-cyclically and just exaggerating the behavioral swings that are already out there. It’s not behavioral coaching if you’re doing the same thing as your client and saying, “It’s okay because I’m here with you.” You should be pushing back. You should be telling them what they don’t want to hear.
Michael: It strikes me. We did a study about two years ago now on personality traits of advisors themselves. There’s some good research out there in the realm of psychology of the anchoring personality traits of human beings in general. One of the most popular models is called the Big Five: extraversion, conscientiousness, an openness to experience, agreeableness, and the last dimension of it is neuroticism, which gets used in a lot of different ways, but in the Big Five context it’s people that are most inclined towards anxiousness or emotional instability, meaning their emotions tend to move with whatever the environment is around them, good or bad.
And strikingly, one of the things that we found in the research is that the trait where financial advisors are least like the average person in the general population was not extraversion, which a lot of people seem to assume – like we work with people, and we have to go get clients. Extraversion was not significantly different. Agreeableness was only slightly different. Conscientiousness was only slightly different. The overwhelming, the most dominant, unique personality trait of advisors over the general population was extremely low neuroticism.
In essence, we sort of, literally, are the emotional anchors or the emotional buoys for clients, and that advisors with higher neuroticism seem to be much more likely to not stay in the industry. You could make a case as to whether it doesn’t work and they don’t succeed, or just the emotional toll is too high because if you take on your clients’ feelings ad infinitum, that will burn you out in volatile markets as the advisor. But we found this huge difference that being able to be that emotional anchor for a more emotional client was the distinguishing factor of advisors that seemed to persist in the long run as advisors.
Jason: Yeah, and that does make sense to me, much the same way that people in other, I guess I would call them ‘interventional fields’ tend to be quite calm and even-keeled. I know a lot of surgeons. They tend to be kind of emotionally low amplitude in some ways, and I think that makes them good at handling crises. Firefighters can be like that as well. And I think that’s a huge asset, and it’s a trait that can be…of course it can’t really be taught, but it can be polished in people. You can, through training, you can get people to be a little more of what they already are, which I think would be a good thing.
I don’t think any of that really changes the fact that, in the data, we can observe that a lot of RIAs engage in performance-chasing behavior. And I think there’s been an unfortunate tendency over the years in the industry for people to kind of hold themselves out as higher life forms, almost like, “I’m Spock from ‘Star Trek’. I’ll always give you the perfectly rational, objective decision inputs, and I’ll never get carried away.”
But, just think about Legg Mason Value Trust. You know, Bill Miller’s famous mutual fund. Bill beat the market 15 years in a row, arguably one of the greatest track records in investing history. It was a load fund. You couldn’t buy that fund unless you went through a broker or a financial advisor. Virtually all the money went into the fund as performance was peaking. And as it crested and collapsed, all the money went right back out. That money was driven by advisors. So I don’t know. I mean, the notion that individuals left to their own devices do crazy, stupid things that advisors never do, I’m not so sure about that.
Michael: It’s always struck me as well that we get a strange colored image of this as advisors. Almost anyone who’s been doing this for any period of time through market volatility has had that subset of calls from clients who really do get anxious about markets, who are sort of neurotic around market volatility. They do pull the trigger at bad times. They do pile in on the greed. They do bail out right at the troughs, right at the bottom. Ideally, hopefully, we manage to talk some of them back off the ledge.
It has always struck me, though, that if that’s your problem, you probably do blow yourself up in investing from time to time and then eventually say, “I’m really not good at this. It keeps going really badly. I think for myself, for my financial future…”, or frankly, in some cases, “…for the sake of my marriage, I’m going to find a financial advisor and let them do this for me.” If you’re really good at it, you don’t call us. We just don’t see them. We end up disproportionately seeing whatever that small segment of the population is that is most likely to blow themselves up, do it repeatedly, get to the point where they say, “I need to give this up and hire an advisor.”
And so we get this view of, “All investors tend to blow themselves up because our clients disproportionately blow themselves up.” I’m not sure that’s true either. I don’t know if that means at the end of the day we’ve unwittingly created a niche for ourselves of, “We particularly draw on low neuroticism advisors who are good at being the emotional anchors for clients who are disproportionately high in neuroticism and most likely to blow themselves up and go and find a financial advisor.” That’s how we’re a match-made-in-heaven thing that we have ended up with, but there does seem to be this odd pairing.
Even and especially in some of the recent market volatility – I know last year – Vanguard had a lot of data out that the bulk of their clients were not panic selling. Truly, the overwhelming bulk of their clients were not panic selling. A number of firms basically came out and said not only was there more buying and selling, but the buying was primarily occurring amongst the youngest, least experienced investors who were the most comfortable with the market volatility that was going on. Betterment I think had put out some similar data. And a lot of us advisors I think still had the clients who were calling in a panic in the midst of the pandemic lows in March, but is that just because of who we’ve ended up attracting with this investment-centric, AUM-centric model that a lot of us still run?
Jason: Yeah, probably that is part of it, and some of it could be demographic too. I think clients 55 and older, just sort of by construction, are probably more likely to panic in a downturn than clients in their 20s or 30s just because they figure they might have less time to recover, or they’re just on the verge of being able to afford a comfortable retirement, and they don’t want to lose it. But I think there’s another important thing to tease out here, Michael, which is that when people have an incentive to do something, they may not always recognize that they’re not that good at doing it.
And if you were paid on an AUM basis to be a registered investment advisor and a financial advisor providing planning and other advice, you may think you’re better at the investing part of the equation than you really are because that’s what you’re being paid to do. And you may be quite good at behaviorally coaching your clients not to chase performance, but it doesn’t necessarily follow that you’re good at monitoring your own tendency to chase performance because you’re getting paid on the basis of assets, and that can really taint your judgment about whether your portfolio selection choices are actually good for your clients.
Michael: So as we look at this ongoing evolution of advisors from portfolio managers – I guess if I really go back to our roots as “financial advisors,” it was stock pickers and stock managers, and then we went to mutual fund pickers and ETF pickers. Our curation of investments has evolved. Now we’re maybe curating a wider range of solutions for clients in this advisor-as-curator model.
I am curious then how you view just financial advising and financial planning overall. Do you consider advisors a profession? Do you still think of advisors more in the sales context than the advice context? I know we’ve got a view of ourselves because we live in it with the pride of trying to talk about our value every day. But, as a journalist that covers the whole spectrum and the whole gamut, how do you look and think about financial advisors and sort of this ever-present question of whether financial advising or financial planning is a profession unto itself?
Jason’s Perspective On Financial Planning As A Profession [01:11:10]
Jason: Well, let me start by saying journalism isn’t a profession. And I try to be very careful whenever I talk about journalism not to imply that it is. Journalism is a field, or it’s a way of earning a living. It is most emphatically not a profession. You don’t need a particular degree. You don’t need a particular course of study. There’s no licensing of any kind. There’s no certification. In fact, there literally is no qualification across the industry of journalism to be a journalist. Anybody. You don’t need a college degree. You don’t even need a high school diploma.
Michael: So someone can operate and act professionally, but you don’t frame journalism as a profession because of these degrees, courses of study, certifications?
Jason: Journalism is…I know of no definition, no reasonable definition of ‘profession’ that would enable journalism to think it is one. But I’m not sure about…I think financial planning should be a profession. I think it can be a profession. I kind of doubt it is right now. I think there are too many competing vested interests – trade associations, certification bodies, regulators – and the incredible noise and confusion that surrounds the term ‘financial advisor’ is terrible. Form CRS that was put forward by the SEC, oh my God, that wasn’t last year. I guess it was about a year and a half ago. I mean, the pandemic has made it impossible to remember when anything happened.
Michael: Eighteen months/eighteen years ago.
Jason: I think it was about 18 months ago. Form CRS – I’m expressing a personal opinion – I think is a regulatory fiasco. I think it has added not just a layer of complexity and almost complete incomprehensibility to the relationship between advisors and their clients, but it’s also created all kinds of opportunities for mischief and for an entirely new source of confusion. And I just pity the poor person who knows that she needs financial advice but has no idea how to find it. This person gets a Form CRS stuffed in her hand or is told to download it off a website, has to read this preposterous, cumbersome, junky document and make sense of it, and then has to interview an advisor.
The only way advisors can reliably set themselves apart in this kind of marketplace is either with extreme competence or with aggressive marketing, and that’s a difficult dynamic for consumers. There, off and on over the years, has been talk about federal licensing for financial advice. Personally I am inclined to think that might not be a bad idea, although it would be hard to get consensus on what the standards would be. But, no, I don’t think the field is a profession yet.
Michael: So where is the gap to you? What do we need to get to that would make you comfortable writing about financial planning as a profession when you’re talking about it in the journal? Where is that gap? What does it take?
Jason: Well, I think a profession has to have universally accepted and enforceable standards of competence and ethics. And the basic reason journalism isn’t a profession is because the competence of people in it varies all over the map, and, frankly, not everybody in journalism has the same standards of ethics as people who work at “The Wall Street Journal” or “The New York Times” or other organizations I admire. And the financial planning industry would have to gather together and speak with one voice about competence and ethics, and I just don’t think it’s there yet. I think it’s like herding cats right now.
Michael: I know you’ve been someone that’s been…well, I was going to say “outspoken” against the CFP Board. I don’t know if that’s fair. You’ve written and highlighted some issues, concerns, and stumbling blocks of the CFP Board in particular in its role…
Jason: Right, and I think it’s important to emphasize that I try not to editorialize in what I write. Of course I have opinions. Everyone has opinions, but I try just to be matter-of-fact in my reporting and anything I write about the CFP Board or anyone else for that matter. I wouldn’t characterize it as being critical or passing judgment, but certainly the factual pattern that my reporting has turned up over the years about the CFP Board indicates that they still have some work to do. And I think, to their credit, they have worked pretty hard on some of these issues and made some real progress. It’ll be interesting to see where they go in the next few years. But the report that the independent task force put out, and again my sense of time is shot. When was that, two years ago? I’m not exactly sure.
Michael: A year and a half ago. It was about 14 months ago. They put that out at the very end of 2019.
Jason: Right. I think it was in November or December. That’s right. That report not only cited consistent, repeated issues about the internal due diligence and enforcement process at the CFP Board, but also, much to my surprise, pointed out how often those issues had been aired in the press, in many cases in articles I had written. And, to be honest, it hadn’t occurred to me that that had really registered with people who might be overseeing the CFP Board, but that was kind of heartening. I hope that the issues we raised in that coverage over the years can serve as a kind of roadmap of the areas of concern that the organization, at least in my opinion, ought to consider addressing.
Michael: And it sounds like, from your perspective, you had framed up that a profession has universally accepted and enforced standards of competence and ethics. Your concern is maybe less around the competence and ethics, per se, but the enforcement seems to be the particular theme to me that a lot of your coverage of CFP Board has highlighted – that they’ve got a standard, but whether it’s really being enforced the way that it should be enforced to be a profession is not clear.
Jason: Well, and let’s be fair to the CFP Board here. I think the organization, very understandably, has a bit of an identity crisis because on the one hand, I think the CFP Board would sort of like to see itself in a regulatory or quasi-regulatory function. But on the other hand, it doesn’t have the budget, the manpower, the experience and expertise to do that. FINRA is a multi-billion dollar organization. The SEC is effectively a branch of the United States government. CFP Board is just a minnow alongside whales like that. To move to a regulator or quasi-regulator status would be just a quantum leap.
If I were running the CFP Board, on the one hand, I would say, “Wow, that would be great. We could be so much bigger. We could do so much more to serve the public good.” On the other hand, that’s really a daunting, intimidating, complicated, and difficult transformation to make. At some point they’re going to have to make a decision, which is, “Do we stay a certification body and stop even pretending we have a regulatory function?” Or, “Should we apply to the government?” Which I believe they would have to do for status as a self-regulatory organization. And a lot would have to change for that to happen.
Right now the industry is kind of in a regulatory no-man’s-land where jurisdiction isn’t really clear. Depending on which hat you’re wearing and which kind of transaction you’re making, you could be subject to FENRA rules. You could be subject to SEC rules. CFP Board’s fiduciary standard will apply. I think it’s a real muddle for practitioners, and it’s also yet another source of confusion for the public who not only don’t understand this but wouldn’t if you explained it to them.
Michael: To me there’s just…there’s this interesting inflection point that CFP Board I think is going through as well. The roots of the CFP marks were very much, it was this voluntary designation to demonstrate a higher level of competency and standards. The CFP Board has talked long about being the gold standard. Their brand color is literally gold, or at least a very yellow, gold-like color. But the more mainstream it goes, the less it becomes ‘the gold standard’, and the more it becomes ‘the standard’.
I think there is a point now where the CFP Board seems to want to see themselves enshrined as the standard for financial planning. If you are a financial planner, you are a certified financial planner. I think it’s a great direction to go. Personally, I’m very supportive of seeing the industry go in that direction and part of what I think gets us to profession status. But it’s not small shift when you go from being the gold standard to the standard, including what happens when you shift from being sort of, in essence, something that’s top tier to something that’s mainstream.
Jason: Right. As Charlie Munger would say, I have nothing to add.
Michael: As someone that just followed both the financial services industry broadly and the financial advisor world alongside of it, what surprised you the most about the evolution of the advice business over the 30-odd years that you’ve been following and covering it?
What Surprised Jason The Most About The Evolution Of The Financial Advice Business [01:23:22]
Jason: Well, isn’t that an interesting question? I’m not sure. I guess it’s the first time it’s occurred to me that most of the answers people give when they get that kind of question must be wrong because I think we can only construct that in hindsight. Thirty years later, it’s kind of impossible to reconstruct your former state of mind because it’s all overwritten by everything that’s happened since. I guess I was about to say what surprised me the most is that AUM fees have not come down more than they have, but I think that’s colored by hindsight bias.
Michael: Because you weren’t necessarily talking about AUM fee compression 30 years ago.
Michael: It was just like, “I think this is awesome.” Mutual fund commissions have come down from 8% loads to 5.5% loads by the 1990s. “This is amazing.”
Jason: Yes, exactly. It’s interesting, I think. it never occurred to me before. We all ask that question in every interview we do with anybody, and I just realized the question is kind of a fallacy, but let me try to answer it, anyway. I guess what surprises me the most is that more consumers have not sought the financial advice they need. I think that’s actually a good answer to your question.
And I can only think that that is the industry’s fault, for some of the reasons we mentioned earlier, and also for too often taking the easy way out. This is not so much a problem in the independent RIA world, but it certainly is in the traditional world of what used to be called wirehouses. When the DOL proposed the fiduciary rule a few years ago, all the big firms protested that this would drive small investors out of seeking advice. That’s got to be the most hypocritical, phony argument in an industry that specializes in them.
The brokerage industry really outdid itself with that because of course at the same time as they were protesting that, “Oh, middle-class people won’t be able to get financial advice,” they were telling all their brokers to jettison all their small accounts, and nobody with less than $250,000 could even walk in the door. The industry deserves a lot of blame for the fact that households with what statistically are sizable assets can’t get advice, don’t seek financial advice, don’t know they should get financial advice. I think that’s what surprises me the most.
Michael: And that’s just a function of because too many firms literally won’t take the average investor, or because we’ve just positioned financial advice to only be for the wealthy? Where’s the actual gap?
Jason: I think it’s reason 249 to have a dislike of AUM fees. I don’t want to take a $100,000 account, you know? One percent on that is chicken feed. So what if down the road that’s going to be a $1 million account? It’s chicken feed now. It encourages a sales-oriented mentality among people who tell themselves they are fee-only.
Michael: Because just literally if you’re going to, notwithstanding the other criticisms around AUM fees and whether the advice is aligned enough or not, if you predominantly operate on the AUM fee model, you just literally can only work with people who have A-to-the-M, which is only a fairly limited percentage of the entire population.
Jason: A point on a million dollars, now you’re talking. A point on $100,000, I don’t care. And that’s a shame. That’s bad for the public, and it’s bad for the industry.
The Advice That Jason Has For Newer Financial Advisors [01:27:57]
Jason: I guess the first advice I would give them is the advice I give everybody who’s young and bright and ambitious, which is associate with people who are better than you are. That’s one of the central messages you’ll hear from Warren Buffett and Charlie Munger at the Berkshire Hathaway annual meeting. I think it’s really powerful. You want to have wise, admirable, ethical mentors and learn from them as much and as closely as you can.
You should read really broadly, not just in finance but in all other fields because you’re going to have clients from all walks of life. Reading widely will make you a wiser and better person and a better advisor. Practice saying, “I don’t know,” as we talked about earlier. Just learn as much as possible when you’re young. When I was a young reporter starting out, I would – this was back when I was at “Forbes” magazine in the 1980s – I would turn the lights on in the morning, and I would turn them off at night. I was the first person there, and I was the last to leave.
I read “The Wall Street Journal” from the first article on the front page all the way to the last article on the last page. Every time I read an article in The Journal or anywhere else where somebody said something and was quoted saying something that I thought was insightful, I would grab my red pen and circle the person’s name. Of course in those days there was no internet or email, but I would find the person, call them, ask them out to lunch.
The hard work is really important, but the other thing is – and I think you have to be old like me to appreciate this with the benefit of the passage of years – but a lot of luck is the result of hard work. The more people you know and the more you vary your routine, the more likely you are to create serendipity in your work and your personal life. Those happy accidents that come out of serendipity – the conversation you had in the lounge at the airport with a stranger just because the person was wearing an interesting scarf – amazing things can come out of those happy accidents of the people you meet and the things you learn. Embracing that power of serendipity is really important when you’re young and starting out.
Michael: I love that. I love that.
Jason: So there is a wonderful story about this, Michael. Many years ago, when I was at “Money” magazine, I wrote an article about the power of luck. I interviewed a British psychologist named Richard Wiseman who had just written quite a nice book about luck. It wasn’t maybe quite as scientifically rigorous as…it wasn’t ideally scientifically rigorous, but it was well done and very interesting. He had done a massive public survey on what it means for people to think of themselves as lucky.
One of the people – and I’m misremembering the details – but it went something like this. One of the people who filled out the survey, I believe, was a…I believe her husband had died not long before, and something terribly tragic had happened to one of her children. But she filled out the form. There was a question, “Do you consider yourself lucky?” I think it was a 1 to 10 scale. She circled 10, “extremely lucky”.
He was so puzzled by this that he asked her. “Your husband recently died, and this terrible thing has happened to your son. How can you consider yourself lucky?” She said, “Well, a while after my husband died, I decided I had to get outside myself and try to rebuild a social life. So I came up with a simple rule, which was before I go into a room full of people, I close my eyes and I think of a color. Then I open my eyes, and I walk up to the first person in that room who’s wearing that color.”
She paused and looked at him and smiled. Then she said, “So I always have a date on Saturday night.” I just love that story because that’s somebody who knew how to harness the power of serendipity, and even though she’d had these terrible tragedies in her life, it not only made her feel lucky. She actually had good fortune because she made it for herself.
Michael: I love that. I love that. As we wrap up, this is a podcast around success. One of the things that always comes up is the word ‘success’ means very different things to different people. I know you’ve had an incredibly successful career as a financial journalist, a lot of very well-deserved awards and recognition and fantastic books that you’ve written. But I’m curious, how do you define success for yourself at this point?
How Jason Defines ‘Success’ For Himself [01:33:55]
Jason: Well, of course like everybody, I would break it into personal and work-related. I guess you’re asking me about the work-related aspect of it, so I’ll answer that. I think it’s just trying to be honest with myself about what I’m trying to do and whether I’ve achieved it. I once sort of jokingly at some industry conference – somebody asked me, “How do you define a fiduciary?” And I said, “Fiduciaries are people who are willing to learn things about themselves that they would rather not know.” The audience went dead silent, so I don’t know whether people liked it or hated it.
But I think success, for me, is at least trying to be honest about whether I’ve done my work well. That’s very hard. I’m not pretending that it’s easy or that when I make those judgments they’re correct, because of course I’m lying to myself. That’s a large part of what it means to be a human being. But I hope I lie to myself less than I did when I was young, and I hope I lie to myself less than a lot of other people who do what I do. I think what’s important about that is that you attempt it, not whether you succeed.
Because, first of all, there’s no way of knowing if you succeeded, because only a higher power could really determine whether you’ve been honest with yourself. There’s no internal objectivity for that because we’re all biased. But I think at least trying to do it is really important. It amazes me how many people don’t seem to do that, because it’s uncomfortable, you know? I try not to have a lot of sunk costs in my work. If I’ve done something and my editor or someone else who reads it doesn’t think it’s good, then what I try to do is tear it up and start over.
Of course, I do a different kind of work than a lot of advisors. I’m not saying that if your client doesn’t like the financial plan, you should completely revise it from scratch every single time, because that probably isn’t a very good idea. But being able to let go of what you’ve done because you don’t think it was good enough in the attempt to make it a lot better, I think is really important. On the occasions when I’m able to do that, that’s when I do feel that I succeeded.
Michael: Right. I love that vision and framing. To me it’s a path of self improvement, of continuous improvement with sort of the asterisk that you can’t actually improve and get better until you can be honest with yourself that you’re not as good at something in the first place.
Jason: One of the ways I like to put this is, and again this is…although I say this about my writing, that’s just because I am a writer. That’s just what I do for a living. But I don’t know why it wouldn’t apply to other kinds of work. The best feeling that I can have about something I’ve written is when I say this about it. I don’t know if it’s any good, but I’m very sure at this point that I can’t make it any better. That’s a really good feeling. When I have that feeling, very often that’s when other people will say, “Oh, that was good.”
Michael: I love it. I love it. Well, thank you so much, Jason, for joining us on the “Financial Advisor Success” podcast.
Jason: My pleasure, Michael. We talked about a bunch of things I thought we would and a bunch of things I didn’t realize we would.
Michael: We never quite know where our conversation is going to go.
Jason: That’s great. Thank you so much for having me.
Michael: Absolutely. Thank you.