A Tale of Projection
“WE SEE AS WE ARE”
Like most people, I’m asked what I do for a living. It was so easy to say, I’m an analyst at Ford Motor, when I was, or I work for Mobil, when I did. This changed when I went to work for Legg Mason in 1987 as an investment broker. The difficulties began, and the difficulty became stronger the longer I worked on a commission basis. When asked what I did for a living, I felt uncomfortable answering because I knew I played two roles, that of salesperson and advisor. I knew that the conflict of when to wear the advisor hat vs. the salesperson hat was too fine a line to walk, and I often questioned if my advice was in my best interest or the client’s. After a few years, I recognized my advice was biased and compromised. I knew that in order to focus on the advisory side of the equation and sit on the same side of the table with my clients, I had to change my fee arrangement. In 1990, I started my own independent fee-based investment management firm. I’ve utilized the same fee-based model since and have never felt conflicted.
I call the independent fee-based advisor a FAB, and obviously think this is the only type of advisor people should hire. Conversely, I call the commission driven advisor or sales-driven advisor a SAD. I purposely picked these two pseudo-acronyms because I want to convey a message and I don’t want it to be subliminal. I want it to be explicit. If you hire a SAD, you will be “sad” one day. If you hire a FAB, you might be “fabulous.” Although I believe you have no chance of success with a SAD, you do with a FAB. I will use these two terms throughout this tale. The most important thing that differentiates these two types of advisors is that one has no conflict of interest.
There isn’t a successful advisor, regardless of what they call themselves, who isn’t eternally on the lookout for wealthier clients. As the sages at Legg Mason who trained me would say, “If your business isn’t getting bigger, it’s getting smaller.” This eternal quest for new clients is the mark of a successful advisor as it is in any business I have ever studied. I remember the best investment broker at Legg Mason, with over 30 years of experience and an annual income in the seven figures, always telling the rookie brokers about his prospecting methods and the latest wealthy client he had just enlisted. This is why whenever any advisory salesperson is asked what they do, there is always a bell that goes off and out comes the sales hat. It’s the nature of the beast. It matters how advisors see themselves, but this tale is about how you see advisors.
Today, when I’m asked by someone who doesn’t know me, “Carlos, what do you do?” I answer “I help people with their money.” The typical reply is “Oh, so you’re a financial planner” or, “Oh, so you’re a broker” or, “Oh, so you’re a money manager or wealth manager.” They normally follow that statement with, “I’m with big brokerage firm XYZ” or “I’m with so-and-so at so-and-so, do you know him?” This perception of what I do is the reason for this tale. I know what I do, and I have a clear understanding of how other advisors operate, but most people don’t. If it’s difficult to describe what I do in a short explanation then it’s even harder for someone to understand; thus, the subtitle of this tale, We See as We Are.
When you hear the word doctor, you have a clear picture of the profession. When you hear the word police officer or teacher, you have a clear image as well. But, when people hear any title that describes what someone in the financial services business does they are typically clueless as to specifics, so naturally they project their viewpoint. This “see as we are” projection or ambiguity has led to a sense of confusion surrounding financial services, and this confusion hurts clients since they don’t understand the nature of the advisor’s expertise or their motivation. This should help.
Let’s look at how the financial services industry sees itself today and how today it wants to direct you to utilize their services. Please keep in mind that a little over 20 years ago the industry didn’t use this terminology. It’s new thinking. It’s new marketing. It’s incorrect. It’s self-serving, but it is what it is, nevertheless. The financial services industry wants to divide advisors into two broad categories. The first is what they call asset gatherers, which means they deal with the public directly. The second is asset managers, which means they don’t deal with the public directly. The financial services industry has gone out of its way to make people in the industry think they need to define themselves accordingly. Because most asset gatherers are in fact very poor asset managers, with low confidence in their ability to deliver investment returns, the relentless pitch has worked. Fortunately, you don’t have to divide the industry the way the industry wants its advisors to see themselves. Remember you are in charge of your own financial success.
The premise behind the industry’s push to classify its advisors as asset gatherers or asset managers is a “big lie.” Its basis is the faulty premise that asset managers are better at managing money than asset gatherers. There is not one bit of research or an academic study that proves this. The only universally agreed upon research is that asset managers consistently underperform against a benchmark.
Let’s look at how the industry wants you and their advisors to see the world. As the names imply, and what the industry wants you to think, is that asset gatherers focus on gathering money from clients while asset managers focus on investing or managing money for clients. The hidden or subliminal message is that asset gatherers aren’t very good at asset managing and that asset managers aren’t very good at asset gathering. Thus, there is the need to separate duties and the perception of a separation of duties. It’s working. As I said before, it’s not true. However, if you tell a “big lie” long enough, people believe. Other than the fact that there is no proof that asset managers are better at managing money than asset gatherers, why do I feel so strongly that the industry is wrong or at best disingenuous when it divides its advisors into these two camps? The reason is clear. Everyone is an asset gatherer in this business since the more you manage, the more money you earn.
If the industry must classify its advisors, then in my opinion, they should subdivide the industry into two categories. The first is asset gatherers who know the client, and the client rightfully perceives them as their asset manager. The second is asset gatherers who don’t know the client, and the client rightfully perceives them as asset managers. This would be more appropriate. It’s how I look at the industry, and how you should too.
For the purpose of this tale and for clarity, let’s temporarily accept the industry nomenclature. How does it pertain to you? Asset gatherers as the industry defines them have many names. My general rule is to ignore what they call themselves and concentrate on the following—if you can associate a first and last name with an advisor, and the advisor can associate a first and last name with you, then you are dealing with what the industry calls an asset gatherer. You correctly view them as your asset manager, but the industry doesn’t want you to.
Once you’ve identified your advisor as an asset gatherer, if you pay them exclusively on a fee basis, you are dealing with a fee-based advisor or FAB. If you pay them on a commission basis, you are dealing with a SAD. I encourage you to adopt these two terms and tell your friends and family. Ask yourself right now, do you know the name of your advisor and does he or she know your name. If the answer is yes to both questions then ask how they are compensated or how you are charged? If it’s on a commission basis then you are dealing with a SAD, otherwise you are dealing with a FAB. If you don’t know the name of your advisor, then you are looking at them every day in the mirror.
So how do you recognize an asset manager based on the industry’s definition? My general rule is; if they don’t know you, you are dealing with an asset manager. Because the essence of the client/asset manager relationship is that you know them and they don’t know you, the relationship is one-dimensional. There is no give-and-take. They are hired guns. They are hired asset managers or HAMS. There are many types of HAMS. The most familiar is the mutual fund manager or exchange-traded fund manager. I doubt that they know you, but you probably know of them or else you wouldn’t have entrusted them with your money.
In summary, we’ve taken the advisory world and divided it into the FAB, the SAD and the HAM. FABS and SADS are asset gatherers. They know you and you know them. You distinguish one from the other by the way you pay them. Here’s the rub. They are rightfully asset managers as well, because you are entrusting them with your money and placing trust in their investment selection or asset management ability. HAMS have no idea who you are. By my definition, they are also asset gatherers, although the industry likes to call them asset managers. I think they do this to diminish both your confidence as the client and the confidence of the advisor in themselves as to their ability to manage money. The industry definition, the wrong definition, the “big lie” implies neither FABS nor SADS are as equipped to manage your assets as HAMS. Yet most HAMS stink.
These terms in this tale are important to understand because they reveal the motivation of the advisor. I selected them for a reason. An advisor’s motivation is critical to your long-term financial success. If you don’t know what makes them tick, you are in trouble. I think that your understanding of an advisor’s motivation is so important that I have written other tales on this subject. In any event, you should know what role your advisor should play. If you can see the advisory world as it is and not as you are, you are well on your way toward a successful financial future.