Norb Vonnegut for the Wall St Journal writes: "Fee-sucking, evergreen income." That's how Bill Michaels describes our industry's reliance on asset allocation. The problem, he says, is that it doesn't make money for clients. But here's what "diwussification"--his play on diversification--does for advisers: It minimizes risk, locks in annuity revenues, and frees them "to go play golf."
Mr. Michaels, now retired, was the kind of risk-loving stockbroker that has all but disappeared from financial services. During the 1990s, through options and a staggering margin balance, he built a 1,150,000-share position in Dell. It paid off big-time.
His message to our industry: Man up. He's the only adviser I've ever met with the chops to buy one stock with $23 million on margin--conviction that came from long hours of research.
Mr. Michaels met Dell's management and scrutinized the 10ks. He patrolled investor forums and knew which analyst was saying what. He became a true student of the company and, to this day, attributes his success to G.M. Loeb's book for the ages, "The Battle for Investment Survival: How to Make Profits."
I know what you're thinking: "old school," "not my kind, dear," or "lucky he didn't lose his Gucci loafers and then some." I did, too. I thought advisers like Mr. Michaels were extinct.
Of course they haven't actually died out. Today they just run hedge funds, or at least work for them. Investors will always flock to financiers who take risks and win big.
Still, in my view, the real dinosaurs of wealth management are the ones who drone on and on about asset allocation.
Investors don't need us to diversify. ETFs are easy to buy, easy to use, and easy to understand. Vanguard and countless other organizations have created low-cost ETFs that enable investors to diversify their equities without the need for an M.B.A.
Similarly, fixed-income ETFs eliminate the need to research individual bonds. And new instruments, like Guggenheim's Bullet Shares, enable investors to build laddered portfolios without our help. These securities are forcing us to justify whether we offer any real value.
Yes, I've heard the usual arguments: "Clients hire me to remove the emotion from their portfolios."
Yeah, right. If you want to build a sustainable business based on emotional reassurance, go back to school and become a shrink. At the moment when the Dow Inustrials hit 6547.05 in 2009, every one of our clients was evaluating whether he or she had the right investment team in place.
From what I saw, advisers were more terrified than clients in the crash. How do you reassure clients about their portfolios when you are wondering whether your company will go belly up? When your deferred stock and net worth are tanking, thanks to the toxic waste that some monkey cooked up in another division?
Sure, there are many ways to differentiate investment advice. I used to describe the benefits of putting private company shares into Grantor Retained Annuity Trusts before initial public offerings. This technique moved stock appreciation to kids, beyond the reach of estate taxes. It created huge tax wins for several clients.
But let's be real. Estate planning and income tax strategies--they're for the lawyers and accountants. Just ask your compliance department. Or read the disclaimers they attach to your emails. Our clients will find these techniques with or without us.
Back to the original question: How do we compete in the age of plug-and-play ETFs?
There's growing evidence that younger generations are comfortable managing their money, that they prefer online tools, that they don't want our help. And wealth management websites are goading them on, attracting luminaries like Burton Malkiel who tell investors, "You're paying too much for investment help."
Traditional advisers, the ones who meet clients face to face, need to do something fast. Otherwise, it's only a matter of time before a wealth-management version of Amazon eats our lunch.
Not everybody has Bill Michaels's appetite for risk. But our survival depends on sharing his bottomless appetite for knowledge. In today's world of asset allocation, this means immersing ourselves in the markets, soaking up all the research, listening to the talking heads, and taking a stance on individual stocks and bonds. It means keeping our heads down even when it's more fun to gossip about who did what during happy hour Thursday night.
There will always be investors, who prefer grow-your-own portfolios. But for my money, I'm betting on advisers who develop the deep knowledge base necessary to help clients navigate their growing list of options.
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