Tom Sedoric

We recently posted a MarketWatch column titled The Most Important Question to Ask a Fund Manager that outlines key criteria for selecting an asset manager. Chuck Jaffe at Dow Jones sums up the research succinctly: “…just look for a low-cost fund where the committed manager - and hopefully his entire family - has had their own money in place for a long time; chances are you’ve found a winner”. I believe there’s an underreported corollary for financial advisors. 

Even the smartest people can fool themselves into thinking they have more money than they actually do - trust me. This can be particularly evident for the “captains of finance” that pervade the financial services industry. This came into focus recently when I uncovered a pair of studies about the financial advice industry that raise two important and revealing questions: do advisors truly practice what they preach? If they don’t, then why should their clients be listening to them? 

One survey of 117 financial advisors compiled earlier this year by CLS Investments, LLC, found that only 19 advisors had completed a formal succession plan for their own businesses. This lack of a long-term plan may explain why half of the advisors in the study say they will not retire until at least age 71, if at all. 

The study also revealed that “most expect the sale of their businesses to fund the majority of their retirement, with 41 percent saying the sale of their business will be between one quarter to one half of their retirement assets, and another 14 percent expecting a sale to make up half of all of their retirement assets.” This suggests that prudent savings and sound investing during their careers may not have been adequate or didn’t occur at all. 

It is clear to us that independent advisors need a wakeup call - they are relying overwhelmingly on their businesses to fund their retirement,” says Todd Clarke, CEO of CLS, about his firm’s survey. “But they fail to account for the fact that should something happen to them, or if their business does not sell for the right price, they, like most Americans, will be woefully underfunded for retirement.

Another survey of 771 independent financial advisors by FP Transitions found that “99 percent of independent financial services and advisory practices go out of business when their founder retires.” In addition, the survey found that too many advisors were viewing succession planning as their retirement nest egg creation, and not a strategy for the future growth or investment in the business. Basically, they were all hoping to win the lottery. 

This is no small matter in an industry faced with serious demographic challenges. According to 2014 data by the research firm Cerulli Associates, the average age of advisors in our country is now in their 50’s. A mere 11 percent are under the age of 35. Amazingly, the consulting firm Moss Adams has estimated the industry could face a shortfall of more than 200,000 advisors in less than a decade. I’ve been fascinated that more young professionals, like our younger colleagues Casey Snyder and Erika Luczynski, don’t assess the landscape and see the enormous opportunity that may exist in a world for providing sound counsel. Financial advisors without a succession plan for their practices put both themselves and their clients at risk.

I have previously raised awareness on the deals and financial incentives that financial advisors receive when changing firms1. Though the self-regulatory body FINRA is discussing greater transparency, little has been accomplished thus far, and the zero-sum game of changing firms does little but ultimately raise expenses for the swapping advisor’s clients. Many advisors actually take advantage of the lucrative deals available from firm swapping because they are either greedy, or have failed to adequately manage their own resources. Like many, these advisors may have considered themselves immune from consequences of their own financial inadequacies, and hoped that another ‘big bonus’ jump to another company, or a sale of their firm will save the day. I know that “hope” alone is an inadequate retirement strategy, and I hope that FINRA and others provide increased transparency for the investing public on this issue in the future. 

A key distinction between “great” and just “mediocre” professionals of any type is often honesty and transparency. I’ve been asked over the years by our clients about my personal balance sheet, and don’t hesitate to discuss such a private topic. I have earned every cent of my nest egg and I manage my resources in the same fashion as I do many of my clients. In many cases, our objectives are aligned perfectly. I am an investor of patient capital, including my own, and have never taken a step down the slippery slope of speculation or firm swapping to improve our family’s circumstances. Many financial “professionals” seem destined to damage their own balance sheets by actively, and often unsuccessfully, trading their own portfolios - sometimes with leverage. The activity often occurs without an honest assessment of their results. Sometimes, and most sadly, it is done to generate revenue so that they can keep their jobs. 

My portfolio looks a lot like that of our clients. It is diversified, there is proper asset allocation, it is maximally tax efficient, and it reflects my values on risk management. Basically, I do for myself what I do for my clients, which I believe is not only a sound policy, but the most honest one. Why shouldn’t we eat our own cooking?

It’s easier said than done, as suggested in Shakespeare’s Hamlet: “to thine own self be true.” A few years ago, a close financial advisor colleague asked me for analysis on her financial situation. What was fascinating when she shared her table of assets and liabilities was how she viewed the extent of her wealth. This is a hardworking, supremely ethical advisor who has rightly earned the trust of her clients over the years. 

Yet, she was less than honest with herself and her family when it came to assessing their liabilities. Deferred compensation, restricted stock, and illiquid stock options are examples where we are most prone to overstate values. Even 401k and retirement assets are often overstated as clients and colleagues neglect to consider the ultimate tax burden that must be paid. An asset that is illiquid or deferred isn’t really an asset until it is sold and the taxes paid. Though the 2008-2009 debacle sobered a number of financial professionals (particularly those living on leverage), investment gurus, and regulators, we know that memories are short and transparency is often lacking. Ask a few questions before giving your money to anyone. As the retailer Sy Syms said; “an educated consumer is my best customer”. Today, the first discussion with any new advisor should begin with “So, tell me - how do you manage your money, and how do you get paid?” With increased transparency, measurable client outcomes and success could be soon to follow.


¹‘Tenure and Transparency’, January 2014. This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. The views expressed are those of Tom Sedoric – Partner, Executive Managing Director and Wealth Manager and are not necessarily those of Raymond James.