Advisers: What Can Be Taught and What Must Be Learned

Early on in my career in the financial services industry, my colleague, Dennis Wallace, often reminded me that there were some things about the industry that I could be taught, but the most important things I would have to learn on my own through painful experience. Obviously, he knew after some 20 years in the industry that I, like most young financial professionals fresh from university with a newly minted Series 7 license, was under the impression that everything we had learned in business school about models, ratios, and forecasting would readily apply to the daily grind of financial services, and that our client portfolio and cash-flow projections would go as smoothly as the simulations we had run with our Ph.D. mentors.

That was in 2005 when I became a registered representative after almost three years as a client liaison and portfolio administrator at another financial firm. I was then aware that some 90% of financial advisers wash out of the industry early, but since I had had the advantage of observing client interactions with market ups and downs without actually having to answer to clients directly, I figured I was at least a step ahead of the competition.

It was, in retrospect, a faulty assumption.  Dennis was correct:  the things I was taught in a classroom setting by my professors about building portfolios and security analysis were helpful, but they were a fraction of the skills I would require if I were to survive more than a few years in the industry.  I remember a former colleague of ours who, like myself, was a new rep, but who, unlike myself, had years of prior experience in corporate finance.  In some ways, he was far more qualified academically than I was at the time, but he lacked the ability to communicate effectively.  Because he had spent almost his entire professional career staring at a computer screen and not talking with people, his lack of interpersonal skills doomed his career in financial services.   He didn’t last very long, and he ultimately went back to work in the corporate world.  I learned from watching his struggles that even the greatest financial model is worthless if it can’t be communicated in such a way as to draw client capital to it.

Now that I am an industry veteran, when clients ask me to speak to their college-age children about their career aspirations and what advice I can offer to them, I usually start by recommending they get as much practical experience as they can whether by interning for free or taking a low-paying entry-level job in their industry of choice, even if it means at first taking less money than an alternative job in an undesirable industry.  Ideally, if they are interested in financial services, I recommend they seek a position in which they will have heavy client contact because it is only with the experience of dealing with demanding and anxious customers on a frequent basis that they will sharpen their personal communications and client management skills.  This is, hands down, the greatest asset that any adviser can have who wishes to serve the public.  The reasons I say that are these:

  • In an up market, clients rarely call you back, except to ask for more cash from their portfolios.  You must develop the habit of reaching out to your clients first to ensure they maintain realistic expectations, do not get complacent and thus get caught off guard by the next market dip, and, most importantly, that they maintain their scheduled portfolio maintenance such as rebalancing and so forth.  They will probably fight you at the time, but they will almost certainly thank you later.
  • Similarly, just because the market is down doesn’t mean your clients, – especially retired ones, – will not need income from their portfolios.  It can be frustrating for unseasoned advisers to learn that their clients rarely stick to their agreed upon financial spending plans.  They can scarcely be blamed; after all, not many people foresee a financial hardship or sickness that results in increased cash burn, least of all when it’s most inconvenient market cycle-wise.  Therefore, it is your job to anticipate, and ensure sufficient liquidity within the portfolio in the likely event it is needed.
  • When you meet with a prospective client, you should realize that you are not just interviewing for the job of that person’s adviser; you are also interviewing that client to see if he or she will make a good client.  I have learned that an adviser should be up-front with a prospect about this.  Some clients want to be “sold” for whatever reason, but most are just looking for a competent professional they can trust.  The most successful relationships are built on mutually agreed upon expectations, transparency, and reliability, on the part of both the client and the adviser.
  • Remember that your clients are your own portfolio.  You should monitor each relationship just like a good portfolio manager monitors each of the positions in his portfolio.  Each client is unique in his or her own way, and each of them chose you to fill a very serious role in their lives.  It is a privilege to serve them in such a serious capacity, and your responsibilities should not be taken lightly.
  • You may be surprised how much you can learn from your clients.  Some of the best investment ideas I’ve had over the years were the products of long and in-depth conversations with very creative people who insist on seeing the world as one of boundless opportunity, albeit with period hiccups.  These clients are the real gems, and their creativity mixed with tempered optimism make them the most fruitful client relationships.
  • While I was at first opposed to social media, I’ve come to appreciate the resources available to financial professionals on such platforms as Twitter.  It is perhaps unique in financial services that while we are all competitors in a general sense, those of us who interact on Twitter and in the blogosphere seem genuinely happy at the success of others and we are all eager to help others by sharing our wisdom and experiences.  These resources are free, and demand only your time and attention.  It would be foolish not to take advantage of this opportunity to learn.
  • Finally, I’ve learned that you shouldn’t be afraid of adversity in the markets.  You can analyze an investment to death, subjecting it to a hundred backtests and you can attempt to discern its promise with a 100 ratios.  However, there is a big difference between doing the math in the classroom and watching its value fluctuate in a client’s portfolio.  It is when a client’s portfolio is underwater that your mettle will be tested.  You have to remind yourself and the client that in the short-term, the market is an emotional organism that doesn’t care about your careful analysis and your financial goals.  It can swamp you and your portfolio if you let it.  However, it is important not to overreact.  Just because one investment outcome was adverse doesn’t mean your entire process was awful and needs to be scrapped.

There are countless other examples of situations and scenarios for which professional training on its own would have been inadequate. Apprenticeships and internships help, but ultimately there’s no substitute for real-world experiences, assuming you survive them.