Bad Financial Advice Will Multiply As Good Advisors Become Scarce

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A well-known recruiter for financial advisors crafted a recent post that has gained some attention. The recruiter warned of future shortages of advisors in the industry, and the deficiency it will create in terms of a scarcity of financial advice. It will come as a result of the increasing number of advisors leaving the profession, corporate downsizing and the growing ranks of retiring advisors that are finding it difficult to partner with a qualified suitor to take over their existing books of business. This shortfall will be coming at a vulnerable time when the population of retirees continues to swell into the next generation, and the increased complexity of products, asset classes and global markets require upgraded investment skills that fewer professionals have mastered in recent years.

The financial services industry is guilty of changing the criteria and requirements for talent acquisition, and has engendered this self-destructive trend that leads to the consolidation and eventual demise of advisor qualifications. In the last 10-12 years, a combination of several commercial forces involving margin compression, regulatory vigilance, operational risk and a migration toward a more predictable fee based, recurring revenue model led the way toward altered training methods, compensation and career paths that new financial advisors would be subject to. Existing advisors would have to modify their professional behavior, business plans and expectations to accommodate these adjustments. Clients would gradually begin to lean away from their advisor's proprietary claim on their accounts, and concede to a more shared dependency on the firm.

This new era of conformity adopted throughout the industry was one that also steered away from encouraging advanced market skills or active financial management, and instead toward a grid that emphasized and rewarded asset gathering and the practices of externalizing investment management. Market knowledge was no longer a training priority as traditional skills were outsourced to an open architecture platform with heavy handed sales managers pushing products that drove the metrics and compensation for financial advisor productivity. The next generation of cold calling automatons was let loose on the public with scripted monologues to convince prospective investors of their firm's unique offering and objectivity. To convince clients of their investment prowess they would blindly regurgitate research in the absence of their ability to interpret data and form their own opinion. Advisors were not guided and trained as fiduciaries but commercially evaluated and processed as salespeople.

"Cookie cutter" asset allocation models were produced en masse, with identical quantitative structures despite the claim that investment solutions were "customized." Capital market assumptions were sometimes outdated or omitted; leaving most advisors incapable of having the conversation as to why or how this allocation was determined; and how the portfolio would be impacted with a change in interest rates, capital flows or FX intervention. A purely theoretical education wouldn't help explain how diversification failed when most markets experienced a two standard deviation move and all asset classes shifted to a correlation of "1.00"?

The public endures continuous insult from innocuous wealth management and private banking websites, and advertising that's impossible to distinguish with its predictable client pledges and conceptual generalities that promote a false sense of security. We have all seen countless versions of those familiar images of the senior couple walking together on the beach, or the young father frolicking in the grass with his children, or that accomplished "Bond-like" executive boarding a private jet, or perhaps that unconvincing photo of the "knowledgeable" and concerned advisor aimlessly pointing to irrelevant charts at a gleeful client review.

If you were to ask most of the senior professionals in the industry what initially interested us in this career, many will respond by saying we had a strong interest in the markets, the financial reward, the entrepreneurship, the excitement, a passion for investing etc. It is with these incentives that we trained rigorously, gained entry level positions on trading desks or as analysts, and read through infinite reams of research and periodicals to hone our skills.

We were hypnotically glued to monitors with endless streams of data that permanently embedded in our minds the historical price references we can immediately recall when the violent collision of markets, events, and emotions are repeated in the future, and we are summoned to make and execute critical decisions. It is this remarkable quality of time, uninterrupted by bathroom breaks or lunch deliveries, during which we spent managing real positions for real clients in real markets in real time with real money that differentiates our role and brands an everlasting impression on our career history.

One cannot replicate the experience the more seasoned financial advisors of the past had trying to sell S&P Futures to neutralize an equity portfolio during the crash of 87', or the anomaly discovered by legging into credit call spreads in crude oil options during the Persian Gulf War in 90' , or buying delta neutral put premiums in British Pounds during the ERM crisis in 92', or liquidating the entire German Bund portfolio for a hedge fund nearing insolvency during the 94' bond market crisis, or managing a billion dollar peso futures positions during the Latin American crisis and devaluation in 95', or the long equity portfolio that collapsed during the 96' "irrational exuberance" speech that soon recovered and collapsed again during the "Asian Contagion" in "97', and recovered and collapsed again with the Russian debt crisis and Long Term Capital Management blowup in 98', and the euphoria in 2000 of owning all of those glorious shares of Inktomi , and of course one can never forget being short volatility in front of 9/11.

It is the aforementioned market knowledge gained that also helped an increasingly scarce breed of advisor sell FNMA paper and avoid CDOs after the government encouraged banks to drop lending standards in 01', or to buy oil shares and bonds in 03', and REITs in 05', and to limit their exposure to auction rate securities after 06' when the notion of "failed auctions" were unthinkable in 07'. And when you bought Goldman Sachs at its IPO price nine years later in 08', bought commodities and Munis in 09', bank stocks and emerging markets in 10', sold the Dollar in 11', the Euro in 12' and the Yen in 13'.

There is no substitute for good training and market knowledge. And despite the vast armies of financial advisors mass marketing their conflicted prescriptions, it is the shortfall of experience, not a shortage of advisors, which will result in the future shortfall of good advice.

Joseph Sabbagh is chief executive officer of JVS Capital Managment, LLC. Previously he was managing director at Nine Thirty Capital, executive director at Morgan Stanley, and a vice president at Goldman Sachs for tens years during which he worked in the investment bank's fixed income and wealth management divisions.  

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