Should you say “yes” to the financial adviser who will tell you “no”?

Sonnie Bailey

5 June 2016

I usually enjoy articles by Barry Ritholtz, founder of Ritholtz Wealth Management, host of Bloomberg’s “Mastesr in Business” radio podcast, and author of many fantastic articles, showcased in his blog The Big Picture. I think he “gets it”.

So it surprised me to read one of his recent articles, “The best sort of financial advisor will tell you ‘no’“, and find myself disagreeing.

At a fundamental level, we agree. A good financial adviser gives counsel to his or her clients. Clients can come to an adviser with a course of action, and a good adviser will tell them it’s a bad idea. Or at the least, let the client know the risks and potential downsides of what they are wanting to do.

And in fact, it is one of the litmus tests I would use when meeting with advisers to review their advice processes. I would ask for a recent example where they had done just that. 

(As an aside: another litmus test for insurance advisers was to ask about the last time they had recommended a client reduce their level of cover, or cancel a policy, on the basis that they could now self insure. This was usually against the adviser’s interests, because it would mean cutting off a stream of trail commission.) 

Ritholtz goes one step further, however. He explains that “We have fired clients who insisted upon committing financial hari-kari”. He suggests that, as a client, “[y]ou can do anything you choose – just not with our firm. We don’t offer an a la carte menu. Either you drink the Kool-Aid, or you don’t.”

I think the Kool-Aid metaphor is both telling and unfortunate. 

There is a difference between the service of providing financial advice from the service of implementing client instructions. Clients should make decisions, not their advisers. Their decisions should be informed by good quality advice.

A client should be able to make decisions, informed by advice. Insisting on a relationship where the client has to do what has been dictated to them might work for some. But it is not a healthy relationship for all people.

And engaging with clients in this way shouldn’t be core to the way a professional services provider engages with clients.

Ritzholtz refers to an article written by one of his colleagues, Josh Brown (also known as “The Reformed Broker”). Brown explains that “Lawyers call the shots on strategy. Doctors are in charge of diagnosis and treatment. There may be choices for the patient to make along the way, but the professional’s job is to make the final decision based on those choices.”

I don’t think Ritholtz or Brown characterise the role of lawyers or doctors correctly. Lawyers and doctors advise clients/patients and can help implement what the client wants to do. 

As a lawyer, I can say this with authority. There are times when I can be forceful with a client regarding what they should do. But there are many times where there are multiple options available to a client, and it’s not my place to tell them what they should do.

What might be suitable for a client can depend on many factors, including the costs they might incur, and the risks involved. It’s not my decision to tell a client what option they should take – it’s their decision. I’m just helping them to make an informed decision.

Many times, clients make decisions that are different from what I would do. But they are legitimate decisions, and as a professional I’m fine with that.

The same goes with doctors. Before finishing this article, I asked a doctor and a dentist whether this accurately characterised how they and their colleagues engage with patients. They were incredulous. 

In many cases, doctors (and dentists) present patients with options, and it’s not the health professional who should decide what the patient should do. 

Furthermore, should a doctor “fire” his or her patients who keep smoking or drinking heavily, even though they tell them otherwise? Should a doctor “fire” his or her patients who don’t take their medication as prescribed to them?

Should a dentist “fire” a patient who doesn’t brush and/or floss as regularly as they should, or who drinks more soft drink and juice than they recommend?

I think the more telling point comes from Brown’s article, where he says:

The only way to build to build a scalable, sustainable and valuable investment advice practice is to demand that your advice is actually adhered to. Turning clients down who cannot accept that is a must. Running 100 different portfolios and playing games with people’s day to day desires is not doing anyone any favors.”

Here, we get to the heart of it. Even for high quality financial advisers – and my impression is that Ritholtz and Brown count among them – we see a confounding of the separate services of advising clients and implementing their instructions.

Brown says that in his view, “Billing on an advisory account where the client is not taking your advice is borderline unethical”.

I disagree, so long as your advice is solid and you have communicated it clearly to your client. To my mind, refusing to implement client wishes, and not allowing them to make their own decisions, because it does not help you “build a scalable, sustainable and valuable investment advice practice” is problematic.

The first step is to provide high quality advice. A separate step is implementing client instructions. The instructions might line up with the advice they receive. Or they might not.

It is entirely legitimate to charge a client more to implement advice that is not part of the normal workflows of the advice business. This should be a factor that is communicated to the client when you counsel them that what they want to do might not be in their best interests, and that there are risks involved.

The key thing is to remember what a financial adviser is there to do. And in my view, the adviser is there to provide good quality financial advice. 

Related: Does an adviser need to recommend one course of action to a client, or can the adviser propose options?

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