Listen to any investment related commercial and you’re almost guaranteed to hear a sales pitch that promotes service rather than performance. You’ll hear a lot of buzz phrases like “we listen to you”, “we’re here for you”, and “you can trust us,” but you’ll hear nearly nothing about returns. We believe the investment industry is conditioning people to focus on service because it’s not confident in its ability to generate outstanding returns. In September, Wealthfront commissioned a survey through Harris Interactive to better understand how the general population felt about the skill of its financial advisers.
Listen to any investment related commercial and you’re almost guaranteed to hear a sales pitch that promotes service rather than performance. You’ll hear a lot of buzz phrases like “we listen to you”, “we’re here for you”, and “you can trust us,” but you’ll hear nearly nothing about returns.
We believe the investment industry is conditioning people to focus on service because it’s not confident in its ability to generate outstanding returns. In September 2010, Wealthfront commissioned a survey through leading market research firm Harris Interactive to better understand how the general population felt about the skill of its financial advisors:
- Only 6% of U.S. adults said they “strongly agree” that financial advisors know how to consistently outperform the market.
- Even more shockingly, only 3% of U.S. adults with a financial advisor said they “strongly agree” that financial advisors know how to consistently outperform the market.
- 59% of U.S. adults said it is “essential” that a financial advisor offers excellent customer service, while only 17% of all U.S. adults said it is “essential” that a financial advisor demonstrates an ability to consistently beat the market.
Unfortunately many financial advisors have embraced this new belief that they can completely ignore performance. We’ve even come across a number of financial advisors who confidently tell us performance doesn’t, and shouldn’t, matter. We think this is unacceptable.
Financial advisors have a legal obligation to act as a fiduciary to their clients. A fiduciary is one who is “often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.” How can maximizing risk-adjusted returns not be part of a financial advisor’s fiduciary responsibility? Sophisticated institutions would never ignore returns or choose service over performance. Why should you?
To me it’s analogous to choosing a surgeon based primarily on bedside manner. I don’t know about you, but I want the surgeon who’s going to do the best job fixing me, not the one who makes me feel emotionally comfortable. Service matters, but it shouldn’t be the number one basis on which you choose your financial advisor.
Financial advisors have a very important role to play in helping individual investors optimally achieve their financial goals. Make sure you choose one who proudly volunteers client performance, not one who avoids the topic at all costs. Making the wrong choice might cost you.
About the author(s)
Andy Rachleff is Wealthfront's co-founder and Executive Chairman. He serves as a member of the board of trustees and chairman of the endowment investment committee for University of Pennsylvania and as a member of the faculty at Stanford Graduate School of Business, where he teaches courses on technology entrepreneurship. Prior to Wealthfront, Andy co-founded and was general partner of Benchmark Capital, where he was responsible for investing in a number of successful companies including Equinix, Juniper Networks, and Opsware. He also spent ten years as a general partner with Merrill, Pickard, Anderson & Eyre (MPAE). Andy earned his BS from University of Pennsylvania and his MBA from Stanford Graduate School of Business. View all posts by Andy Rachleff
