There are many reasons why millions of people choose to use a third party to make financial investment decisions rather than relying on their own skills. Although many individuals have trouble trusting others with their money, financial advisers are trained professionals who are highly knowledgeable in complex financial skills, like calculating an internal rate of return, reading a financial report to judge a fund’s management style, and rebalancing portfolios. Those who choose to make investment management a career have valuable financial knowledge beyond what a layperson could learn without formal education. Individuals who know best know to trust a financial adviser.
Clients financial options can be limited by the company they choose
Many brokerage firms or investment houses offer their own in house advisory team but independent financial advisers are often less biased and more likely to make a decision based on performance and risk rather than on fund ownership. This can be very useful to investors as independent firms often have access to a larger range of funds than an adviser employed by an account custodian. The more assets a firm has under management, the more options for funds and securities they can provide to their clients.
Despite the knowledge and education financial planners and analysts have, clients and investment advisers do not always agree. Oftentimes, firms will have an investment strategy in place that clients adopt as a part of their engagement with a firm. For example, many firms have asset class allocations within a larger scale distribution of fixed income versus equity. Although a client can often decide the ratio between the two based on investment amount and personal risk tolerance, it is up to the adviser to decide how much equity should be invested where, such as in real estate and or domestic large cap investments. Many advisers have particular funds they choose to use within an asset class based on rate of return, historical performance, fund management, and other factors. While this can be a valuable strategy, especially for firms that have a strong grasp on investment strategy, it may not fit precisely with what a client wants.
Clients, especially those who are finance amateurs or professionals, may have strong ideas about what sorts of investments they do or do not want to take part in. For example, a client with a high risk tolerance and a substantial portfolio may be interested in a high private equity allocation despite an investment adviser’s warning that private equity can be a dangerous market. In this situation, an adviser needs to think carefully. To keep a client engaged with the firm, it is not wise to ignore his or her wishes entirely. However, weighing the odds and not jumping into investments can save an adviser’s reputation and an investor’s portfolio. Deciding how to handle a situation where a client wants to deviate from a firm’s strategy or opposes an adviser’s investment philosophy can be one of the most complex facets of portfolio management.
For small firms with one-on-one management strategies, sitting down with a client is a good way to approach an issue. Doing background research to support one’s opinion can be a strong mediation tactic for both adviser and client. With clear facts, rates of return and historical data, both parties can provide solid arguments for or against a position. Some compromise might be necessary, as well as additional research on the part of an adviser and his or her firm. Getting options from other professionals or a company’s investment committee members can be a great asset in decision-making. In come cases, there are ways both parties can win. If a client is interested in buying gold, for example, the solution might be a gold exchange traded fund.
Sometimes, however, there is no chance for compromise. Many firms develop investment strategies and do not care to deviate from them for reasons such as personal philosophy and professional reputation. In these instances, it may be better for the adviser and client to part ways. Different firms meet different needs, just like clients have different wants. This is part of the investment advisement industry, and a possibility of which both clients and advisers need to be aware.
Castle Harbour Securities is a boutique financial services firm dealing with banks, family offices, sovereign wealth funds, corporates, trading companies and professional asset managers.