Have you ever heard of the ‘Crab Mentality’? I’ve listened to enough motivational mumbo jumbo over the course of my career to have heard the analogy about ‘two crabs and a bucket’ a few times over. Full and fair disclosure: I’ve never actually attempted the crabs/bucket exercise (that would make me a sicko), but it seems to make sense and always makes for a heck of an analogy. For the uninitiated, it’s said that your average Joe crab will have no trouble climbing out of a bucket on their own. The story goes that if you throw two crabs into the same bucket ‘two crabs enter, no crabs leave’. Why is that? They just pull each other back into the bucket over and over again. They focus more on preventing the other crab’s success than they do on the task at hand – climbing out. In other words, no one wins. Guess what typically happens when a client throws two advisors into the proverbial bucket? I could probably stop right there and spare you the details, but that would make for a lame blog post.
I was reading an article recently in the Wall Street Journal that was focused on financial advisors and how they deal with the dynamic of managing only a portion of a client’s assets. The assumption is that the other portion is with another advisor. Why would an investor have multiple advisors? There are any number of reasons, but the one given most frequently by clients is that they are ‘diversifying’. That rationale seems reasonable on its face and I can see why a client would walk down that line of reasoning. In reality, hiring multiple advisors for ‘diversification-sake’ rarely works and in many ways is counterproductive. Why? Have you ever been in a ‘kitchen with too many cooks’…………..or in a ‘village with too many chiefs and too few…….?’ wait a minute, you’re not even allowed to use that expression anymore!! You get my point, it’s an unhealthy dynamic and I’ll explain why via a few examples/scenarios from personal experience. The following are presented in ascending order of lunacy:
The Horse Race (2 advisors):
A client might propose to separate advisors that each follow the same portfolio directive and the one with the highest return at the end of some period will win the client’s business. Is it just me or does this proposition sound like some sick, frivolous proposition that Dr. Evil would think up while holding his pinky finger up to his mouth? Pop quiz: Do think that that these two advisors will stop at no length to undercut one another to curry favor with the client? Press green for ‘yes’ and red for ‘no’. Question # 2: Do we think that both advisors will assume more or less risk in an attempt to win this little contest? Here’s a novel alternative: how about fully vetting both advisors by following the steps that I outlined in my previous blog post Financial Advisor Selection: The No B.S. Guide, and have ONE, not two of them follow the portfolio directive? That sounds reasonable to me.
An even worse subset of this convoluted scenario is when the same Dr. Evil client sets up a horse race between two advisors with two different portfolio directives. Best return wins, go at guys/gals!!!! It goes without saying that this particular situation is not destined for greatness. It sets up a race between an apple and an orange and the winner is chosen using an inappropriate yard stick. That strikes me as twisted and just unfair to both professionals. Don’t laugh, these snare traps are set up and play out regularly between investors and advisors. Cue the Mylanta and Pepto.
The Client Advisor Horse Race:
Early in my career I was hired to manage money for a techie millionaire kid. He had just sold his company and needed investment help. He literally said to me ‘here’s what I’d like to do………..I’m going to break my portfolio into two halves. You manage half, I manage the other. We’re both picking individual stocks. Let’s see who does better.’ Talk about a ‘damned if you do damned if you don’t’ scenario for me. If he beats me, I look like a boob. If I beat him and do the obligatory touchdown dance, I look like a boob……….right as he fires me! Amongst many other reasons that this was ridiculous, this situation did nothing but encourage me to assume undue risk with this client’s money. It was a race, was it not? Not good.
The Advisory Council – Advisors Working Together in Harmony
I had a client (let’s call him ‘Jim’) reach out to me several years ago about a local company that provided ‘college planning’. This company ‘pitched’, yes, pitched, my client on the idea of magically moving assets around in their portfolio to attain lucrative scholarship/grant offers from colleges and universities. This client appeared brainwashed and seemed to think that Harvard or Stanford would be waiving tuition for his son……….right before cutting them a check on top of that! The client asked that I give this other advisor a full breakdown of his portfolio and that we coordinate with each other to maximize his financial aid. Sound reasonable so far? Stay tuned. I contacted my good friend, colleague, and well-respected college financial aid planning expert, Tim Higgins, to get his perspective on the situation. Tim knew of this other advisory group and in a Babe Ruthesque moment (pointing to center field, calling his shot for a home run) walked me through exactly what this other group would be recommending to my client (he was dead-on by the way). I then called my client to ask that we all (client/ other advisor/me) do a conference call that afternoon so that I could be brought up to speed and provide feedback. The client thought this was a great idea and called the other advisor to set up a conference call. I gave my client a list of questions that I had for the other advisor (provided by Tim Higgins) about their services and recommendations. I asked that my client pass this list of questions/items along to the other advisor so that we could have productive phone meeting. An hour before the conference call, I received a pre-emptive call from the other advisor and here’s a summary of the conversation:
Other Advisor: Hello, this is Joe from XYZ Company that provides college financial aid planning. We have a mutual client, Jim, and I know that he asked you to provide us with some information about his accounts. Yeah, if you could just send that over to us I’d really appreciate it.
Me: Oh, certainly. I planned to provide all of that information on our conference call today with the client.
Other Advisor: Yeah, here’s the thing………..that call isn’t going to happen.
Me: Why not, I talked to Jim and he said that he loved the idea of us coordinating on this matter to ensure that he’s making a good decision.
Other Advisor: Are you kidding me? Do you actually think that I’m going to share my recommendations with you? Why would I do that? Do you really think that I’m going to engage you in front of the client and answer that list of questions that you sent over? Do you think I’m stupid? Why would I ever do that?
Me: Wow, I thought that we were trying to work together on this. I’ll touch base with the client to see what he’d like to do about the call.
Other Advisor: Go ahead, but trust me, it ain’t happening.
He was right. The call never happened. I reported back to the client and informed him that the other crab, I mean advisor, was refusing to answer any of my questions and to participate in our conference call. At this moment I thought that I was wielding Thor’s hammer, about to squash this shifty insurance salesman right where he stood. Not so much. Jim, the client, asked that I notify the other advisor that the conference call is not necessary. I asked him to at least get some answers to my questions about the other advisor’s recommendations and strategy. Jim refused. What happened next? Jim got fired. I sent Jim a respectful e-mail dismissing myself as his advisor. This relationship had flat-lined over the course of 2 hours that morning. Another crab bites the dust!
So what’s the takeaway? Is it impossible for multiple advisors to coordinate and provide innovative advice to a client? Absolutely not, but it’s really tough to accomplish. It sounds great in theory and it’s sometimes necessary, especially for high net worth clients/families with very large asset bases. But to be clear, splitting up a $1,000,000 IRA account amongst multiple advisors is a near certain nightmare for everyone involved because there’s just not enough money involved to make it worth anyone’s while. I truly believe that the solution to this problem is to go about initial advisor selection in the proper manner, which I’ve outlined in previous posts. The absolute wrong way to do this is to split your portfolio up and pit professionals against one another. This isn’t craps, it’s your financial future. As I mentioned above, setting up horse races can and does lead to unnecessary risk taking which can lead to disastrous results. There are better ways to find a competent money manager than needlessly risking your capital in silly portfolio cock fights. Lastly, ‘diversification’ doesn’t mean having assets at Brokerage X, Y, and Z or mutual fund company A, B, or C. Diversification is achieved by running a linear regression to determine the correlation amongst the different assets in your portfolio. Properly combining assets with low, if not, slightly negative correlations to one another is the definition of diversification. If you’ve never discussed that concept with your advisor or it seems novel, it may be time to find a new crab.
By: Andrew Gonski
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. LPL Tracking #: 1-369530