Stephen Covey, the author of Seven Habits of Highly Successful People, has made a good part of his reputation by getting people to focus on things that are genuinely important rather than those that are merely urgent. As advisors, we play a similar role in helping our clients make sense of competing products and strategies.
The issue is that a substantial amount of decision-making can be manipulated simply by not introducing key elements of what ought to be in the decision-making process. This problem can neatly be summarized by Ben Franklin, who once said, “people don’t know what they don’t know because they don’t know what they don’t know.” In essence, how can someone ask intelligent questions about a subject they know nothing about? That’s the whole point of people hiring you in the first place.
Now, pretty much every study on the subject shows that cost is a major determinant of performance. As a general rule, the more things cost, the worse they perform. Yet my experience in speaking with other advisors is that they often go out of their way to avoid the subject, often justifying by saying, “my clients don’t ever ask me about cost.” If I were speaking to those same clients, I believe they would say, “my advisor never once asked me about my views on cost.” In short, neither constituency is talking about it… but that doesn’t mean it ought not be talked about or that the matter is unimportant. Where exactly does the onus lie?
A large number of commentators feel that cost is an extremely important consideration and likely one of the most dangerous risks investors face. As a result, I put a direct question about client views on product cost in my investment policy statement questionnaire. Since I ask about whether clients think cost is irrelevant (somewhat important or extremely important) I have found that virtually all clients say that they think cost is either a somewhat important or an extremely important consideration. In light of that collective response, don’t you find it curious that many advisors sweep the topic under the carpet? The cost question is entirely fair game within the context of financial risk, and is every bit as real a consideration as other insidious wealth eroders such as taxation and inflation.
How can it be that so many advisors who otherwise do an excellent job of explaining risk and return tradeoffs to their clients can be so negligent in explaining the vital importance of cost? Many clients don’t understand marginal tax rates. Others find pension integration beyond their grasp. A good number won’t see the importance of deciding between taking income as a return of capital, dividend or capital gain. In spite of these and other knowledge gaps, we advisors tell our clients about those products and strategies that will provide the solutions to their problems. Lack of client understanding is no excuse for silence on discussions about fees.
Covey also talks about the distinction between efficiency (doing things right) and effectiveness (doing the right things). My sense is that a substantial number of advisors are penny-wise and poundfoolish because they take such painstaking care in devising great strategies while simultaneously ignoring highly effective low-cost product solutions that are staring them in the eye.
This is not to suggest that lowcost products are a panacea. Rather, it is to suggest that low-cost options ought to be offered if the person giving advice is genuinely interested in trying to maximize the client’s long-term, client-specific, risk-adjusted, after-tax and after-cost returns.
It’s not as though product discussions and strategic discussions are mutually exclusive. Low-cost products work perfectly fine, too. To be truly effective, advisors need to do the right thing – and talking openly about the importance of product cost is definitely the right thing to do.