Advisor Alpha Explained: What Financial Planners Get Paid For with Don Bennyhoff

In this episode of Don’t Shoot the Messenger, Chris Ball sits down with Don Bennyhoff, former Vanguard investment leader and one of the key architects behind the widely referenced “Advisor Alpha” research.

Don spent nearly 23 years at Vanguard, helping redefine how financial advisors communicate their value beyond portfolio performance. He later served as CIO and Investment Committee Chair at a $1.7bn RIA and now works as a fractional CIO through Bennyhoff & Co, helping advisory firms build disciplined, repeatable investment frameworks.

This conversation goes beyond the headlines of “3% alpha” and into what truly drives long-term value in financial advice.

We discuss:

• What Advisor Alpha actually meant, and what it never claimed
 • Why behavioural coaching often adds more value than stock picking
 • The dangers of unnecessary portfolio complexity

If you are building an advisory firm, refining your investment philosophy, or thinking about the evolution of financial planning, this episode is packed with practical insight.

Because in the end, the real value of advice is not about outperforming markets. It is about helping clients make better decisions over time.

If you want to see what life in Hoxton Wealth is like, please visit:  / @hoxtonlife 

For more information on Hoxton Wealth careers, please https://www.careers-page.com/hoxtonwealth.com

For my videos by Chris, please visit his Youtube:  ⁨@ChrisBallHoxton⁩  

Transcript

Setting The Stage: Don’s Background

SPEAKER_02 0:00

Welcome to another episode of Don't Do the Messenger. And today I am joined by someone whose work has helped shape the value of financial planners globally. Tom Bennyoff uh spent nearly 23 years at Vanguard, where he helped create Advisor Alpha, one of the most widely referenced frameworks.

SPEAKER_00 0:19

If low cost was the only thing that mattered, then everyone would be driving a Yugo. You need to be careful for the advice that you're paying for. I've been in the industry uh over 35 years now. Mr. Bogle, who founded Vanguard, uh wasn't really a big fan of financial advice and paying for financial advice. What sprung that change like internally? Mr. Bogle was very famous for his attack on advisors. How would you, you know, in your findings, how would you describe advice as generate high trust? If everything was just a math problem, things would be a lot simpler, but it's not.

SPEAKER_02 1:02

So welcome to another episode of Don't Shoot the Messenger. And today I am joined by someone whose work has helped shape the value of financial planners globally and helped under help clients understand the value that actually planners provide. So Don uh Don Bennyhoff uh spent nearly 23 years at Vanguard, where he helped create Advisor Alpha, one of the most widely referenced frameworks on how advisors add value through planning, behavioural coaching, and helping clients make fewer bad decisions over long periods of time. Don was also part of the very original team that created uh Vanguard's model portfolios too, which was which is really cool. After Vanguard, Don went on to serve as CIO and investment committee chair at a 1.7 billion RIA, and more recently launched Benny Hoff Co. where he works as a fractional CIO, helping advisory firms build disciplined, repeatable investment frameworks. Um, so welcome Don and great to have you on. Thanks, Chris. It's a pleasure. Awesome. And today we're going to talk about the evolution of uh the financial planner and what advisor alpha really means. Um, maybe what it did not mean and how advisors can build businesses around processes. So, Don, I'd like you to take us back to the beginning um and how you first got into financial services and what drew you towards the investment side rather than you know kind of sales or distribution.

Building Advisor Alpha: Beyond Low Cost

SPEAKER_00 2:40

Um, well, thanks. Uh yeah, it started a long time ago. I've been in the industry uh uh over 35 years now. Um, and I started as a traditional financial advisor at a broker dealer. Um did that for you know six or seven years and then uh decided to um move closer to where I grew up. Um and that's when I joined Vanguard actually as a first as a financial advisor. Umguard started to offer fee-based advice to clients in the mid-90s. Um and at that time it was pretty um pretty controversial, quite quite frankly. Mr. Bogle, who founded Vanguard, uh, wasn't really a big fan of financial advice and paying for financial advice. And so um it was it was very interesting to start it, you know. You know, I wasn't expecting uh financial advisory positions to be there. But as the popularity of it grew, a lot of Vanguard do-it-yourself and investors were you know accumulating wealth and needed help. Um, that's when I realized sort of that there is, you know, there is this inflection point where at some time, you know, at some point people begin to doubt their own ability, or maybe they don't have the willingness, or maybe they just simply don't have the interest in managing um their portfolios and doing their planning for themselves. And sort of that created the initial kernels of this idea that you know part of the financial planners' uh value isn't in managing the portfolios, but managing something much more holistically. Um eventually Vanguard uh wanted to create a strategy team, a research team to sort of help lay out how Vanguard thought investors should approach investing. Um, that was a first because Vanguard was really a fund company up until that point. And around 2000, 2001, that's where we started to come up with this idea of you know, how do we want to talk about the value of an advisor and the value of advice? Um a lot of people sort of don't have the remembrance of it live like like you know, I do being in the business that long. But you know, in 2000, really the industry was still largely commission-based compensation. Advisors, you know, talked about their value proposition as their experience, their ability to get investors better returns. Um and yet a lot of the investors that that we were finding were interested in um planning in particular were looking for something far broader than just simply their portfolio. They were looking as someone to really help them with their lives, not just their portfolio. So it um, you know, really in 2000 is when we started to knit everything together in the concept of this value uh of advice based on our experience at Vanguard. When people would come to Vanguard, um Vanguard wasn't a firm that did um tactical. It they really they didn't choose or you know put their value proposition based on um their ability to choose better managers or choose individual stocks and bonds. They didn't do that, and so a lot of people were, you know, a lot of prospects were asking, well, what am I paying for? Because that's how the industry had trained them. Um, and it was funny because we would hear um people say, Well, you know, well, we're the low-cost provider, therefore you should come to us because we charge less. And, you know, again, sort of, you know, when you have enough gray hair, you remember some of these things, but you know, few people were will remember um, you know, the the Yugo. Um, but if if low cost was the only thing that mattered, then everyone would be driving a Yugo. But since most people don't don't uh know about the Yugo, clearly that that business plan failed. So uh it was an interesting road. It was actually based on a lot of practical uh work from our experience being advisors first and then trying to help advisors frame their value proposition at Vanguard. And from there it just took off.

SPEAKER_02 7:29

Because yeah, I mean, and that's a really interesting point because you know, Vanguard that most people know it uh as um in the UK and probably in the US as well, is is a you know, is for the low-cost tracker funds that track the markets, uh S ⁇ P 500, FTSE 100, MSCI World, what whatever it might be. Um and you know, don't and you know, it's kind of the anti-advisor establishment that you know that's how I I I kind of not anti-advisor establishment is probably the wrong word, but you know, it was kind of you know, I suppose you need to be careful for the advice that you're paying, paying for. That was always the message. Um, and you know, you need to be really, really cautious of costs. So what what sprung that change like internally to actually go, do you know what? Actually, advice actually delivers alpha. And you know, how how did you kind of methodically go through and decide what bits added what? And was there any surprises when you were going through that as to I actually didn't really expect that that bit was going to add that much? And I actually thought that, you know, I don't know, whatever it is, you know, allocation was going to add a lot more, but it actually doesn't add anything, like you know, your findings with that.

ETFs, RIAs, And A New Alliance

SPEAKER_00 8:45

Well, uh to your point, um, you know, at that time, um the culture at Vanguard was still very product-centric. Um, now, while Vanguard is always known as sort of the pillar of indexing and well known for their tracker funds and so forth, at that time uh ETFs were only just um taking root at Vanguard. Vanguard issued their first uh ETF uh in 2000 here in the States. So we had to be very careful in that we were a corporate function, and so we had to recognize that Vanguard actually had more active funds and index funds. So we couldn't be you know completely uh all index as the solution. But the common denominator between Vanguard's active funds and index funds and the evidence in the industry was that costs matter. Um, thankfully, that put us on the same side as Mr. Bogle, who was who was you know working in our building at the time. But you know, Mr. Bogle was very famous for his attack on advisors, as you say. Like he used to call them croupiers and basically suggest that paying an advisor um you know was throwing good money after bad. Um, you know, it was interesting because what it when we took up the advisors alpha approach, it was not very popular with Mr. Bogle. We we caught a little flack about it. Um but one of the things that Mr. Bogle did that I think was part of his DNA was he assumed that if he could do it, any advice any investor could do it, that they would have the belief, they would have the discipline, they would have the ability to see the problems. Because there was plenty of problem advice out there at the time, more so than today, but there's still plenty of advice that I think many of us would disagree with that may not necessarily be how we do it if we were advising people. But the the inflection point that we saw there was that with the advent of the ETFs in Vanguard, prior to that, really advisors couldn't use Vanguard's products routinely. So it was hard to kind of tell them about you know how to how to access low-cost funds when they didn't have selling agreements that would allow the Merrill-Lynchs or the um the UBSs of the world to offer Vanguard funds because they they didn't pay for distribution. ETFs fixed that so that ETFs, especially when Vanguard launched them, created the opportunity for an alliance with advisors. And thankfully, Vanguard leadership agreed and saw that that that alliance was going to be very important because part of Vanguard's mission statement was to take a stand for all investors, um, not simply to take a stand for Vanguard investors. And since advisors advise more clients than Vanguard holistically, it just seemed like a natural um a natural alliance to be able to pursue that effort to help investors get a better shake.

SPEAKER_02 12:16

Yeah. Yeah, it's interesting, isn't it? Because ultimately, you know, I suppose with the introduction of uh RIAs and having the fiduciary responsibility to the client, moving over uh from the big, you know, the big broker dealers, that kind of invention of that industry and and the and the growth of that um probably really, you know, kind of played into you know into that um into that market. Um, you know, low cost, passive tracker funds, you know, full dis you know, full disclosure of fees, charging the client instead of getting kickbacks from the fund. That you know, it was probably the wind in your sales as well. Uh and actually the way that a lot of people probably wanted to operate, but maybe didn't have the framework necessarily there and the you know the funds and the infrastructure to do it. So it seems you know right place, right time um as well.

SPEAKER_00 13:04

Yeah, and I think I think the key was was the um the increasing availability and popularity of ETFs because if you think of it at that time, Vanguard has thrown its hat into the ring offering these opportunities. Therefore, it it begins to uh uh shed a you know a spotlight uh on the topic and how how these can be used by individual investors as well as advised investors to better help their chance of investment success. Um other firms got into the business in a big way. You we've all seen the growth of ETFs. Um and so more and more firms were creating more and more marketing around the benefits of in of ETFs and low-cost investing. And that, you know, over time has really embedded itself, I think, in investors' psyche so that more people are aware of the effect of cost today than probably ever before.

SPEAKER_02 14:05

Yeah, definitely. And do you know what is that we actually see a um you know kind of a we we say we call it swimming with the tide, you know, investors like passive solutions. It's it's something that's in their control in terms of the cost. They appreciate that it's difficult to outperform the markets over time. So all that work that you know kind of you guys were doing and with the message at Vanguard, you know, with all those you know the themes that you know make it which are important for investors to know, um, have obviously resonated and hit home because globally people, you know, people people know that now. It's not you know, it's not you trying to educate investors, that's just they they get that those are common things and you know common sense things probably that you should be uh that you should be focusing on.

Costs, Efficiency, And Market Evolution

SPEAKER_00 14:52

Yeah, and the evidence continues to stack up. Um it is one of those things where I'm always a little bit leery about historical data. I don't believe it's proof. I think it it does uh shed light on how things have been, but things do change. Uh a lot has changed in the industry um really since um, you know, over the last say 40 or or so years, there have been some very important changes in the US uh you know uh industry, not just in the mutual fund industry, but also the investment industry. Um changes in laws and regulations and processes like decimalization. You know, when I got into the business and you know, uh the spreads were at an eighth, which is 12 and a half cents, and you know, they drop to a drop to a penny on average. And you know, those are things that that actually do play a part in all of what people are trying to do and gain an advantage. Um, things like the internet has really you know democracized infotion um and made it more readily available, um, and more people are involved in the market, which means more more people are pouring over that information and looking for an advantage. And that makes it, you know, it's good because it makes the the you know uh the markets more efficient in theory. But if you're on the opposite side and you're trying to gain an advantage by finding information that other people are overlooking, it makes the job a lot tougher. So it's not really a surprise that over the years, you know, activists continue to have a very hard time of trying to do what they hope to do, which is outperform their benchmarks.

SPEAKER_02 16:38

Yeah, definitely. It's it's it's very, very interesting, isn't it? It's um super, super interesting. And what like so, you know, I've always been keen like to understand. So, you know, when the research introduced the idea that advisors could add around 3% in value, what did people understand about that figure? Or what did people um, you know, what were people maybe the misconceptions around that?

SPEAKER_00 17:05

Well, first, um that I I was not really, you know, cards on the table. I was not really a a strong advocate for putting a number on it.

SPEAKER_02 17:15

Fair enough.

The “3% Can” Misconception

SPEAKER_00 17:17

Mainly because I really thought that that every advisor would basically pick up the paper, look at the number, and just tell it, you know, tell everyone, see Vanguard says advisors can add 3%. We never said advisors add 3%. We said they can add 3% using uh you know some of these tools at their disposal. But the reality of it is not every advisor adds value. You know, that's the thing that to me is um probably the thing that's most overlooked. Um, also the thing that many people don't realize is that when you look at the tools in the toolbox, and we just chose some of the more common ones, things like asset allocation and rebalancing and asset location and you know um things like that. Like we tried to focus on the things that were most common to advised portfolios, not everything. So it's not an exhaustive list, even. Um, but people didn't realize that when you're looking at helping people accumulate wealth, and then one of those value ads is how to help people spend in retirement, those were opposite ends of the spectrum, right? You're not simultaneously helping people necessarily do both. Like it's it's one of those things that that that people tended to just look at the bottom line and kind of pick up that and wave it like a little flag. But um, the reality is that that that there are a lot of ways that advisors can add value. What was different about our approach at the time is that we were asking people to really shift their focus from being like portfolio and investment professionals to being something more, something that was broader. That's an important component of our jobs, but it's not actually the aspect that can add the most value. And ironically, for most clients, uh most advisors, it's the soft skills, not their their technical acumen. It's really those that it's the EQ, not the IQ, where they can add a differentiation with their value proposition, because many clients get the portfolio management. They get somebody who wants to help them with that. It's everything else that the soft skills, the you know, getting to know them, getting to know what really makes them tick and what they really want to achieve, and really some of the things that are like must-haves versus nice to haves within their planning. You know, it's it's not just simply you know filling out a risk questionnaire and building a portfolio that that kind of fits that model. There's so much more to it, and it's much more in the soft skills, the the relationship management rather than portfolio management.

EQ Over IQ: Soft Skills Matter Most

SPEAKER_02 20:18

Yeah, it's really interesting you say that because we uh last week I uh interviewed Carl Richards and he's uh you know a big uh you know a big advocate of exactly what you're talking about and exactly what you guys, you know, you you guys preached and you know really you know came up with all those years ago. Um and he was saying that it's all about the relationship. Um and actually I was at a conference in the US in Miami um of uh of uh CEOs of uh RIAs and you know obviously as within any panel now, you know, one of the common one of the common uh topics is all about AI. How is AI going to impact our profession? What are we gonna, you know, what are we gonna are we gonna lose out to it? And actually, you know, they were saying it obviously, you know, it's gonna help efficiency and everything else like that, but the thing that it will not be able to replace is the soft skills, so is the relationship part. And advisors and planners, um however they you know wish to term themselves, must focus on being great at relationships, which is really interesting because that part of the profession and that part of the job seems to always remain true and remain relevant.

Earning High Trust With Clients

SPEAKER_00 21:33

I think so because it all hinges on people. Um, and it's if everything was just a math problem, things would be a lot simpler, but it's not like that's the difference between sort of science and nature. Like it's it's it's one of those things that it's it's just not it's not something where you can take a highly organized framework and apply it and have it work exactly the same across. Individuals. It just doesn't work that way. And you're exactly right. It's all about the soft skills. And one of the things in particular that's important is for people to understand when advisors are going out, a lot of the soft skills look to the relationship management. And it's particularly about trust. Trust is an integral part of any relationship that's going to last. And advisors understand that because they're people too, right? So, you know, they I think many people strive for trust. One of the things, though, that that we found, you asked earlier about surprises. And one of the things that I found very interesting was we did some research on advised clients years ago. We interviewed 4,000 clients that worked with advisors, and they weren't just Vanguard advisors. And we asked them some specific questions about trust. And we're interested to see how it played into things like the referrals and the retention of clients that all advisors are looking for. And the thing that was interesting was that when people think about trust, they think about it as one thing and it's not, especially in clients' minds. Like clients, we ask clients to essentially give a grade to their advisor on how much they trusted them on a you know zero to five, uh zero to ten scale. And what we found was that high trust was unique and it was the key to getting referrals and asset retention. If a client had average levels of trust, they were actually less still less likely to refer their advisor than not, and less likely to stay with them. So when people are thinking about trust and they're thinking about this relationship management, I think what they need to focus on is what can you do to earn that higher level of trust, that high level of trust that the client has in you to be able to achieve those ends that you're hoping for, which are happy clients that are happy to refer you and happy to stay with you.

SPEAKER_02 24:29

And how how would you, you know, in your findings, how would you describe advisors generate high trust then? What are the typical activities or typical things that would you know mean that high trust is gained?

Simplicity Versus Complexity In Portfolios

SPEAKER_00 24:42

Um it's a great question, and it will vary person to person because everyone's an individual. But what the common denominator was was it didn't really hinge on portfolio performance. With a lot of surveys, um a question keeps arising about grading your advisor's performance. And I think people necessarily associate that with their investment performance. On the other hand, I suspect that that's less the case than grading their their advisor on their personal performance, how how they treat their clients. We found that that clients, the primary thing that clients wanted um from their advisors was to for their advisor to really know them, to really listen to them, to really um spend time with them on topics that have nothing to do with their portfolio. There was this common thread that there are these sort of things that really take a lot of time, which is again what sort of we were trying to emphasize, which which was if if every advisor only has so much time, where do you want to invest that time? Where do you get where are you going to get their highest return on that time? Um, you know, managing the portfolio and talking about the performance, or talking about the client, their circumstance, and all those, um, those relationship management aspects. Um it really, it really is, it is spending more time with the client, getting to know their family. Um, you know, it's some of the some of the things that are easy to overlook. Um, you know, how when you're treating, when you're talking with and and how you treat your client, there there are certain things. Like I never I never say, you know, or encourage people to say that they speak to their clients. You don't speak to your clients, you don't, you know, you speak with your clients. It's a it's a it's a it's a we're together aspect, not a I'm I'm you know the professional and you're you're not. Um you know when you you know ask about their their family, you know, be particular. Don't just say how are the kids. It's it's it's saying, hey, how are Jimmy and Judy? Um is a is sends a very different signal, sometimes maybe very subtly, but it sends a very different signal than how are the kids. It tell it tells the clients that that you at least cared enough to look at your CRM to check in and get the names of the kids before you had the call. Um it's a it's a different, you know, we talk about the care in terms of um the fiduciary standard, but there's a care of for the client that has nothing to do with putting their interests first. It has actually more than that. It's not just they're doing the right thing by them as a profession, but really doing the right thing as a as a person. Um just trying to get to know them. Not everyone's going to be your best friend, and that's not what you're going for, but really to help people achieve what they're hoping to achieve by using an advisor, more often than not, just takes more time. It takes very deliberate interest in trying to get to know what makes them tech.

SPEAKER_02 28:18

And that's that's really why it's important as well to you know to work with clients and take on clients that aren't necessarily 100% the same as you, but that you do share interests and commonalities with. Because if you're you know, if you're working with people that there's, you know, you're on two completely different ends of the spectrum, you're never going to be able to build that relationship and you're never going to be able to build that, you know, that quality um understanding of their of their lives, of their families' lives, and thus be able to provide the the right advice to them.

SPEAKER_00 28:48

Yeah, it's really it's really challenging, especially when you're just getting started. Um, you really try and you know gather assets, gather clients. Um, you're trying to help everyone you can help. Um and you know, that may be a a necessity early on, but everyone should be working towards the same thing. Everyone should be should be understanding exactly who their ideal client is, who who is a better fit for them. As you said, find those commonalities where you can truly share interests rather than pretend to be interested in whatever they're doing when it's really not up, you know, up your alley. Um, it eventually it shows. Clients pick up on it. Um, clients, I think um, you know, they still are a bit jaded and expect people, you know, an advisor to be a salesperson first. Um, thankfully, a lot of that's changed. And, you know, you know, that's where I'm you know glad to see firms like Hoxton thriving because you guys stand for the right things, um, you're doing the right things. Um, I think there's a lot more firms out there working with and helping clients, but realize that you know, you're not there to help everyone. You're it's not even a good business model to try and help everyone. Be particular, you can't make a career off of one client.

SPEAKER_02 30:14

It's interesting because we, you know, by default target people who are expatriates and uh you know are are internationally focused. That that's been the you know, that's been our our business since we you know since we kind of started those more complex needs and that you know virtue. And and thus our advisors and our planners are internationally mobile people themselves, so therefore there's there's that kind of connect. And you know, now you say that it kind of it rings it rings really true. I've got another kind of different question as well for you, next, which is a lot of a lot of advisors or a lot of planners try to demonstrate the uh value that they provide through complexity and frequent changes within the portfolio and thinking that they've got to go back with new ideas all the time, when actually, as we know, that you know, nine times out of ten actually just leaving it as it is and and letting and letting the portfolio do do the work is the key. How how would you know what what were your kind of observations and what would you say to those people to get them out of that mindset and how they can start developing deeper relationships with their clients to, you know, and the behavioural coaching side to you know to start to you know emphasize true value as opposed to perceived value?

Setting Expectations And Proactive Coaching

SPEAKER_00 31:34

Yeah, complexity is a thing in our industry. I think it's you know it's been around as long as I can remember. It it's quite often a justification that you know of why you would want to pay for advice because you have somebody who understands the complexity of the markets and yada yada. Um you mentioned uh our our model portfolio effort um uh earlier in the the intro. Like one of the things that I've personally I've always been a fan of simplicity. Um I understand that's not everyone's cup of tea, so I'm also a fan of optionality. So nothing wrong with creating you know portfolios with more moving parts for people that really feel like that's what they want, because it may help them actually by by recognizing and understanding exactly what they want, have the conversation about why they may not need it, but why they may want it has it has nothing to do with what they need. It's what they want. And so maybe it helps them stay uh wedded to the the plan a little better. But when we were creating the ETF model portfolios, this was back in uh 2010, and we were asked to create model portfolios for a platform for one of the um one of the firms that were going to be offering them to advisors in their in their market. And when we created the model portfolios, this is when um ETFs were now pretty widely available. And one of the models we created was was basically four total market ETFs. So, you know, uh an all-US stock, all uh international stock, all US bond, all XUS bond. Um, really straightforward, well diversified, low-cost four ETF model portfolio. And we created a few others to allow people to sort of uh decompose those into maybe some some individual parts they were looking for. Um but but what they the the response was you can't we can't offer this four fund model portfolio, no one's gonna pay an advisor for that. That was like the response because it was too simple. And I never quite understood it because building the models isn't the complicated part. The complicated part is the behavioral aspects of dealing with what you have in your portfolio over time. It's the rebalancing choices, it's the staying with things even when they're out of favor. So in the US, international or XUS stocks have been out of favor for quite some time. And a lot of people, you know, keeping somebody, yeah, keeping somebody, you know, well diversified and in advance of this last year really help them. So it's so like complexity is to me, it it I'm a big fan of Da Vinci, and you know, he said simplicity is the ultimate sophistication. I really believe it. I don't think things need to be complicated. That tends to make them more expensive. It tends to make the the clients uh less apt to actually understand what they have and why, so that when things don't work out maybe the way that were planned, maybe it's just a simple the size and style tilt with uh value and small cap that were also out of favor. It doesn't make them wrong in the long run. I don't know whether it'll be the good thing or bad thing in the long run. I do know that it creates behavioral conflicts sometimes. If the if the client doesn't buy into the strategy with the same um enthusiasm as the advisor, when things don't work their way, they think something's broken.

unknown 35:38

Yeah.

SPEAKER_00 35:38

And it may not be broken, but because it's not working and because it's not giving them the results that they were sold on, it becomes a problem and then it becomes the advisor's problem.

Where Firms Overestimate Client Knowledge

SPEAKER_02 35:49

So I think I think yeah, I think that's really I think again that's really interesting what you said because I think it's also where the advisors don't build up that expectation upfront. So you know, it's people's perceptions and reality are normally different things, and your perceptions and my perceptions will be different of the s of the same thing. So building up people's expectations early on when they start their planning journey with with your firm or or whatever it is, and saying that look, we're not going to be changing things all the time. We don't, you know, we do see simplification within portfolios as you know as as true value and you know, and explaining that up front and then trying to kind of reiterate that through your communication, whether that's your newsletters or whether you know that's in client meetings or whatever it might be, um, is super, super important because I think people default to the meme, which is you haven't made a change in my portfolio, therefore you're not doing anything, um, which you know to again is probably someone not really demonstrating their value properly. But it's you know, it's it's really it's really interesting. How you know when a client comes in, Don, and they, you know, typically people don't come and say, I want help with behavioural coaching on my portfolio, or you know, I want I I want help with you to build me a full holistic financial plan. Typically they come in and go, you know, I um have an IRA that I've or I've had a 401k that I've paid into for years and you know, I've left my employer, I don't know what to do with it, or I've got a UK pension, I've paid into that and I'm no longer there, or I'm no longer in the country. How do you balance solving the issue that is clearly on their mind and they want help with versus um you know, versus actually trying to help them holistically because we know that that's obviously where we want to help a client with. We don't want to just be, you know, one transactional piece and and and operate with them on that. Like how do you, you know, how do you shift from that problem into the wider, you know, into the wider, wider situation?

Building Optionality Into Model Portfolios

SPEAKER_00 37:55

Yeah, it's a great question. The and again, I think it will be the the proper approach will be very client and opportunity specific, but I think it is important to be, you know, be open and honest about your role, that you can be a problem solver for this point. Something about, you know, you know, you you need to help them move an account from from one place to another. You can be the solution for that, but you're so much more. Like it that that's where we talked earlier about the evolution of advisors alpha. Well, one of the things that grew, we always had an aspect of behavioral coaching, but more and more we we began to appreciate that especially, I I always use the phrase behavioral coaching rather than behavioral finance. I know the behavioral finance has a lot more academic work behind it. Um, it's taught in the CFA curriculum. Um, but to me it was always more like a vocabulary quiz. It was, you know, define this. It doesn't really help you as much prepare for it because usually it's a reactive approach. It's recognizing the behavior after it, after it uh shows up. We became much bigger fans and and wrote an entire paper on the need to be have, you know, think of behavioral coaching as being proactive behavioral coaching. Essentially, you you want to coach for tomorrow, today. To me, just what you said with your relationship, whether it's you know, you have you have some uh opportunity to help someone who needs your help. You can help them with this small piece, but certainly be proactive and let them know everything else that you can do for them, you know, and you should do for them. A lot of times people, you know, on their own will not take the holistic view, will not do the things that they really need to do. There's, you know, when people joke about more, you know, people spending more time uh planning a two-week vacation than they do planning for retirement, it it's only a sort of a joke. It's really probably more true than not.

SPEAKER_02 40:18

Yeah. Very, very, very interesting. And where where where do you where where where do you think advisory firms most commonly underestimate complexity? So obviously, you know, we've got you know, it's got advisors trying to complicate what they're doing, but advisory firms and that might be in their investment governance, it might be in their investment process when they're dealing with clients, how they teach their advisors or planners to, you know, to kind of go through that.

SPEAKER_00 40:50

Um I would probably I would probably lean on um sort of what we talked about a little earlier with Mr. Bogle. Like we as investment professionals know how much time and effort we put into understanding what goes on. And still, we're only just scratching the surface. I include myself in this, is that I'm not an expert on everything investments. Um, you I don't think anyone can be. You you have a tendency to draw your attention and your focus on the things that matter most. Clients are the same way, and I think investment committees overestimate investors' grasp of the investment topics, how they think about risk. Um, they certainly don't define it as standard deviation or volatility or some of the other more common statistical measures. They all have their own definition. Um, mine tends to lean on uncertainty and doubt. Um, because that's what I see with clients, and that's what we sort of uh spoke briefly about when it comes to when things don't work out. The first thing that clients think of isn't that this they're going through a cycle where you know uh small cap and value are out of phase. Um, they think something's broken. If you're using active managers, they think that some, you know, that maybe they have the wrong manager. You know, maybe they should have a different small cap value manager. Maybe it's his fault or her fault, or you know, that they they don't really understand the nuances to the degree that we expect them to. And I think it's it's an imperative for most firms to embed that in your decision making at the investment committee, when you're building your model portfolios, when you're thinking about your methodology for advice, of understanding that you're gonna have a breadth of client experience from some people that are true novices and really need your help, the true people, some people that think that they are experts. In my experience, a lot of people that uh when they think they're experts, um, it's because they confuse, they, you know, with one of those common risk questionnaires like, how long have you been investing? Oh, I've been investing for 30 years. It doesn't make you a knowledgeable investor. It just means you've been kicking money into the stock market, maybe through a retirement plan or what have you for a long time. It doesn't make you knowledgeable, even if it makes you experience. I think investment committees have a tendency to overestimate people's knowledge and experience. And when they build complexity in, it may be right for a very small segment of client population, but probably less so as a maybe a broad brushstroke or a default position.

Skills To Master As A New Advisor

SPEAKER_02 43:48

Yeah. And how like when when people, you know, because again, it varies firm by firm. Some firms let their planners decide upon the underlying investments, you know, in you know, in in in Let's say at Hoxton we try and provide a centralised approach where we offer different solutions so planners can pick what's right for the for the clients, but ultimately, you know, it is it is plan eleven, and then some you know some um some planning firms will just be this is the one solution that we offer and you know therefore everyone gets it. Um when people are thinking through that, you know, and deciding what processes that they should put in place. Um how how how do you think of that? What how do you kind of how how do you work with you know in your role as as you know, kind of you know, fractionalized CIO now, how do you how do you work through that with planners and planning firms to get there?

SPEAKER_00 44:39

Um I I referred earlier to to my belief in optionality. And I believe so with when you're looking at your approach to helping clients. Um so similar to what Hoxton does, I believe in looking at your investment methodology, your model portfolio, your investment solutions as a spectrum of choice. Um something you know might be um something relying on 100% uh tracking funds, you know, um something that could be using uh quasi-tracking funds, say like a DFA type of framework where you can impart some size and style tilts, so you're deviating from market cap weight to suit either the belief within the firm or the belief within the client. And again, I think the client having a belief as strong as the firm definitely makes that uh an easier um opportunity. But I think it's important because some clients believe it and some clients want it. Um, so being supportive of that, I think, is uh is important. Again, with a focus on those things you can control to help try and improve outcomes. And then you can have the other end of the spectrum all the way to uh low-cost, full, low-cost active, should you choose, and you probably should have some opportunities there because there are some clients that you know are looking for an opportunity to outperform. If you put them into a fully passive portfolio that's market cap-weighted, that looks like the market, they can't outperform. Um, so you're not really again, listen to the client, certainly have those conversations. I do think it is about choice. Um, but holistically, I think you can impart your own, like the firms or your your own philosophy on it, where I build model portfolios that range from 100% uh index funds to 100% active. But the common denominator is they are all low cost. Yeah.

AI’s Role And The Primacy Of Relationships

SPEAKER_02 46:56

Yeah, it doesn't have to be you know extremely expensive just to have some kind of active tilt in there. I think that's what people kind of you know get wrong, don't they? Or they or you know, it's the assumption that that they assume. Right, so I'm gonna kind of switch gears a bit now. So, you know, a couple of last questions because I know you know I really appreciate you giving up your time. Um, and I obviously don't want to keep you you too long, but it if you were starting as a financial advisor today, what skill would you focus on mastering first?

unknown 47:28

Wow.

SPEAKER_00 47:30

Um I would uh again kind of leaning on that that relationship management, I can it was 35 years ago, but I can still remember how I felt, you know, as a 25-year-old, um, you know, just joining the business for the first time. Um, you know, you know what you don't know, but you actually bring more to the table in the term in the context of your personality. Like you're like you bring value to the table, even if you don't know the investment, the industry, and everything that you'll learn along the way. Um, I I think I think what I would encourage people to realize is that their personality matters, especially when we talk about building client and and your client base, is that certain clients really do um like an extrovert. Some some clients don't mind an introvert. They actually appreciate maybe somebody's um they they associate that with maybe a little more attention to detail or what have you. But I think I think people underestimate the the tools that they bring to the table, even when they're brand new. Their investment you know experience is um is low, and you you know, you don't have a choice. You have to you have to catch up. Um but I do think that people largely underestimate those soft skills that they bring to the table. And I think those are an important aspect. If you really want to be successful, you can you can get this, you know, the CFP designation or the CFA charter. It doesn't make you a good advisor, it just means you've passed the exams. It's really it's really what you bring in addition to that that'll differentiate yourself. 100%.

SPEAKER_02 49:32

It's yeah, exams don't mean uh that you're gonna be fantastic at your job. It's it's all those soft skills, isn't it, that you were talking about before and bringing your own character to it and not trying to be something else, not trying to be someone else. Like it's very easy to try and speak a certain way or copy certain people, but if that's not true to your character, you it's never gonna stand up over the longer run, and actually it's probably gonna detract the people that you do want to you do want to focus on. So we talked earlier, you know, kind of last question, but we talked earlier about you know AI and you know the advent of you know future advice. What do you think you know, like looking ahead 10 years, what do you think the role of a planner or an advisor will look like? Um, and what will truly differentiate the best from the rest of them?

Final Reflections And Closing

SPEAKER_00 50:18

Um I hate to keep you know uh you know beating on the same drum, but I I really do think it's it's the people that appreciate the EQ, the people that appreciate the the value of the relationship to their clients, um will be the most successful. Um and I in in this case I'm defining success a little more broadly. It's not just simply about having the biggest book, having the most AUM, having the most money flowing through the tills. Um, I think it's the most successful is is on both sides because you feel you feel personally like you're taking care of people. That is that's an important component for me, is that I want to take care of clients the way I would want to be taken care of. I would want my family taken care of by someone else. Um AI is a great tool for efficiency, but as you mentioned, it it doesn't replace the soft skills. Um, you know, it I I use AI routinely myself. Um, I think it's gonna be amazing for uh growth and a lot of um professionals working outside of the broker dealer firms and sort of the traditional models. Um it is a lever that allows people to be more efficient and effective with fewer moving parts, um, which I think is great because what it is allowing me to do is I don't have to do some of the busy work that I used to do, which allows me to have free time to try and speak with my clients, um, you know, think about the conversations that I've had, create content or deliverables that might help them base, you know, have better client conversations themselves with their clients because I'm thinking more about them, have more time to think about their needs, their concerns, and what really I can do to help them. So I think AI will be beneficial for many firms and in in again as a lever and creating some efficiencies, but uh you know, with very, very few exceptions, and we've already gone through sort of the robo advisor phase, so we've seen plenty of this um before. But I do think that um AI and robo advice, maybe it maybe it helps some novice investors, but I don't think it's gonna replace um any investor that is honestly providing those relationship management skills because those are if if somebody's not interested in that relationship, a client isn't, then maybe they do lean into some of those those uh AI uh abilities and maybe do it themselves. But for those that value the relationship and really are looking to work with a highly trusted advisor, I don't think they have anything to worry about as long as they're paying attention to the relationship management skills.

SPEAKER_02 53:40

100%. That's uh that's super, super useful. And yeah, it's all about the relationship. I think podcast off the podcast, like the common theme that runs through it's about relationship, relationship, relationship. Um, and definitely that you know couldn't uh couldn't be truer. Um so look, Don, really, really appreciate you taking the time to come on and and and to and to talk. I found this really, really useful, uh, and I'm sure uh the listeners of the podcast will will as well. So thank you very much, and we really appreciate your time.

SPEAKER_00 54:12

Thanks, Chris. It's always a pleasure.

SPEAKER_02 54:13

Thanks, Don. Have a great day.