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Investors are wise to adviser conflicts and lack of objectivity

By Charlotte Beyer

The movement by investors to seek independent advisers to help pick funds or money managers gained wide acceptance in the 1990s and 2000s, inspiring stockbrokers, accountants, lawyers and consultants to form wealth advisory divisions. The trend accelerated as these same professionals decided to break away from the big firms and form their own wealth boutiques, sometimes called multi family offices.

These advisers all claim no conflicts because they select only outside managers or funds, avoiding the conflicts of any internally managed assets. Large Wall Street investment firms also offer to help pick the best in class money managers, directing their clients to external, not internal funds. Coined open architecture, the concept was that investors could rely on a smart professional, who could recommend the best outside managers or funds.

One high net worth investor inside a private online community at the Institute for Private Investors, sees it very differently:

“Who is this advisor who is “truly independent? I have been thinking a lot about this lately. The kind of people that these consulting and advisory services businesses hire are NOT generally investment people. They are giving investment advice but they are not themselves investors. They are less likely to understand the emotional and temperamental issues that go on with investing. It’s one thing to talk of bulls but it’s another thing to be in the ring with one.

“Since they are not investment people, they usually do not have great relationships with investment people. Investment people’s incentive is to tell the advisors, AKA the money people, what they want to hear to get their money. That means that they do not share the juicy information that will let you know if the investment is actually a good one. I call that the “marketing wall.” It’s an invisible wall that exists between the money and the investment team. This is almost impossible to breach unless you yourself have traded like instruments, or if the investment manager is your buddy.

The more clients an adviser has, the more people they need, the more people they need, the more bureaucracy there is. That means that the top people often have to spend more time managing the business than keeping up to date with their business and advising their clients. And usually, the kind of people they hire are young, inexperienced and inexpensive analysts that were not good enough to work for an investment firm but were good enough to be hired by the advisory services. Another corollary effect to the conflict that I do not think has ever been discussed before: the analysts evaluating these managers for you are aware that if they make nice with the managers they are supposed to be evaluating for you, they may end up being good enough to work for the investment guys. The advisory people usually jump ship because the compensation (financial, and possibly emotional and intellectual) is better on the investment side.”