Advisers who pick stocks are hurting clients — and the value of their firms

If you’re an adviser and you pick securities for your clients, you’re not only wasting time and money, you’re probably doing them a grave disservice.

I’ve been a financial planner and adviser for almost three decades, and it never ceases to amaze me how many advisers think they are adding value by being stock pickers or market timers.

Rather than spending time guiding clients through life events, developing financial plans or giving tax or estate planning recommendations, too many advisers spend too much time each week watching CNBC and Bloomberg and imagining they can outsmart the market.

It’s bad business.

Stocks? Bonds? Real estate? Most active fund managers can’t outperform the indexes of the securities they manage. How in the world can a retail financial adviser expect to do better?

Think of some of the best active managers in the marketplace. They’ve got highly educated researchers and employ teams of CFAs. Yet if history is any guide, even the managers with the best 10-year track records will probably underperform their benchmarks over the next decade.

And, even if you somehow outperform over the short term, given enough time, you’ll certainly underperform in the long run.

But it’s not only middling (or worse) returns that hurt your clients. All this takes you away from you managing and advising them on their entire financial lives. And if all that wasn’t enough, it’s not only your clients who pay the price: The value of your firm suffers when you position yourself as an ace portfolio manager.

Case in point: Over the years, both in my time running the Hanson McClain Retirement Network, as well as doing M&A with Allworth Financial, I’ve interacted with hundreds of financial advisers. We go deep into the DNA of the firms we work with. And here’s the reality: Those firms whose approach to advising is to focus on the overall financial life management of their clients are almost always more valuable than those firms that emphasize investment management.

Obviously, managing portfolios is incredibly important. But it’s clearly not where a good financial adviser should focus.

After all, asset allocation is a low-priced commodity that can be done for, at most, 25 or 30 basis points. Your real value is in other areas, such as financial planning, guidance, distribution strategies and behavioral coaching.

And when the day comes to sell your firm and retire? Advisers whose primary focus is portfolio management are going to find their firm a tough sale. Because, in that scenario, what’s left of your practice after you leave? What’s the advisory process and how does the next principal step in?

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For those advisers who outsource investment management, and have a highly defined, repeatable and holistic advisory process, you’ll absolutely have more loyal clients and more options available to you when it’s time to retire.

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Scott Hanson is co-founder of Allworth Financial, formerly Hanson McClain Advisors, a fee-based RIA with over $4 billion in AUM.