By Ryan Krystopowicz, CFA
Director of Client Solutions
Follow Ryan Krystopowicz @ryankETFmodels
Stock picking isn’t dead—but for most independent advisors, it should be.
Here’s why: the odds of achieving success are low, it’s suboptimal, and performance isn’t everything.
Let’s dig in.
The Odds of Achieving Success Are Low
In other words, it’s rare to consistently outperform a passive benchmark over time. Most active managers come up short in this endeavor—a theme we’ve regularly seen in the semiannual SPIVA U.S. Scorecards1.
How realistic is it to think that an advisor, who typically spends 20% of their capacity on investment management, would render different results2
Not realistic at all.
Jason Zweig touched upon this on Michael Kitces’s Financial Advisor Success podcast:
“Advisors who think of themselves as portfolio managers above all, they have, I think, a really bad and naïve tendency to think that they are incredibly good professional portfolio managers. And 80% of Wall Street’s best and brightest are outperformed by the S&P 500 year in and year out, and they have massive quantitative and qualitative resources that small, independent RIAs don’t have and, frankly, never will have. You’re competing on a playing field that is completely skewed….”3
Let’s steelman Mr. Zweig’s argument and assume there is a population of advisors that are talented (lucky) enough to consistently beat a benchmark by picking stocks. If this is the case, why would that individual choose to become a financial advisor?
The advisor is better off choosing a different career within finance, assuming they are optimizing for potential profits or audience reach.
When it comes to profits, the two-and-twenty fee arrangement common among hedge funds seems a whole lot more appealing than the 1% on assets under management (AUM) many fee-only advisors charge.
Regarding audience reach, an investing newsletter has the capability of reaching a substantially larger number of investors than the limited number of households a financial advisor can serve.
If someone is that good at picking stocks, why would they work at an independent RIA with a few hundred million in AUM? They would be much better off running a hedge fund or SMA model portfolio or publishing an investment newsletter with a seemingly infinite return on investment (ROI).4
To be clear, most financial advisors provide extraordinary value beyond portfolio management. So much value that…
Performance Isn’t Everything
At least not in the eyes of investors who hire financial advisors.
For example, a new study asked people to rate their certainty levels on a scale of 1–100 across a broad range of factors. The study found that people who work with an advisor feel like they are on more solid ground across the board.5
It’s not that performance doesn’t matter. But, as evident in the chart above, performance shouldn’t be a singular focus. Advisors provide a copious amount of tangible value to their clients’ financial well-being that extends beyond the performance versus a benchmark.
To summarize—it’s not rational for independent financial advisors to hang their hat on picking stocks. The odds of achieving success are low, it’s suboptimal from a career standpoint, and performance isn’t everything in the eyes of most clients.
Instead, these advisors should shift their focus from picking stocks to providing other value-adds—i.e., financial planning, cash flow management and retirement planning.
But is this realistic for every advisor to undertake?
Not in my experience.
Many advisors originally entered the business because of their passion for investing. These advisors are understandably reluctant to give up complete control of the aspect of their day that excites them the most…
…even if they understand the benefits of outsourcing investment management and third-party model portfolios.
Thankfully, there is now a realistic compromise that investment-focused financial advisors can utilize in their practice through WisdomTree’s Portfolio and Growth Solutions program. This program enables collaboration between our investment professionals and advisors with the goal of building custom model portfolios for their clients.
Unlike traditional TAMPs or OCIO services, this collaboration allows financial advisors to have input into the construction of these custom models that WisdomTree’s Model Portfolio Investment Committee builds for their clients. This allows advisors to benefit from the massive quantitative and qualitative resources that a global asset manager possesses and cultivate a unique offering tailored specifically for their clients—two amazing benefits often perceived as mutually exclusive.
Furthermore, through WisdomTree’s partnership with Adhesion, we can trade and rebalance these portfolios on your behalf with the ability to create automated withdrawals, account billing, tax loss harvesting and other features.
We believe this program can potentially save advisors time and money and help them achieve better outcomes for their clients—something I don’t have a lot of confidence in when it comes to picking stocks.
Originally published 3 January 2023.
For more news, information, and analysis, visit the Modern Alpha Channel.
1 The SPIVA Scorecard is a widely referenced research piece conducted and published by S&P DJI that compares actively managed funds to their appropriate benchmarks on a semiannual basis. https://www.spglobal.com/spdji/en/research-insights/spiva/
2 The Cerulli Report: U.S. Asset Allocation Model Portfolios 2021 (reference to advisors who identify as “Insourcers” and complete investment management in-house).
3 Financial Advisor Success podcast with Michael Kitces featuring Jason Zweig, Episode 216. https://www.kitces.com/blog/jason-zweig-wall-street-journal-intelligent-investor-financial-advisor-curator/
4 This is a summarized point Jason Zweig made in the same Financial Advisor Success Podcast (Episode 216) during the “Giving 4 Financial Advice Is The Art Of Telling People What They Don’t Want To Hear” section [08:36 mark]. https://www.kitces.com/blog/jason-zweig-wall-street-journal-intelligent-investor-financial-advisor-curator/
5 Sourced from a LinkedIn post by Samantha Russell at FMG Suite. Findings from the Northwestern Mutual 2022 Planning & Progress Study. The study was conducted by The Harris Poll on behalf of Northwestern Mutual and included 2,381 American adults aged 18 and older.
Important Risks Related to This Article
For financial advisors: WisdomTree Model Portfolio information is designed to be used by financial advisors solely as an educational resource, along with other potential resources advisors may consider, in providing services to their end clients. WisdomTree’s Model Portfolios and related content are for information only and are not intended to provide, and should not be relied on for, tax, legal, accounting, investment or financial planning advice by WisdomTree, nor should any WisdomTree Model Portfolio information be considered or relied upon as investment advice or as a recommendation from WisdomTree, including regarding the use or suitability of any WisdomTree Model Portfolio, any particular security or any particular strategy.
For retail investors: WisdomTree’s Model Portfolios are not intended to constitute investment advice or investment recommendations from WisdomTree. Your investment advisor may or may not implement WisdomTree’s Model Portfolios in your account. The performance of your account may differ from the performance shown for a variety of reasons, including but not limited to: your investment advisor, and not WisdomTree, is responsible for implementing trades in the accounts; differences in market conditions; client-imposed investment restrictions; the timing of client investments and withdrawals; fees payable; and/or other factors. WisdomTree is not responsible for determining the suitability or appropriateness of a strategy based on WisdomTree’s Model Portfolios. WisdomTree does not have investment discretion and does not place trade orders for your account. This material has been created by WisdomTree, and the information included herein has not been verified by your investment advisor and may differ from information provided by your investment advisor. WisdomTree does not undertake to provide impartial investment advice or give advice in a fiduciary capacity. Further, WisdomTree receives revenue in the form of advisory fees for our exchange-traded Funds and management fees for our collective investment trusts.
Neither WisdomTree, Inc., nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax advice. All references to tax matters or information provided here are for illustrative purposes only and should not be considered tax advice and cannot be used for the purpose of avoiding tax penalties. Investors seeking tax advice should consult an independent tax advisor.