I’ve asked many advisors acquiring financial planning businesses the same the question:
How important is alignment of investment philosophy?
For the most part, the answer is:
It’s pretty important.
Of course, there were outliers – such as my interview with financial planner Richard Fogg. (For Richard, the answer was “somewhat important.”) Or, with Ian Kutner who had a mostly transactional business.
But for many practicing financial advisors, investing is a big part of what they do. And some are very passionate about the subject.
At Define Financial, we’re no exception. While investing is just one part of what we do as financial planners, we want to make sure that we’re doing investing right. Why? So that we can make the biggest positive impact in the lives of our clients.
Our Investment Philosophy
For us, doing right by our clients means a strict focus on evidenced-based investing. And most of the evidence points to low-cost investing as a mandatory factor for investing success. Of course, low-cost investing isn’t the only thing that defines (pun intended) our investment strategy. We also seize upon other factors that are historically proven.
This means tilting portfolio exposure towards small capitalization companies, under-priced companies (i.e. value stocks, or value investing), and those companies showing greater profitability. We mostly access these strategies through Dimensional Fund Advisors. Why not do this ourselves? Because we know that Nobel-prize winning economists can do a much better job of this than we can.
While there are other, more nuanced details that define (again with the puns!) our model investment portfolios (such as opting for the exclusive use of U.S. Treasury bonds for fixed income allocation), these smaller details are less important than finding an advisor who understands (or is at least open to) evidenced-based investing.
In Succession Planning, Investment Philosophy Alignment is Important
Recently, I had a conversation with a local radio personality and financial advisor eager to exit the business. He built his brand by differentiating himself as a market timer. As such, his book of business generating annual revenue of one million dollars was predicated upon jumping in and out of asset classes on behalf of his clients. And while acquiring yet another book of business is always on our minds, integrating a group of clients into our own firm that are trained on market timing would not fit with our own firm’s low-cost, buy-and-hold approach investing approach. In short, if you’re dogmatic about stock picking without any consideration for cost, we are probably not the right firm to buy your book of business.
While we certainly don’t expect our future acquisitions to be obsessed with low-cost and diversification, we need to be empowered to help our newest round of clients by putting those clients into portfolios that – we think – most the most sense.
If you’re considering how to exit your financial advisor business and are open to the idea of your clients’ portfolios being given an evidenced-based investment approach, reach out to us.