When ETF-friendly advisors give advice to prospects, it’s worth noting what they shouldn’t say.
Let’s face it: Most of you reading this post are “the guy” or “the gal” on a financial topic—most likely, ETFs. You’re at a cocktail party, and someone says, “What do you do?” You say something a little bit vague, like “I’m in investing” or “I’m an advisor.”
And that’s when it all goes downhill.
Now, if it’s the right kind of cocktail party, this could be a golden opportunity. Maybe the couple you just met has wrapped up selling a family business and is looking to invest $10 million in proceeds, and you’re just the right match. More than likely, however, the person you’re chatting with isn’t really a prospect. Based on my experience, the chances that the person you’re randomly talking to is financially literate is probably pretty low.
So how do you handle the conversation? Here’s my patented five-step plan:
- Break the money taboo. If you’re being grilled as the money expert, just ask flat-out, “How much have you saved for retirement, and how much debt do you have?” In modern American culture, this is nearly the equivalent of questioning someone’s parentage in public. But it immediately focuses the conversation. If they balk, well, your conversation is conveniently over. If they’re willing to say, “I’ve got a $500,000 mortgage, $20,000 in credit card debt and $300,000 saved,” then you may actually have an interesting conversation in front of you.
- Give them the best free advice first. Nine times out of 10, when someone starts talking to me about their personal finances, they’re honestly not even ready to start investing. They’re paying 9 percent on an ARM they let run too long. They’re paying 18 percent in credit card debt. Even folks who have “funny money” sitting in a brokerage account have generally not gotten it right—they haven’t maxed out their employer 401(k), they haven’t contributed to an IRA.
- Assuming you’re past the first two steps and they still want to talk about investing, focus on costs first. How much are they paying their financial advisor? How much are they paying on their mutual funds? On their trading? An enormous number of people I ask have absolutely no idea. I recently had a relative go through the math and discover that their actual investment costs in the previous year between what they paid their advisor and their investment managers were more than 3 percent.
- When it comes to recommendations, be boring. Most people who get to the point of asking, “What’s hot?” are already headed for trouble. You do them a favor by walking them through the simple math of why a long-term, well-diversified, multi-asset-class portfolio they can basically forget about is going to be the best starting point.
- When pressed, go macro. The smartest investors in the world now think first and foremost about macroeconomic forces. That’s why our Alpha Think Tank has been such a hit with investors. If Nouriel Roubini and Don Luskin and David Kotok aren’t talking about Citibank’s earnings or General Motors recalls, maybe your cocktail-party friend shouldn’t be either. It’s far more important to get the call right, on, say, the dollar, or international bonds, than it is on Tesla’s dealership strategy.
Notice what’s not on my top five strategies for handling the annoying cocktail party? Talking about ETFs.
Those of us deep in the weeds often get caught up in how cool and interesting the ETF structure is in a vacuum. But for nearly all investors, ETFs are just a shell—arguably the best, most-tax-efficient, lowest-cost shell, but a shell nonetheless.
Contact Dave Nadig at [email protected].