LB Thinking Podcast: Advisors should consider individual security selection for their clients

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high yield bonds with the potential for dramatic price appreciation. Today we're talking about why many financial advisors don't want to purchase individual stocks for their clients and what to do if you face an advisor with that fear. Joining me now is Freddie Garcia, Vice President of Investments for Left Brain Wealth Management, which you can learn about online at leftbrainwealthmanagement.com and on Twitter @leftbrainir. Freddie Garcia, it's great to chat with you again.

Well, Chuck, I'm glad to be on today to talk about a topic that both me and you are very, very passionate about.

I am because I've written two books on choosing and working with financial advisors, and I'm a huge believer that financial advisors work for the person who's bringing them the money. And if a client comes in and says, "I want to invest in individual stocks," and the advisor says, "Yeah, don't really want to do that," even if it's a small piece of the portfolio, let alone the core holdings, well, you've got a bad advisory relationship. Yet you were looping me in on some things in the financial services world about advisors who were basically saying, "Yeah, if a client wants to invest in individual stocks," To heck with them, dump them.

Yeah, that's true. And one of the reasons I'm so passionate about this is we are definitely living in the technology age right now where so much information is so easily accessible to everyone, whether it be advisors, whether it be to clients. And clients and customers are hearing so much information about financial news, they're hearing about stocks and appreciation and the ability of some of these stocks and their potential. And yet they go and they visit their portfolios and they're not seeing that same type of return. So what do they do? They go and they discuss with their financial advisors, and their financial advisor comes back to them and gives them an answer like, "Well, you know, you want to make sure you invest for the long term. You want to make sure you stay the course, and you know, necessarily investing in individual securities might be a little bit too risky." And those are the types of answers that they're receiving back, but when they ask more, they get further and further pushback, and the reason is not because the advisor is trying to save them from individual stocks. It's because the advisors themselves are hesitant about using individual securities and taking that next step of finding out more about individual stocks and how to benefit clients' portfolios by, you know, using individual security selection. And that's the frustrating part, and that's what, you know, wanted me to talk about this topic today, because I think as a consumer, you have the right to demand and ask more, because if you can't ask your financial advisor about stocks, then who are you supposed to ask?

The other side of this is that the evolution of finance has made it so that this shouldn't be that hard. Now, I'm not saying that stock picking is not difficult because good stock picking and doing it consistently is incredibly difficult. It requires discipline. And oh, by the way, the advisor's job is to help the customer get emotional discipline, develop a plan, stick with it, ride it out, make it work. All those things are hugely important. But it used to be, oh, I don't want to work in individual stocks because it's hard to build a diversified portfolio. But today, if somebody's got mutual funds as the cornerstone of their portfolio, they're diversified. If they then want to add individual stocks to add some juice to their portfolio or because they are comfortable taking that risk, you don't have to worry about the diversification side. You've got that covered already.

Yeah, that's true. And that's again, one of the big lines that advisors always give to clients is that if you go individual stocks, you're not going to be diversified. Well, the reality is, is you don't have to just pick one stock. Nobody's telling them just buy one particular stock. You can still diversify by choosing multiple stocks. You can also incorporate ETFs and mutual funds in there to make sure you are diversified, but you shouldn't definitely shy away from stocks And the reason again, and this is what gets me so wound up, is that it's because the advisor doesn't want to do the work for the clients. They don't want to take the next step. They're intimidated by it. They want to refer them to another area and just kind of stay with the same cookie-cutter portfolio that they've been doing for years and years when they're seeing that their clients are asking for more. And unfortunately, they're failing to deliver on this.

Let's also talk about the relationship with the advisor. Because at Left Brain, well, you guys love stocks, but if somebody came to you and said, hey, I don't want to own individual stocks, you would say, fine, let's build a portfolio for you. You've got that level of knowledge. You're able to say, let's dig in and find the funds or the ETFs and build you a portfolio. When somebody's saying, I don't want to do individual stocks, they're using ETFs and they're using funds, and they're typically saying, as in this online forum that you and I were looking at that, oh, I don't have the bandwidth to go become an expert in stocks. But even if that's the case, wouldn't you say, okay, well, go get me an advisor. Like, I don't know for sure that Left Brain Wealth Management does this, but an advisor who doesn't normally do individual stocks themselves could basically say, hey, let's bring the stock portion of the money over to Left Brain and be able to add it that way. So all of this to me seems like just not doing your duty as a financial advisor. Am I wrong?

No, I would agree with you, Chuck. I've been in this business now for about 24 years, and I don't claim to be an expert on every topic. And when I'm not familiar with an area, I usually try to find more about that particular area or bring in an expert or product specialist or someone who does have experience with it. And the reason I would go that route is because if my client is asking for that, Remember, we're working for the client, so we have to, you know, I'm not anti against any type of strategy or product if the client is asking that because ultimately that's the goal. And prior to my career at Left Brain, individual security selection was not my specialty, but I didn't shy away from it that if I had a client that asked more about it, I would try to get more informed or try to point them in the direction that would be helpful to them. And that's one of the things that advisors, I think, today really should start taking those steps. Even if they're not, you know, security experts, they should look at areas that could possibly help or complement their practice to make sure that their clients are getting what they need rather than just say, "Well, you don't want the risk," or "That's not something that you should be doing." Is it something they shouldn't be doing, or is it just like I mentioned, it's something because they don't want to do? And, you know, I shared with you before responses from different advisors when we bring up this topic about individual security selection, their thoughts on it, or Some people are afraid that if they add the individual security selection and that starts performing differently than how their current portfolios are, the clients may want to see more of that individual security selection and that doesn't make, you know, the individual portfolios they're using look any better. So that's one of the fear factors too. Also, advisors want to spend their time again just gathering assets rather than actually managing money. I've brought up this discussion before to different forums and the response I get back is just frightening. When I brought this up to a well-known forum about, "Hey, would you like to to hear about how advisors can learn how to possibly add security selection to their clients' accounts. The response was, no, that doesn't interest our advisors because that doesn't really cover holistic planning. You know, money management doesn't cover holistic planning. We're a little more looking for long-term, big picture type stuff. And it's like, if there's not a big picture about managing clients' money, then why are you an advisor?

Yeah, there's a huge disconnect here. And, and so much of it has to do with the advisor wanting to look good. I mean, the idea that you could say, hey, if, if we do an individual stock portfolio which is concentrated, it only has a few holdings because you've got ETFs and you're diversified and you have hundreds of holdings in other parts of your portfolio and that performs better, and you think, oh wait, maybe that ETF portion of my portfolio is not doing so well. Well, A, your client doesn't understand what you're doing at all. If that were to happen. And B, you're going, I'd rather have my client not do better, not do as well so that I look good, than have them think, wow, I had a piece of my money that I took a little more risk on. It did great. And that improves my returns. I mean, that is so incongruous to me. But I also want to go another way. I mean, at Left Brain, obviously it's deep stock knowledge, et cetera. I was a little surprised when we were talking about this forum that some of the folks were kind of like, well, hey, if you need stocks, you know, you can go to this little service or that little service. And we're talking about, you know, free websites run by guys that their reputations are, eh, I mean, but wait, you're turning for stocks and that's what you've done. That also strikes me as super dangerous here.

Yeah. And it's not doing your proper due diligence when you're referring them to someone that they're not even familiar with. You know, advisors aren't investing their money according to some of these sites that they're recommending people go to, right? But yet they would turn their clients on to there? So that part is frightening. So what I would implore listeners today that are listening to the show and possibly pass this news on to their friends, I would say, if you are working with an advisor right now, what is it that you're getting from your advisor? And if you had a question about your portfolio, about a good investment, what would your advisor say? And if they can't give you a clear-cut answer saying, "Hey, this is a good investment. This is what you should be doing," then perhaps it's time to look for a different advisor. Because if you cannot ask your financial advisor about stock advice, then who are you supposed to ask? You know, if you're getting your information from the neighbors or TV and you're not getting it from who's supposed to be an industry professional, then maybe it's time to find somebody else. And for industry professionals that are listening to this show that may not like what I'm saying today, again, I would ask you to really say, why are you in this business? Is it to just put clients in different products, or is it really to manage portfolios? And make sure that people are doing the right things with their money. And if that's the case, why wouldn't you want to complement your practice by taking that extra step? Like you mentioned, there's a lot of information out there. This is the digital age. If you want to take the steps to learn more about securities, it's available out there and clients are asking for it. So I would implore everyone to take the next steps, find out more about this, and make sure you're working with the right people that can help you get to what you're trying to accomplish.

Or find a sub-advisor or what— I mean, If I was working with a financial advisor right now and they said, well, I want you to get rid of your stocks, that would be insane because of the tax consequences, etc., because they don't want to help me manage them. So you can always bring someone else in. But in the limited time we've got left, I got to throw one more at you. You like it, of course, when somebody works with stocks. But what happens when you get a client who instead of saying, hey, Freddie, tell me what I should be in or, or help me manage and build a portfolio, they say, Hey Freddie, that latest meme stock, man, I gotta go buy that thing that's been all over the news, that's been blowing up, that even though you like fast growth at Left Brain, no, this is not the right thing. What do you do in that circumstance?

Well, again, this is the benefit of working with individual stocks. We do our due diligence on every position that we pick, and one of the reasons that we do that is because we want to explain why we bought something. Now, we also research stocks that we don't buy. I mean, it's not just part of researching what you buy, it's also researching what you don't buy necessarily because if it's something that you don't think is right for the client, they just want to buy it, you should give them a reason as to why. If they want to go ahead and do it, well, they certainly can, but again, you want to be able to give this client the due diligence of saying, "Hey, I did my research on that position and here's my reasonings either for or against it." That way if they make that purchase and they decide to do it on their own, you were able to educate them along the way a little bit and they'll appreciate that and sometimes that does happen, right? But again, if you do your research and help them out, clients will appreciate that even more. You don't just say, don't buy it because I don't know anything about it.

No. And if your advisor is doing that, they are not helping you. They're treating it like it's their money, not like your money. Freddie, great stuff. Thanks so much for joining me.

Chuck, glad to be on today.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations. But are designed to engage your brain. Please do your diligence before making any financial transaction. I am Chuck Jaffe, your host. You can learn more about my weekday podcast at moneylifeshow.com. But trust me, if I sound passionate about this subject, I've written two books on choosing and working with financial advisors, and getting it right and finding someone who works with you is super important. That's one more reason to thank my guest, Freddy Garcia, Vice President of Investments for Left Brain Wealth Management. You can learn more about the firm and its services at leftbrainwealthmanagement.com. You can learn all about their investment research at leftbrainir.com and about their mutual fund at leftbrainmutualfunds.com. The firm is on Twitter @LeftBrainIR. Left Brain Thinking is available every other Wednesday. You can follow us on your favorite podcast app to make sure you don't miss a single chance to wear your left brain thinking cap. And until next time, happy investing, everybody.