Jun 22 2023

How a Fiduciary Advisor Can Add Value to Your Portfolio

A little bit about me and my background, I've been a financial advisor for over 20 years, actually. Doesn't seem like it's been that long, but I guess the gray hair will attest to the decades that I've been doing it. My first job was at Payne Weber, which is now UBS, as a stockbroker in 1998, and that was my start in the business.

I went from Payne Weber to a M&T bank, working with bank clients and doing investing in financial planning. And then I decided I have to get out of the full commission business. I wasn’t cut out to sell stocks and call up people and offer hot stock tips and things like that. So I moved to Charles Schwab, which is actually where I ended up meeting Pam. I was really enamored with the fact that they didn't pay their financial advisors commissions and they seemed free to be able to recommend what they thought was in their best interest. And it was at Charles Schwab that I started working on and completed my CFA certificate, which is the Chartered Financial Analyst designation.

The designation and schooling I went through to obtain it really helps me with investing in portfolio management, and crafting client portfolios. But after about five or six years at Charles Schwab, I realized I wanted to provide more one-on-one advice to higher net worth clients and wanted to get out of the brokerage world and work for a registered investment advisory firm. I wanted to be independent. I wanted to be able to tell people that I was acting as a fiduciary and acting in their best interests and all that. And so I decided to open up my own firm, Servo Wealth Management. I’ve spent the last 10+ years running the firm and working with new clients and I’ve really enjoyed it. 


Benchmarking is important in conveying value to your client when managing their investments. When I first started managing money the way that I do now, I was really fixated on looking at the components of my portfolio. When looking at a large cap fund and a small cap value fund, I started comparing those funds to a suitable index like the Russell 2000 value or the S&P 500, to see if we were doing any better. And that's still important to this day. I always say if the fund(s) that you're using aren't doing any better than the broad indexes, then it just makes logical sense that you should use the indexes. I don't invest in index funds, personally. I tend to use the mutual funds and the ETFs from Dimensional Fund Advisors or DFA. 

As I've evolved and as I've worked with more and more clients over the years doing retirement planning and trying to achieve real world goals, what I've realized is that the most important benchmark for clients isn't beating an index. It's achieving the rate of return that they need to fulfill their financial plan. So if a client is in retirement and they're in their mid sixties and they've got another 30 years from which they need to draw an income from the portfolio, they might not need the return of an all stock portfolio. They might be okay with a slightly lower returning, less volatile portfolio. And in that sense, maybe they've underperformed compared to the S&P 500, but they're on track to achieve the return that they need to accomplish their financial goals. So when I talk to clients today, or even with prospective clients, I'm more focused on what they are trying to accomplish. What rate of return will that require their money to earn? And what's the best way to invest the money to get that rate of return, even if it's not as high as somebody else's or their neighbors or what have you.


It’s also extremely important to properly communicate and keep your clients informed on the status of their investments. To do this I typically send out comprehensive quarterly reports that show them where their money is allocated, what the returns have been, what fees have accrued and and illustrate the progress they’ve made since inception. But I always tell my clients that the quarterly reports are optional. You don't have to look at them. I've learned over the years that the more you look at your portfolio, the more likely it is that you're gonna see something that's temporary that might scare you or might induce you to maybe chase performance and do something that you shouldn't do. So I still send out these quarterly reports, but to supplement them I also send out a more robust year-end report. I tell all my clients that the year-end reports and our yearly conversations are the most important conversations that we have each year. It's not that I don't talk to some clients monthly, quarterly, etc., but those tend to be much lighter conversations.

Adding Value

Adding value to the client really comes down to the art and science. I like those words. The science of investing is something that I had to learn after a couple years. When I was first starting out as a financial advisor, I was trying to pick stocks. I was taking the research from Payne Weber or the mutual fund ideas from M&T Bank and trying to sell clients the next hot stock, the sky high mutual fund, but soon realized that this process wasn’t the best solution. I was so frustrated in fact that I still remember four or five years into working as a financial advisor that I was ready to give up and go in another direction. It wasn't until I learned that there was an entirely different way to invest your money, where you didn't have to try to pick the right stocks or the right time to get in and out of the market.

What I learned was that simply investing in the market can give you a good long-term investment experience. I mean, we all know that for the last 90 odd years, the S&P 500 index of large US blue chip stocks has averaged like 10% return a year. Intermediate term government bonds average like 5% a year. So right there, you realize some combination of stocks and bonds, if you hold onto them and get those long-term returns should be sufficient to achieve your long-term goals. And so that's when my whole thought process with investing started to change. As I dug deeper and tried to really research and understand the right way to invest, what I learned was there was a science to investing. There were actually financial academics that were digging in and studying where the returns come from, not just between stocks and bonds, but also in the stock market and in the bond market. And what they had determined was looking at stocks, smaller companies tended to have higher expected returns over time compared to larger companies. And then looking at low-price value stocks compared to high-price growth stocks over time, the low-price value stocks had higher returns than the growth stocks. So I quickly realized it was possible to create a portfolio that emphasized these different parts of the market, and didn’t force you to jump in and out of your positions. It was this ‘Ah ha’ moment that I got really excited that for the first time I could honestly say that I knew how to create a portfolio that can do a good job to help somebody make money, the right way.

And then I realized there's an entire psychological aspect to investing. Humans aren't robots. They're not just taking my advice and accepting what I'm saying and not paying attention to what transpires after the conversation. This is where the art of investing comes in. It's not just about building a good portfolio. It's about working with people on an ongoing basis, keeping them from sometimes being their own worst eminent enemy, and shooting themselves in the foot. You could put together a solid portfolio for a client that doesn't work out for one reason or another. They might bail on the strategy at the wrong time, or they do the wrong thing at the wrong time and they give up on it, or they move their money to something that's been doing better recently. And what I had to learn was that my clients needed coaching and counseling to stick with their portfolio and stick with their plan through time, especially when things aren't going well. But it’s important to stay the course to see the returns.

Reducing Risk

What is risk? How do you reduce it? You know, a lot of times we think investment risk is losing money, or in 2008, seeing a portfolio drop by 40 or 50%. Yikes. That can be really scary. But when you work with people who are long-term investors, what you realize is that short-term results, good or bad, are just temporary. We know after 2008, the markets came back and had a phenomenal decade, and everybody that had lost money temporarily in 2008, if they held on, they made their money back and they really didn't experience any risk.

Whereas back in 2008, if somebody had all of their money in bonds, they might not have lost a lot of money. But over the next 10 years, they probably didn't make much money either. And if they were taking money out of their portfolio, they were probably taking out more than they made (in returns), which means they had to start depleting their principle and we're already on the path to running out of money. Even though they had invested really safely, they were running the biggest risk of not having enough money at the end of their life to be able to live comfortably.


When it comes to diversification, I'm a big believer in holding almost all of the stocks and bonds in the market. I'm not somebody who says, just buy these 10 stocks or these 20 stocks, or these five or 10 bonds. I like to diversify not just across US stocks and bonds, but also internationally. In most of the portfolios that I manage there’s typically thousands of different stocks, bonds and ETFs. It keeps you from having all of your eggs in one basket and having that basket be the worst one. Today a lot of investors are really enamored with large US stocks like the S&P 500. I mean, the S&P 500 has averaged like 13% a year for the last decade, it's really incredible. But people forget that 10 years before 2010, from 2000 and 2009, the S&P 500 lost 1% a year annualized, whereas a lot of other asset classes, like international small cap value stocks did much better. So my approach to diversification is to spread it out broadly within US and international stocks and then further diversifying by incorporating both large companies, small cap and value companies as well.

Looking Ahead

I'm really worried that everybody's looking at the last five or 10 years of market returns and assuming that it’s going to continue indefinitely. The number one thing I can tell anybody today is you've got to be broadly diversified. If you don't have some stuff in your portfolio that hasn't done well over the last 10 years, you're not doing it right. No trend in the markets has lasted forever.

Normally every couple years the thing that was doing well starts to do poorly and vice versa. We've seen this in the last couple years with smaller and more value-oriented stocks. After the covid lockdowns, large tech stocks that were surging throughout covid have  taken a backseat to smaller and more value-oriented stocks. But still, people are fixated on US stocks. You've got to bite the bullet, plug your nose and move some money into international and emerging markets. 

The last thing I’ll say is this, don't go overboard with bonds. Even though interest rates have gone up, the 4-6% returns they’re currently producing has typically never been enough to accomplish serious long-term goals and who’s to say these high returns we’re seeing now, won’t be gone tomorrow? So be diversified and don't be afraid to own things that have good, really long-term returns, but just haven't done as well over the last five or 10 years.

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