“What stock should I buy?” That’s the single worst question you can ask a financial advisor. It’s also one of the most common questions we hear. This question essentially asks for a solution before even describing the problem. And while the solution is always the goal, that solution can only be identified after a plan is in place to build the solution. Asking “what stock should I buy” is no different than asking a doctor “what pill should I take?”
Consider the differences in approaches: A man walks into his broker’s office and asks what he should do. The broker pitches a new hedge fund placement–top Wall Street talent, strong 3-month track record and a nice commission for the broker. That same man walks into his doctor’s office and asks what he should do. The doctor begins by asking what ails the man before ordering multiple rounds of tests.
To begin finding a solution to your medical (and financial) issue is to start understanding the client’s situation. A round of tests are ordered to attack the ailment from different angles. In the wealth advisory space, these tests are done through a set of questions. Asking standardized questions helps uncover both the problem and cause of the problem.
Quite often, these initial questions uncover the client’s catalyst for concern. Fiduciary standard, tax mitigation strategies, lack of education around investment decisions, underperformance in investments are often the reasons for clients reaching out to us.
Once that root cause is identified, further questions help flush out the client’s pain point. To continue our analogy, this is similar to how back pain can actually be caused by a weak core. While the patient only knows there is back pain, the professional knows to look for the common root causes of pain.
With the catalyst and pain points identified, the doctor is now responsible for identifying multiple solutions and preferred option. We feel the explanation of potential solutions is critical in the wealth advisory space. Within this set of solutions, a preferred solution should be highlighted, along with an explanation for why we feel it is superior to other options. In the end, we advise clients on their options; the ultimate decision is theirs.
Once a physical therapy or medicinal solution is identified, a physician provides either a written script or list of therapy providers. In our world, this is the written financial plan. It clearly outlines both the problems and solutions.
Unlike a physician’s script, the financial plan changes over time to capture life’s changes. New job, real estate opportunity, business start up opportunity, and private school tuition are all examples of what necessitates a revision to the financial plan. Whenever one cog in the wheel changes, it creates an opportunity to build a more efficient tool to achieve the client’s goals.
When we are asked “what stock should I buy”, we politely respond with “I don’t even know that you should own stocks. I don’t know whether you need to grow your assets to meet your goals, and if you do, how much risk are you comfortable with having in your portfolio?”
We aim to highlight the need for a financial plan. Starting the financial planning process is the right solution for someone trying to figure out how to improve their financial situation. Sure it’s not an answer the person wants to hear, but it’s a concrete answer built to answer the client’s long-term needs.
The difference in approaches between a doctor and financial broker is that the doctor is searching for the problem, while the broker searches for a sales ticket (amazingly, those carbon copy pink slips still exist in brokerage firms.) It’s for this fundamental difference in approaches that it baffles us when we’re at a dinner and someone asks “What stock should I buy?” Without a series of questions, that’s an impossible question to answer.
The correct and best answer to “what stock should I buy” is to first complete a financial plan. Again, take a look at how medicine approaches solving a problem: gather data, test for problems and begin a checklist of potential remedies. Building a financial plan encompasses all of these steps and helps identify issues that the client may be unaware of at the moment.