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The Wicked Smart Investor: A Big Name is not the Secret Ingredient


By Chris Hanson

Consumers of many products or services are frequently offered a choice—go with the little guy or the big, branded behemoth.  This is true whether you’re baking blueberry muffins or hiring an investment advisor. Before you succumb to the will of marketing myth makers, let’s examine your choices in both decisions.

Let’s talk about the legendary Jordan Marsh blueberry muffin. Mention these treats to Bostonians of a certain age and you’ll likely evoke blissful memories of downtown shopping trips with Grandma. If children behaved, they were rewarded with muffins glistening with crunchy sugar on the top and slightly tart, juicy blueberries in the middle. At the right time of day, the appetizing scent of the muffins baking even overpowered Grandma’s Jean Nate’ perfume. The muffins were so good that amateur bakers eagerly sought out the recipe. Yet the recipe was a closely guarded secret and many were misled by the counterfeit concoctions of parish cookbooks and handwritten index cards.

One day, the culinary cliffhanger was almost solved. The food section of the Boston Globe featured a recipe formulated by pastry chef Nick Malgier. It seemed the secret ingredient was buttermilk; the acid in it helps keep the muffins moist. The Wicked Smart Investor used this recipe a few times enjoying great adulation from all that devoured my muffins. Imagine my dismay years later when Jordan Marsh baker John Pupek revealed the true recipe with absolutely no buttermilk! I felt like a fraud, passing my muffins off as legit Jordan Marsh when they were just another fake. Dejected but determined, I baked muffins using both recipes and held a few blind taste tests. The muffins baked with buttermilk won by an overwhelming majority.  This may rock Bostonians right to their “R” dropping core but just because it is a Jordan Marsh blueberry muffin does not mean it is the best blueberry muffin.

So, are investment advisors from big institutions better than the small independent outfit? That is a question for you to decide. Since I’m independent I obviously have a bias. Let me do my best to educate my readers objectively.

First, you do not lose any fraud protection with an independent advisor when a third party has custody of your money. Usually a large outfit, this custodian offers many checks and balances that assure your advisor never has physical custody of your funds or the reporting function. You receive statements directly from the custodian bypassing the advisor.

Next, an independent advisor usually has more freedom of investment choices. If your advisor works for a firm with proprietary products, it is very likely you’ll be placed in those products even if they are not best for you. Or, the advisor may have a quota for certain third-party products that also fall short.  Don’t be fooled into thinking that advisors from big firms have the best research, and better returns will likely follow. The internet has democratized investment research; small players have access too.

Finally, larger firms also tend to be publicly traded and/or have layers of expensive management. The constant pressure to produce growing revenues and pay large salaries reduces the ability for larger firms to be fee competitive. Frequently, advisors at these firms are paid less, fueling high turnover. You may never speak to the same advisor twice.  Smaller firms usually enjoy less turnover.

The stock market simply does not reward investors based on the size of their advisory firm. The myth makers be damned.  I recommend choosing a fee-based advisor offering great service and held to the fiduciary standard. That’s the crunchy sugar on top.