Advisors need to be more aware of their shortcomings and do a better job of explaining the value proposition they offer to clients and prospective clients, according to Barry Ritholtz, chairman and chief investment officer of Ritholtz Wealth Management.
"It's important for advisors and their clients to understand what their blind spots are — where they think they have a skill set that perhaps they don't — and how to manage being wrong," he said Friday during an online Riskalyze RIA Roundtable event.
After all, "the people who think they're always right are cult leaders or politicians," he said. "I think the closer we are as advisors and investors to critical thinkers and scientists, the better we are, the better our firms are and the better our clients are."
The ability to rank one's own abilities and skills is a skill in and of itself, he noted. "Let's put it in plain English: Amateurs have no idea how mediocre they are," he explained. In comparison, people who are experts "know they're expertise" and, if anything, "they tend to be more modest because they're aware of complexity and they're aware of their own shortcomings."
Avoid what "has been called Mount Stupid" — when you learn a little and get confidence from that, thinking you know more than you actually do, he joked.
Blind Spot Examples
Ritholtz pointed as an example to a blind spot that he experienced in his career, recalling that after his firm was created in 2013, he and the other founders started growing and added staff as needed. But eventually, after a client pointed it out to him, he realized: "Hey, we're a bunch of white dudes … We hadn't really thought about it."
"I was very late to recognizing this," he admitted. Once he and the other founders realized that was an issue, they "made a concerted effort" to hire women and people of color as CFPs, he said.
Another thing that he has learned is that, during the hiring process, "if it's not an obvious yes, it's a no." That took him a while to figure out, he conceded.
It also took a bit of time for him to learn the "80/20 principle: 20% of your time of your effort [for] your clients is probably responsible for 80% of your revenue," plus or minus a few percentage points, he said.
But the flip side of that is also true, he explained: "80% of your headaches — 80% of your problems, 80% of your consumed bandwidth that you wish was not being frittered away … is driven by 20% of your clients."
The "takeaway" for him and his firm was "let's not have those folks as clients," he recalled. When they launched the firm, there was a small percentage of clients who were "enormous headaches" and they decided to drop them. That "turned out to be a brilliant thing," he said.
They now "disqualify" some potential clients — for example, those who are rude to the firm's staff or who decide they don't want a particular item in their portfolio and log into their portfolios on their own and sell it.
