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The “Warren Buffett approach” as a sales pitch?

The name on everybody’s lips these days is Warren. Buffett that is. As the current “bull market” shows signs of a slowdown, investors are seeking “new” paths to growth. It’s no wonder. The headlines continue to shout about new highs followed by precipitous drops, and investors are out of practice at navigating such unpredictable waters. It seems the perfect time to follow the wisdom of the Wall Street sage, Warren Buffett, has arrived. That’s precisely why several behemoth financial services firms have recently launched aggressive marketing campaigns leading with Buffett’s name. I have no doubt the sage himself would be mortified to know what they’re actually selling.

In reality, what these firms are pitching is a collection of individual stocks based on their research desk’s findings. They have simply selected a handful of US stocks that may (or may not) be in the Berkshire portfolio, back-tested them for three years to illustrate great growth, and then bought these stocks for every new prospect that walks in the door. It’s an easy sell because, after all, who can argue against Buffett? 

For financial advisors like me who are fiduciaries committed to our clients’ best interests—not increasing the bottom line of a large corporation—this tactic is infuriating. Not only is the marketing utterly misleading (Warren Buffett is a devoted follower of Benjamin Graham’s technique of long-term value investing), but also, because it’s so slick, our industry is seeing clients we have worked with for years being pulled off of a wiser course. Instead of sticking to carefully designed investment strategies that are built to deliver long-term financial strength, they are being persuaded to adopt a short-term growth strategy that is most certainly not Warren Buffett-approved. (It feels a whole lot like watching your best friend fall for the wrong man, except that, in this case, the consequences can be even more devastating!)

If you’ve heard the pitch, you know how compelling it can sound. Here’s why I urge every investor to be cautious about the “Warren Buffett approach” and to work with a trusted fiduciary who is truly working in your best interest:

  • No commissions—ever. Fiduciary fees are 100% transparent. Because we do not receive commissions for any solutions we recommend, we have no incentive to recommend products that don’t address your needs and your goals. Yes, we receive a straightforward fee for the services we provide (usually a small percentage based on your assets under management), but our real reward comes in helping each client create a path to financial confidence. We don’t get a free cruise for bringing in new clients, and we don’t sell false promises. I recently read this article that raised alarm bells about physicians being incented by pharmaceutical companies for prescribing certain drugs. By choosing a fiduciary, you can rest assured that your “prescription” is selected to do one thing: improve and maintain your financial health.
  • Protection through diversification. A carefully diversified portfolio is not designed to beat the market, but rather to grow your assets over time while protecting your nest egg from market volatility. In certain market conditions, a portfolio that includes a cushion of bonds and international stocks that are loosely correlated with the US stock market will generally deliver returns that are lower than the S&P, especially in the current market in which US stocks are the best performing asset class. While that can be a bitter pill to swallow at the moment, it’s important to stay disciplined and avoid the siren song and recency bias that can pull you off course. Successful investors stay the course.
  • A risk-averse strategy. Harry Markowitz, the father of Modern Portfolio Theory (MPT), was awarded the Nobel Prize in economics for his groundbreaking theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk. He stressed the fact that risk is an inherent part of higher reward. MPT assumes that an individual investment's return is less important than how the investment behaves in the context of the entire portfolio. At Klein Financial Advisors, we employ the tenets of MPT that have been in use since the 1950s to construct risk-aware investment strategies. MPT is still in use today because of one thing: it works.

Of course, not every non-fiduciary advisor is a shyster. I’m sure there are plenty of very well-meaning advisors working for these large firms who do want to do what’s best for their clients. However, how they are rewarded at the end of the day isn’t always aligned with that goal. Just as today’s teachers are in a quandary by having to “teach to the testing standards” that are imposed from on high, commissioned financial advisors are in a situation they can’t win. Their hands are tied and, sadly, their clients often pay the price. The one way you can rest assured that your financial advisor is truly working in your best interest is to work with a fiduciary—a Certified Financial Planner™ (CFP®) and member of NAPFA—who is legally bound to do just that. It’s advice Warren Buffett would most certainly applaud.