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Does Growing Up Without Wealth Make You A Better Advisor?

By Murray Coleman September 21, 2016

If you’re an advisor who comes from humble beginnings, it might be worth letting clients and prospects know you feel their financial pain.

That’s a key takeaway from new academic research that suggests money managers coming from poorer backgrounds generate significantly higher returns than those raised in more affluent families.

“Our research shows that poorer advisors are arguably more skilled at managing other people's money -- either by working very smart or hard, or both,” says Denis Sosyura, a University of Michigan finance professor who co-authored the report.

The study finds that portfolio managers coming from “families in the bottom quintile” of income data gain more than 3% a year than those whose parents land in the top quintile.

While it focuses on subadvisors and institutional fund managers, such research should resonate with full-service wealth managers, says Debra Brede, president of D.K. Brede Investment Management in Needham, Mass.

The independent RIA, which manages about $700 million, incorporates portfolio management into a broader financial-planning service menu. “If you come from a poor family, the little household expenses that many people take for granted are a big deal,” Brede says.

Having grown up in rural Pennsylvania in a single-parent family with six children who depended in part on food stamps to survive, she stresses realistic long-term financial goal planning. “All of these types of factors – from household spending trends to a client’s aspirations in defining their financial success – go into figuring out how much to allocate to stocks and bonds,” she says.

Conveying a sense of appreciation for the value of money based on past personal struggles is a powerful message for advisors trying to manage portfolios, agrees Leon LaBrecque, CEO of Troy, Mich.-based LJPR Financial Advisors, which manages $640 million.

“Growing up without having everything handed to me, I’ve developed a healthy skepticism about market data and claims by asset managers of outperformance,” he says. “I just naturally gravitate to objectivity when evaluating portfolios – my process strays from becoming too stale and dependent on a few sources for commentary.”

A sliver of LaBrecque’s portfolios are invested with tactical overlays. Still, he says his prudent nature leads him to feel uncomfortable injecting “even a dollar more of risk” into his planning process.

“It’s just ingrained in my upbringing to look under every rock to find nuggets of financial success,” says LaBrecque, whose mother toiled as a waitress at a Detroit-area "greasy spoon" as his father struggled to earn a living as an industrial-machine repairman.

Advisor Mark Germain points to a fear of becoming poor again as a source that drives his work with affluent investors even to this day. In particular, he sees helping to guide investment behavior as a key part of his duties.

Debra Brede

“As someone who grew up without money, I’m very aware of how even the smallest change in a portfolio’s investment mix can create feelings of anxiety for some clients,” says Germain, the CEO of Beacon Wealth Management in Hackensack, N.J., which manages $250 million.

Besides taking a cautious approach to developing risk profiles for clients, he also taps into lessons he learned growing up poor to help affluent parents with a concern about their children becoming too entitled.

Recently a client asked if he could retire early. Germain did some number crunching and reported back that his current lifestyle wouldn’t support such a move. Instead, the advisor suggested an alternative plan where over the next five years his family will work to reduce their household expenses, then develop a plausible exit strategy.

His client approved such a recommendation, which includes no longer paying for his adult daughter’s New York city digs and her "high-end" living expenses.

After discussing the new strategy with all of those involved, Germain discovered that the young woman has actually built a thriving career in recent years.

In fact, he learned she was quite able to pay her own way now. “In this case, my client had just become used to always giving money to his daughter," says Germain. “He’d never really thought about not needing to keep helping out – it'd just become a very expensive habit.”