There’s a lot more to successful financial planning than a whizz bang investment strategy. A whole lot more. Everything that is required can be encapsulated by one single word: BEHAVIOUR.
The depth and breadth of the work required to behave in the markets is infinite in my opinion. It must be as none of us have the faintest idea what we might have to deal with tomorrow, or the day after.
The Vanguard report mentioned below is well worth a look: https://advisors.vanguard.com/iwe/pdf/FASQAAAB.pdf as are other research on adviser value at the bottom of our new “Essential Reading” page on our website.
“Vanguard originally rolled out their advisor’s alpha concept in 2001. It’s updated each year and they say the amount of value a successful advisor can add to a client is “about 3%” per year.
The breakdown looks something like this:
- Portfolio construction (suitable asset allocation, keeping expenses low, asset location, etc.)
- Wealth management (rebalancing, intelligent spending down of the portfolio, tax efficiency, etc.)
- Behavioral coaching (advisor guidance)
The estimate for behavioral coaching is the highest of the three at roughly 1.5%. Obviously, this is almost impossible to measure because there are no counterfactuals. Successful investing is the absence of big mistakes but it’s tough to quantify things you don’t do.
But let’s set that aside and assume this behavioral coaching does add value to the client’s bottom line. Many advisors claim this behavioral coaching includes things like helping clients stay the course or avoid selling out during a bear market.
No client, let alone one with hundreds of thousands or millions of dollars wants to hear about behavioral coaching because it can come across as demeaning. No one wants to hear how emotionally inferior they are.
I want to put a little meat on the bone to this argument.
Sticking with your plan during a bear market can be enormously important but you don’t add value by just by talking people off the ledge during a sell-off.
Since World War II there have been 11 bear markets in U.S. stocks with losses of 20% or worse. That’s roughly one every 7 years. Good luck if you plan on proving your worth as an investment advisor once every 7 years or so.
“Stay the course” is good advice in a fortune cookie kind of way. But the heavy lifting should be done well before the onset of a market crash.
Good investor behavior is not done in the moment but in advance if it’s going to work and much of it doesn’t even come across as coaching at first blush.
Here’s the work that’s required up-front to stick with an investment plan, for both clients and advisors alike:
Explaining your investment process. If you can’t explain your investment strategy in a way people can understand it, you probably don’t understand it yourself (or at the very least, you don’t believe in it). When someone doesn’t understand what they’re investing in and why it becomes harder to stick with it.
Building a portfolio that suits the client’s risk profile and time horizon. A good wealth manager has a process that’s universal but each client’s plan should be personalized to their willingness, need, and ability to take risk. A great strategy someone can’t hold onto is useless.
Clarifying client goals. Two of the more underrated skills of a good advisor are (1) listening and (2) asking the right questions. Asking the right questions to clarify client goals, needs and desires is a huge part of any sustainable investment plan.
Benchmarking and course corrections. Financial goals are typically far off into the future so it can be difficult to measure progress along the way (especially since life invariably gets in the way and changes those goals). That’s why financial planning is always a process and not an event.
It’s also why the most important aspect of a good plan comes from periodically benchmarking progress towards the client’s financial and life goals. It becomes easier to take avoidable risks if you don’t know how close you are to achieving financial success.
Setting realistic expectations upfront. Expectations management is an ongoing process but it begins at the outset of the advisor-client relationship. The “trust us, we got this” era of financial advice is over. Clients need to know exactly what they’re signing up for and more importantly, what they’re not signing up for.
The expectations-setting process includes things like expected returns, the durability of the portfolio under a number of different scenarios, drawdown profiles, and the potential drawbacks to any particular strategy or asset class within the portfolio. No one knows exactly what will happen but it helps to provide a general range of results one can expect.
Expectations should also be set in regard to client communication.
Proactive and ongoing communication. Explaining your investment process and setting expectations should not be a one-time event. Advisors need to be in periodic contact to provide updates, education, and thoughts on what’s going on in the markets and portfolio.
“Ignore the noise” is easy to say but next to impossible to do. That’s why an investment advisor’s job when communicating to the client is to provide context, perspective, and advice in terms of how to think about market, economic or life events as it pertains to the client.
Understanding your clients. Clients run the gamut in terms of their need for communication from an advisor. So it’s up to the advisor to understand which clients need more attention at certain times and which ones need the occasional check-in when necessary.
Everyone deserves periodic communication from their advisor but some need more than others, simply because they’re interested in talking about financial planning, portfolio management, or the markets or because they need reminders about their goals and objectives.
Develop trust with the client. No client is ever going to stick with an advisor-developed strategy if there’s no trust involved in the process.
There must be:
- Trust that the advisor has been thoughtful about their investment process.
- Trust that the advisor put time and effort into portfolio/plan construction and risk management.
- Trust that the advisor has taken the client’s needs, fears, desires, and risk tolerance into account when crafting their investment plan.
- And trust that the advisor knows what they’re doing as a professional investment counselor.
All relationships must be based on a foundation of trust to succeed. If there’s no advisor-client trust it doesn’t matter what else you do, it’s going to be hard for that client to follow through with the plan you’ve created.
If any sort of advisor alpha exists, it occurs because of all the systems, expectations, planning, and trust they’ve developed throughout the process.”
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