The hardest part about what we in the advice business do is managing investor expectations and behavior. The other stuff may be more interesting or get lots of attention – but it’s largely secondary. My friend James Osborne did an important post about asset allocation last summer that got me thinking more about this topic today.
Thanks to quantitative databases filled with market stats, software programs brimming with options and spectacular advances in asset management products, the portfolio allocation part is much easier than ever before. We can all create models or use the portfolios of outside managers and demonstrate their efficacy with a nearly unlimited array of backtesting and projection tools.
This is an age of miraculous efficiency, unprecedented innovation and incredibly democratized market knowledge.
But that’s the fun part. That’s not the challenge.
The real challenge is keeping our clients from acting on their worst instincts. It’s keeping the Recency Bias in check, the performance-chasing impulse restrained and the grass-is-greener wolf away from the door. Easy in theory, hard in the real world.
If we can do these things day-in and day-out, with the vast majority of our practice, we are going to be successful advisors whose clients are able to retire and fund their hopes and dreams.
If we cannot, then our clients will fail and, eventually, so will we.
It’s very simple.
I don’t care how “optimized” our models are or how much math we have behind them – if we can’t keep our clients in them, what’s the difference? A fantastic portfolio that our clients can’t stick to is worthless, we may as well be throwing darts at ETFs.
It won’t merely be the depth of the next sell-off, but the duration of it that will give us the most trouble. Investors will have the urge to sell or to trust the first charlatan they hear crowing in the media about how they called the top. They’ll be drawn to strategies and funds that happened to have done well in a short period of time because they will be convinced that they offer “the answer” – all of the upside, none of the downside. They will second-guess everything that once made sense to them once the old stress fractures of the market become visible again. They will forsake the data that tells them not to act rashly, opting instead for whatever seems to be the quickest fix – a move to cash, a move to gold, a Black Swan fund…anything!
They will, once again, ignore history and even common sense. They will forget all about the things that matter and the time frame that is relevant.
They will, in short, behave as investors always have since the beginning. And in some cases, it will cost them everything.
The automated (robo) advisors will run into this problem during the next downturn, as will I and virtually all of my industry peers. Our responses will be all over the map.
Some advisors will emerge from this period having done more for their clients than others. Some will fight the tide and work their asses off on education and communication to get their clients through. Others will fail. They will rely on email blasts or try to run out the clock or even worse – they’ll give in to the worst requests and demands of the clients they’ve sworn to protect. They’ll violate a sacred trust in the name of expediency, allowing investors to work against themselves out of a misplaced fear of “losing the relationship.”
It’s best to start thinking about this sort of thing now, in the salad days, and to be preparing ourselves for the inevitable. Even if it doesn’t begin this year or next. It’s coming. How we prepare our practices and our people in advance will be critical.
This is the challenge. This is how advisor fees are either earned or not.
Portfolios are now free – valueless. Advice, on the other hand, is invaluable – but only if it’s delivered with meaning and when it counts.
Photo credit: pikadilly
Recommended for You
BOSTON (AP) — Ben Affleck requested that the PBS documentary series "Finding Your Roots" not reveal he had a slave-owning ancestor, according to emails published online by whistleblower site WikiLeaks, and the information never appeared on the program.Associated Press
Some oil stocks have sold off well below oil prices.USA TODAY
Before you get too excited and start booking flights to Las Vegas for the $400 million May 2 fight between Floyd Mayweather Jr. and Manny Pacquiao, let us be clear: These $10 tickets are not for the actual fight, but for the weigh-in. Under Nevada State law, weigh-ins have always been free for the…The Fiscal Times
Why does Guy Adami think Ben Bernanke is going to be one of the most vilified people of the 21st century?CNBC
247 Wall St. could not help but notice four analyst calls this past week in which upside of 50% to 100% was predicted for four biotech and specialty pharma stocks.24/7 Wall St.
Physicians are finally speaking out against Dr. Mehmet Oz and the "quack treatments and cures" he promotes to the huge audience of his television show.Los Angeles Times
As Iraqi Prime Minister Haider al-Abadi was meeting President Obama and his cabinet in Washington, D.C. this week to ask for more U.S. military aid, ISIS was regaining its momentum and recapturing territory in Iraq. The group took control of Iraq's largest oil refinery for a day and is threatening…The Fiscal Times
Angels outfielder Josh Hamilton has put his mansion-estate in Newport Coast on the market for $16.5 million.Los Angeles Times
When it comes to picking stocks, Mad Money's Jim Cramer says cash is not always king. "If you buy a stock just because it's sitting on a mountain of cash, you could get crushed, he says."CNBC Videos
Being disorganized can cost you money, and if you trim your stuff, you may slim down, too.USA TODAY
WASHINGTON (AP) — United Airlines stopped a prominent security researcher from boarding a California-bound flight late Saturday, following a social media post by the researcher days earlier suggesting the airline's onboard systems could be hacked.Associated Press
BEIJING (AP) — China's Central Bank said Sunday that it will cut its bank reserve requirement ratio by 1 percentage point to stimulate more lending into a slowing economy.Associated Press
Want to buy your first home with little or nothing down and maybe get a refund on part of your realty agent's commission?Los Angeles Times
A confident OPEC stated that demand for its oil is likely to increase in 2015. Additionally, it believes that U.S production will decrease, starting this fallOilprice.com
Comcast and Time Warner Cable will hold a vital meeting with the US Justice Department this week in an attempt to allay the concerns of antitrust officials about a merger of the country's two largest cable ...Financial Times
By Alan Baldwin MANAMA (Reuters) - Formula One world champion Lewis Hamilton won the Bahrain Grand Prix for the second year in a row on Sunday with Ferrari's Kimi Raikkonen back on the podium to deny Mercedes another one-two finish under the floodlights. "I am gunning for it," Hamilton told triple…Reuters54 mins ago
Dear Liz: What can I do to stop my broker from deducting trading fees from my Roth IRA contributions, which I make monthly? Let's say I invest $420 each month, but the broker takes $7, or $84 a year. Shouldn't ...Los Angeles Times
Issues of margin trading, a surge of individual investors into local shares, a ballooning stock market, and a slowing of the world’s second largest economy sent the largest China ETF by assets plunging ...24/7 Wall St.
A bankruptcy court is giving Standard Register Co. permission to obtain $155 million in financing that was arranged prior to its filing for Chapter 11 protection. On Thursday, Judge Brendan Shannon issued the order, which allows the Dayton-based company to secure the credit lines. Both are existing…American City Business Journals