The Challenge

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.

 

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

What's been said:

Discussions found on the web
  1. aluminum french doors commented on Sep 17

    Title

    […]here are some links to web sites that we link to mainly because we assume they’re worth visiting[…]

  2. best aluminium windows posted on Sep 17

    Title

    […]that may be the finish of this post. Here you will discover some websites that we feel you’ll enjoy, just click the links over[…]

  3. 地產經紀 commented on Sep 18

    Title

    […]although web-sites we backlink to beneath are considerably not associated to ours, we really feel they may be truly really worth a go by, so possess a look[…]

  4. خرید vpn commented on Sep 19

    vpn ایفون

    It’s heading to be finish of mine working day, nevertheless prior to end I am reading this fantastic publish to improve my knowledge.

  5. خرید وی پی ان commented on Sep 20

    vpn ایفون

    Hey! I know this is somewhat off subject but I was wondering if you realized in which I could get a captcha plugin for my remark form? I’m using the very same site platform as yours and I’m having troubles locating 1? Thanks a good deal!

  6. وی پی ان پر سرعت commented on Sep 20

    vpn ایفون

    Thanks for another useful world wide web website. The place else could I get that sort of details prepared in this sort of an ideal approach?I have a venture that I’m just now running on, and I have been at the seem outfor this kind of information.

  7. Buy IELTS certificate online commented on Sep 20

    Title

    […]Wonderful story, reckoned we could combine some unrelated information, nevertheless genuinely really worth taking a appear, whoa did 1 master about Mid East has got much more problerms too […]

  8. خرید وی پی ان commented on Sep 21

    vpn ایفون

    Check beneath, are some fully unrelated web-web sites to ours, nonetheless, they are most trustworthy resources that we use.

  9. اکانت وی پی ان commented on Sep 21

    vpn ایفون

    It’s likely to be end of mine day, nonetheless before complete I am reading this fantastic submit to enhance my experience.

  10. خرید vpn برای کامپیوتر commented on Sep 22

    vpn ایفون

    Appreciating the time and effort you set into your site and comprehensive info you provide. It’s excellent to appear across a website every as soon as in a although that isn’t the very same unwanted rehashed information. Superb study! I have saved your…

  11. وی پی ان پر سرعت commented on Sep 22

    vpn ایفون

    I’m actually loving the theme/layout of your net internet site. Do you ever run into any world wide web browser compatibility concerns? A small number of my website audience have complained about my website not functioning properly in Explorer but seem…

  12. اکانت وی پی ان commented on Sep 23

    vpn ایفون

    With regard to ergonomics and the sophisticated technilogy Heuer reproduction watches have been the amazing samples of sports watches.