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.

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Lace Wig commented on Jul 25

    Title

    […]Here are a few of the websites we recommend for our visitors[…]

  2. ceramic mug coffee commented on Jul 25

    Title

    […]Every when inside a although we decide on blogs that we study. Listed beneath are the most current sites that we select […]

  3. ceramic mug factory commented on Jul 25

    Title

    […]Every after in a even though we choose blogs that we study. Listed below would be the latest web pages that we decide on […]

  4. ceramic mug factory commented on Jul 25

    Title

    […]we came across a cool web site that you just could possibly love. Take a appear in the event you want[…]

  5. Salsa dance commented on Jul 25

    Salsa dance

    […]always a big fan of linking to bloggers that I enjoy but do not get a whole lot of link love from[…]

  6. Lace Frontal Wig commented on Jul 26

    Title

    […]we came across a cool website that you could love. Take a look in the event you want[…]

  7. custom printed patches commented on Jul 27

    custom printed patches

    […]that will be the end of this write-up. Right here you will find some web pages that we feel you will enjoy, just click the hyperlinks over[…]

  8. websites for cheap flights and hotels commented on Jul 27

    Title

    […]although web-sites we backlink to beneath are considerably not related to ours, we feel they’re really worth a go as a result of, so possess a look[…]

  9. 24 Hour drug store Near me commented on Jul 28

    24 Hour drug store Near me

    […]we came across a cool web site that you simply might love. Take a search if you want[…]

  10. cold room commented on Jul 29

    Title

    […]the time to study or stop by the content material or internet sites we’ve linked to below the[…]

  11. winnipeg gym commented on Jul 29

    Title

    […]just beneath, are many completely not connected sites to ours, nonetheless, they’re certainly worth going over[…]

  12. کولر صنعتی یزد commented on Jul 29

    خرید کولر صنعتی

    I know this if off topic but I’m searching into starting up my very own weblog and was curious what all is necessary to get set up? I’m assuming having a website like yours would price a fairly penny? I’m not extremely world wide web savvy so I’m not a…