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.