INVESTING WITH CLARITY® BLOG
What Am I Paying You For?
October 1, 2019 9:18:10 AM
One longstanding challenge for financial advisors who engage clients in a fee-based portfolio management environment is how to quantify the numerous and invaluable intangible services they typically provide. Unfortunately, investors, more than ever, are laser-focused on so-called tangible characteristics such as short-term returns and fees. We say unfortunately because investors, based on the ongoing Dalbar Study, continue to deliver dismal returns based on their own destructive behavior. Although this destructive behavior is captured in many different cognitive biases that cause investors to make very poor buy and sell decisions, landmark research has discovered that it’s what investors don’t focus on that can really do them harm. No one proclaimed this better than legendary investor Benjamin Graham who said on numerous occasions:
A little while back we composed a summary writing of several research studies that we compiled and used to make the following points:
- Investors continue to be their own worst enemy, supported by the annual Dalbar QAIB Study which highlights the annual deficit returns.
- This destructive behavior is magnified in what has now become known as the Behavior Gap, defined as the difference in terminal wealth between a fund’s total return and the investor’s return in the same fund.
- The sad reality is that most advisors do a poor job in leading their clients and serve more as a dysfunctional collaborator in a co-dependent relationship
- Financial advisors who view themselves as “Investor” Managers vs. Investment Managers are better equipped to analyze the true problems that plague investor and is supported by research done by Meir Stratman in his research paper; “The 93.6% Question of Financial Advisors.”
- Advisors who use specific planning strategies geared towards income creation and tax liability management add nearly 2% of annual incremental return based on the landmark research; titled “Alpha, Beta and Now…Gamma” by Morningstar Research Analysts David Blanchett and Paul Kaplan.
Over the years, as we have waited for the results of the famed Dalbar QAIB every spring, we hope for investor behavior to make a turn for the better. However, each and every year, we continue to see the same disappointing results. As the Dalbar Report has shown for several decades, investor returns are damaged by their irrational behavior which leads to extremely poor returns which accumulate like a snowball moving down Mt. Everest. It is our belief that many advisors shirk their main responsibility, which is to proactively lead their client and guide them in a direction that will curtail self-induced mistakes while providing constructive critique and pushing back when investors tend to desire to go astray. As Advisors, when we view ourselves as Wealth Mentors of Financial Physicians, we seek to identify the client’s natural behavioral biases and manage them before the investor is hardwired to make a decision based on emotion that would be ultimately detrimental to their own wellbeing. Think of an investor taking on their own brain in a boxing match with the referee (the Advisor) overseeing the match providing the guidance as needed. A referee can stop the match on a technical knockout or can encourage that the fighters continue onward. Just the same the Advisor shows compassion or tough love when needed but never steps outside the ring to remove themselves from responsibility.
Unfortunately for many years, advisors have focused on appeasing clients at every whim only to see them jump ship based on disillusionment caused by investors not being able to justify their fee. With the DOL Fiduciary Rule and Robo-Advising front and center, advisors are facing even stiffer competition than their own peers. Good advisors must not lose heart and realize that not only are the good ones worth every penny but clients should be begging them to sign on. Top advisors learned a long time ago it is not about selling past performance or some slick product, rather it is about adding value through financial mentoring and counseling investors not to be their own enemies. By taking this approach it closes the dramatic behavior gap exposed by the Dalbar QAIB Study and leads to deeper and more rewarding client experiences. When the question is posed, “So what am I paying you for” one should be able to confidently articulate several reasons why no doubt.
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