Advisors have spent much of the last two years — and an exhausting two years they were — telling clients not to worry about the day-to-day shifts in the market, that their goals are long-term.
But are advisors applying their own mantra?
According to Mark Matson, the chief executive officer and founder of Matson Money. all too often advisors preach long-term goals to clients while touting the hot new active manager they’ve just discovered. Or the new fund that is sure to beat the market over the next six months.
Even veteran investor Burton Malkiel is guilty of not being able to walk the talk. In his new book The Elements of Investing, in which he touts a traditional, index-based buy-and-hold strategy, Malkiel reveals in the section of the book entitled “Confession,” that he “delights in buying individual stocks and has a significant commitment to China.”
Though Malkiel calls his interest in China “a major story for his grandchildren,” it’s apparent that even the most persistent buy-and-hold giants have trouble sitting on their hands as the world’s markets gyrate.
In the same section, Malkiel’s co-author Charles Ellis revealed his “major commitment” to Berkshire Hathaway stock, one he has no intention of selling. Figures.
“Though advisors say they’re using long-term strategies, they put short-term strategies on top of them. Not even these guys can maintain a long-term strategy. Think what that does to the investor’s mind,” Matson said.
The answer? It focuses them on short-term gains and—in crises like the one we saw in 2007 and 2008—on short-term losses, leading to panicked clients and shrinking assets under management.
While advisors certainly can’t control the market’s volatile swings—and while we’re all sure to see our fair share of bull and bear markets throughout our lifetimes— advisors can help clients fare far better once the next bear comes out of his cave.
It’s all about education.
“They have to understand how much money they can lose in down markets,” Matson said. “You need to show them, if you buy this portfolio, you would’ve lost X amount in the recent downturn.”
Then he added: “This will happen again—are you okay with that?” This way, advisors can create a portfolio that is truly in line with their clients’ risk tolerance.
Larry Swedroe, a principal and director of research at Buckingham Family Services in St. Louis, puts this in terms of Pascal’s wager, in which the consequences of being wrong far outweigh the benefits of being right. The consequences of going from rich to poor should dominate asset allocation decisions, he said, who insists that most advisors fail to tell their clients it can happen again.
“You need to have a plan with the virtual certainty that there are going to be big bad bear markets at some point,” Swedroe said. (For more from Swedroe, check out: What We Learned From the Market Collapse)
“There’s a 90% chance that if I’m 80% in equities, I’ll be alright," Swedroe said. "There’s a 5% chance of failure. If that 5% shows up and I can’t make it, that’s a bad asset allocation. We need to think of the plan B for our clients.”
Looking for a value proposition that sets you apart from the rest in this cutthroat industry right now? I think you’ve just found it.
“In the seventies, people started offering financial planning to differentiate themselves," Matson said. "Today, financial planning is the new commodity, as anyone can create and monitor a plan online for free. The only long-term value proposition you can give is to help people understand that no matter how many tools you give them, their behavior is going to be dysfunctional. They need you to keep them disciplined.”