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We’re in the Client Outcome Business, Not the Investment Performance Business

Posted by: Tom McKeon on May 23, 2018

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Asking an advisor about performance is the wrong question. Your outcome will be far more dependent on his fees and business model.

Not too long ago at a community event someone asked me what I did for a living. On learning I was an investment advisor the person asked, what is your investment performance? I wanted to tell him that he asked the wrong question. But of course I gave hime several honest answers, none of which provided any investment performance figures.

 

Once upon a time I was an active portfolio manager and there was a time when I would have eagerly answered “my investment performance is xx%, and I have outperformed the (insert your favorite benchmark) net of fees by x.xx% over the past 1-3-5-7 years.” What I could not answer was whether my outperformance of the benchmark was due to skill or luck. And therein lies the rub.

 

Fortunately for me and my clients, performance chasing and beating a benchmark at an appropriate level of risk is no longer an appropriate approach to achieving their unique goals and objectives. So our business model and fee structure has evolved to remain relevant and competitive.

 

It’s About Client Specific Outcomes

The introduction, adoption and ascendancy of ultra low-cost, index-based ETFs has changed the advisory business. Some of us advisors understand this and now build optimally efficient, broadly diversified, globally allocated and low-cost  portfolios for clients. Many more advisors still cling to an investment model of yesteryear that come in several typical packages:

 

  • picking stocks in one slot (e.g. US Large Cap stocks).
  • picking expensive and actively managed mutual funds
  • shipping the entire client account downstream to a turnkey vendor
  • charging clients 1.0% to 1.5% for the above services

 

These portfolios typically cost more, return less, miss out on the benefits of a global asset allocation and broader diversification, and expose client portfolios to greater risk…a quadruple whammy of terribleness.

 

So my answer to the initial question goes something like this:

 

I have multiple clients with multiple unique goals, objectives and risk tolerances, so I build broadly diversified, globally allocated, partially hedged, completely liquid, fully transparent, ultra low-cost portfolios designed to accomplish their objectives with the lowest possible risk exposure.

 

Of course clients engage advisors like Clothier Springs to deliver some type of investment returns…that is a given. All asset owners who engage an advisor have some liability (retirement, net worth, college, philanthropic, etc.) they seek to fully fund. But it is not the gun-slinging “did you beat your benchmark” kind of performance. It has evolved to be a client-specific return objective and risk budget kind of performance. For all the right reasons.

 

The value provided by advisors like Clothier Springs has ascended the investment decision hierarchy from stock-picking to reside squarely and finally at the asset allocation level. ETFs provide ultra low-cost pure market exposures. Investment policy, asset allocation and periodic rebalancing of the asset mix do all of the heavy lifting.

 

 

Asking the Right Question(s)

The more pertinent questions to ask an investment advisor are now:

 

  • How do you build portfolios?
  • How many providers are involved in managing my account?
  • What is the overall fee structure (yours and any downstream vendors)?
  • Who actually makes investment decisions (your firm or outsourced)?
  • Are you a fiduciary?

 

The answers to these questions will have a far greater impact on your investment outcome than “what is your performance” or “did you beat your benchmark.”


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