The True Role of the Advisor
Last month’s Truepoint Investor commentary reviewed the wealth destruction that routinely occurs as a result of the average investor’s counterproductive behavior. The following passage from The Excellent Investment Advisor, a book authored by Nick Murray, sums up this phenomenon:
“At the end of an investor’s life, less than 5% of his total lifetime return will come from what his investments did versus other, similar investments. The other 95% will come from how the investor behaved. And the primary determinant of that behavior will be the quality of the advice he got, or didn’t get.”
While good advice doesn’t have to be expensive, no advice or bad advice can cost an investor dearly. Unfortunately, much of the investment industry, inclusive of the financial media, is focused on delivering advice that is profitable for the industry but not the investor.
The true role of the advisor is not to forecast the next hot stock or fund, but rather to develop a sound long-term asset allocation strategy that provides the client with the greatest likelihood of achieving big-picture financial objectives. The most important factor to consider is not the individual investment vehicles; it is the careful combination of these investments within the portfolio that matters most.
However, developing a thoughtful investment plan and ensuring that assets are properly located (i.e., taxable vs. tax-advantaged accounts) only comprise the preliminary steps toward investment success; more important is the ability to adhere to the plan throughout the inevitable turbulent periods of panic and greed.
As referenced by Murray, much of our value as advisors lies in our ability to bring discipline to the investment process. This includes rebalancing in the face of market extremes and the consistent employment of strategies such as tax loss harvesting to maximize the efficiency of the portfolio. In short, if we can help our clients avoid big mistakes, we will have provided significant benefit.
Sophisticated people often find investment success to be elusive because its drivers appear illogical or counterintuitive. Unlike in business or education, greater levels of activity and effort rarely produce improved results. In fact, applying this intuitive approach to the world of investing often leads to inferior returns. Additionally, our human behavioral tendencies strongly tempt us to take action in our portfolios at exactly the wrong times. These factors combine to create a frustrating, and often financially damaging, experience for many investors.
The single greatest opportunity we have to add value as advisors is to help minimize or even eliminate the stress that our clients feel about the investment process; thus allowing them to focus on their non-financial lives and cease worrying about their money. Investment counseling on long-term goals and appropriate investment policy and asset mix is our true professional calling. When the right objectives have been defined for the investor, and academically proven investment policies have been adopted, disciplined operational implementation will deliver long-term investment success.