What’s Driving Your Value Proposition?
The Myth of Performance-Driven Investing
Pssst—Let me tell you a secret. Actually, it’s not really a secret. It’s a fact of life for advisors.
Sooner or later, your investment strategy will suffer a prolonged period of underperformance. It may be that the active managers you selected haven’t delivered the goods. Maybe you had a reasonably diversified portfolio, which means you weren’t 100% invested in the S&P 500 over the last 10 years.
Hopefully, the downturn is not because you looked in the mirror, saw Warren Buffet staring back, and decided to become a concentrated value stock picker over the last decade. Certainly you didn’t add that on top of your responsibilities for business development, motivating employees, managing client relationships, financial planning, compliance, and . . . I think you get the idea and see the problem.
As an advisor, it’s very easy to build your practice on an unreliable value proposition. Advisors solely focused on delivering exceptional investment performance have likely disappointed their clients because efficient markets are, well—unpredictable.
What Comes First—Products of Process?
In other words, you can build your house on the sand by implicitly making promises regarding investment performance that you can’t keep. Every investment fund product will come and go! Portfolio managers with phenomenal track records today may be long gone 10 years from now.
That doesn’t mean you shouldn’t invest with some of them, but it does mean that you have a choice. Are you going to build your practice around products and the personalities or stories behind them, or are you going to build your practice based on consistent principled-based processes that are simple to communicate and that you and your clients can stick with during difficult periods?
In reality, the greatest investment threat your clients, you, and your practice face is becoming a “forced seller” at a time when risk assets have taken a beating. Like today! Advisors analyze investments based on backward looking time weighted returns (how well did we do not considering the dollars flowing in and out of the portfolio), but our clients only benefit from future money weighted returns (how well did we do with actual dollars flowing in and out of the portfolio). This is not a call to market timing! We all have just witnessed another example of how hard that is to do with 2020 hindsight. However, if you and your clients are going to survive and thrive long-term, your firm will have an investment process that enables you and your clients to avoid “forced selling” of risk assets and reap the benefits of long-term investing.
Process-based value is simple to communicate, and it’s something you and your clients can stick with during difficult periods. Investing is hard! That’s why clients come to you—They need you to simplify investing in a way that is meaningful to them.
Investment plans that stand the test of time are deeply rooted in a disciplined process based on the client’s story. That’s worthy of repeating. Successful investing is always based on the client’s financial life plan.
Creating a Financial Life Plan for Your Clients
Financial life plans are tied to goals, and goals are measurable, time-bound, and specific. This means that investing begins and ends with cash flow. And that’s why we believe that every client should have a detailed plan for why, how, and what they are investing.
This plan can be documented in an Investment Policy Statement (IPS). Here’s an illustration of a decision funnel for how investment plans should be designed. Start at the top and work down, level by level.