The case for boring in a bull market of DIY geniuses

This article appears in the October 2021 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

One of the most valuable services advisors provide is saving clients from their own stock tips. While investing is just one area of advice, advisors are much more likely to receive a hot stock recommendation from a client than direction on how to structure a trust.

Whether you call them meme stocks, Reddit companies or something else, names like GameStop and AMC amount to the same thing — gambling. And the entertainment factor is part of the draw. The thrill of seeing savings double in a few days is almost insurmountable. Showing clients a graph of a low-volatility portfolio compounding at 6% for 12 years can hardly compete.

Not only do some clients believe they can do better on their own, they increasingly have access to free and complex tools that provide a veil of sophistication. No account minimums, commission-free trading and fractional share ownership are driving people to start self-directed investing early. You’re probably well acquainted with the not-so-subtle marketing of services that encourage clients to cut out the middleman and get rich quick. So how do you peddle boring in a bull market where everyone is a genius?

Fighting investor psychology can be difficult, but talking in relative terms can be helpful. Ask emotionally charged clients if they think other investors make mistakes (and why). This may help them recognize the same traits and behaviours in themselves, and to consider the role of timing and luck in recent meme-stock outcomes. Such discussions can plant seeds that bear fruit when the market takes a turn. There’s always a reckoning when reality intrudes and momentum investing fails, and clients will seek the safe harbour of professional advice.

This soft approach is probably more effective than telling clients they’re investing with less knowledge than professionals and that their major function in the market is to be the greater fool.

Selling problematic stocks that trigger questions from emotional clients may also be a good idea. For instance, selling TC Energy ahead of the 2020 U.S. election would have meant avoiding the inevitable questions about Joe Biden cancelling the Keystone XL pipeline. Switching into Enbridge would have produced equal returns with less drama. While this may seem like hiding the dirty laundry, the end goal is to keep clients on an investing path that will meet their long-term goals.

This is not to say you should sacrifice return. Just like there are mathematical ways to reduce risk in portfolios without hurting performance, you should consider clients’ psychological needs, such as whether they feel comfortable during the ride. Some are more than happy to let their advisor captain the ship, while others need help understanding why that’s best. You can almost always find more boring alternatives with equal expected return to replace stocks that increase volatility and prompt emotional questions.

Sage advice pays off over the longer term. In addition to the traditional risk profile information such as family, job, education and investment knowledge, you may want to identify which clients will question your choices most so you can be more proactive when constructing their portfolios.

The goal is not just to keep them as your client — it’s to keep them from being their own worst advisor.

Dr. Al Rosen, FCA, FCMA, FCPA, CFE, CIP and Mark Rosen, MBA, CFA, CFE. They run Accountability Research Corp., providing independent equity research to investment advisors across Canada. Accountabilityresearch.com