Our confidence is being tested

Is your confidence currently being tested? Of course it is. You wouldn’t be human if it wasn’t. But is the belief in what you do still intact? Would you invest with you?

I know that is a tough question to ask. Let’s face it — no investor has escaped the troubles caused by recent market turmoil. Quality blue-chip equity buyers, “core and explore” proponents and balanced portfolio fans alike are grappling with deep client disappointment. The question is whether there is a governing philosophy that you adhere to through thick and thin when managing client assets.

I have been in this industry for two decades and have witnessed, firsthand, how well-built portfolios can melt away like snow. We all know intellectually that this stage will pass, but what does it really take to get through it? Conviction! Your clients are counting on you to show and maintain leadership. They are looking for you to show conviction and belief in the strategies you recommended in the first place. This is the real challenge advisors face today.

An advisor admitted to me the other day that he is telling clients that he has no idea where they should invest their money. Whether you feel that way or not, this is not what clients need to hear.

Some of us adhere to a philosophy or a governing set of principles when investing for clients. Such advisors can cite historical facts to back up their argument for asset allocation. Some say the real task is owning the right asset mix, not the right security, while others manage portfolios in an ad hoc manner, applying finesse and gut instinct to the management of client money. Many advisors use research or their own due diligence. Regardless of the methodology employed, none of these philosophies are holding up in the short term. What is most important during a time like this is that you have a position that you can rationally defend.

I haven’t met an advisor in the past month who is not struggling, at least a little. I can tell you, though, that advisors who can clearly articulate their methodology are far better off than those who can’t. Why? Clients are usually far more willing and able to stay the course if they feel they are following a philosophy, not simply making a leap of faith. If you can’t say quickly and succinctly what philosophy you use when investing on behalf of clients, it’s time to learn to do so.

A governing philosophy can be rationally explained. A philosophy serves two purposes: First, it can be effectively communicated to your clients and prospective clients to help them understand how you manage their money. Second, it serves you, the advisor, by forcing you to stick to a belief, even when that belief is being tested. This philosophy should be repeated often for the benefit of both parties.

This discussion unearths two important questions. The first is “What if my philosophy isn’t working?” Those who have a philosophy that isn’t working need to ask if it will serve clients over the course of a normal market cycle. If it does, stick to it. If it doesn’t, you have to look at the value proposition you offer clients. If you have positioned yourself as an advisor who can consistently outperform the markets, think again. If you have positioned yourself as an advisor who will participate in the upside of the markets and dampen volatility on the downside, you have a philosophy worth following. The former philosophy is wonderful in frothy markets, but it is quickly met with dreaded disappointment when the markets turn.

The second question is “Where to start if there is no governing philosophy in place at all?” Those who don’t have a philosophy that governs their money management need to think about creating something that is realistic and attainable.

I began in the industry in 1988. At that time, equity markets, developing markets in particular, were robust. You can probably guess where I am going with this. I was the advisor who fully bought the whole “Nick Murray died at 102 and never owned a bond” philosophy. Nick’s great, but that certainly didn’t end well. My mistaken philosophy was oriented toward short-term thinking. While many of the more experienced advisors I knew told me to stick with balanced portfolios, I pursued my 100% equity plan all the way. I couldn’t resist the immediate gratification of making my clients money. Did they thank me for it? Of course they didn’t.

Today is really no different. We are all feeling pain. However, those advisors who adhere to a philosophy that is realistic and defendable are far better off than those who don’t. The unfortunate reality is that there isn’t a methodology or strategy that works in all economic climates. Investing is not yet a perfect science.

For an advisor’s practice to be successful for the long term, the advice and the products and services offered need to offset the costs that clients pay. If your clients can’t understand your philosophy, it’s no wonder they question your value in difficult times.

Shawn O’Brien is head of Shift Consulting. For more information, contact Shawn@SlowDownGoFaster.com.

(12/03/08)