In 1942, the British surrendered Singapore to a Japanese force about half their size. Legend has it that Singapore’s heavy coastal guns, built to defend a sea assault, were difficult to turn around. Expecting an attack from the South, they were surprised by an assault from the North. Unable to turn around with all the cannons, they were left pointed in the wrong direction.
There has been a lot of commentary about the extent to which advisory, investment and custodian fees erode investor wealth. I believe that when it comes to the destruction of wealth, the guns point in the wrong direction. Instead of pointing fingers at our fees, they should be pointing fingers at the asset allocation.
We know how important asset allocation is to long-term investment returns. A client who does not fully understand what risk is and what he is not does not know. By doing the wrong thing, customers destroy more of their own wealth than fees ever will. Why don’t we talk about it more?
As behavioral financial advisors, we need to push back clients who don’t understand the importance of good asset allocation, pushing them out of their natural comfort zone. We don’t abandon them with a wallet they can’t stand. We walk by their side holding their hand firmly through all market cycles.
When building long term investment portfolios for clients, we need to be honest and share our investment wisdom with them. The two most important questions that will dictate the bulk of our clients’ wealth are: what percentage of your money is allocated to global stocks? And how will you behave during temporary market downturns?
An annual drop of about 15% will happen as often as you celebrate your birthday, and the more your investable assets are invested in global stocks, the better the long-term returns you will get. Other variables have minimal impact on these two crucial questions.
Looking at the numbers from the most recent 30-year investment period, it was interesting to see that the extra returns you get from increasing a portfolio’s equity allocation by 20% completely covered an annual fee of $ 1. %! Everything else you do for this client will be free! Yes, more stocks in the asset allocation will lead to increased volatility, but if wealth creation is the name of the game, the returns are there. It’s free lunch if you can stay in your seat.
Almost all great companies have a “story behind the story”, their secret sauce so to speak. The Urban Massage app has made inroads into the luxury spa industry by providing a win-win solution for the masseuse, the business and the client. But their real secret is that they quadrupled the masseuse’s salary, made possible by not needing to rent expensive premises or invest in bloated equipment. Pepsi has a lifetime contract to supply its beverages exclusively to all restaurants in the YUM YUM Brands line. And closer to home, Vanguard has succeeded by relentlessly focusing on investor bottom lines, not least thanks to its status as a mutual company.
I believe our secret sauce, the story behind our story, is the courage to have tough conversations with our clients and push back on their natural misconceptions about money and investing.
One of those conversations is to steer them away from the misallocation of assets. Our clients need to understand where market returns are coming from, and it’s our job to help them become investment professionals. And yes, they need to understand what volatility risk is and how we treat it. This doesn’t mean that every client needs a full equity portfolio, the best portfolio is one you can stick to.
Another difficult conversation is about fees. How we charge and why we charge it. What we provide for these charges and what could be the real cost of not working with us. We are not destroyers of wealth.
Have the tough conversations early on. Include them in your onboarding process. Get the hard work done right off the bat and you could have a perfect customer for life.
We are working in a noble company providing excellent results to clients. We do this primarily by helping investors create an income they cannot survive and by leaving a legacy for the people or causes they love. Sometimes we even have the privilege of helping people break generational cycles, change their family tree for the better.
Let’s not leave this affair with regret. Let’s show customers what’s possible, rather than discovering what could have been.
Andy Hart is the founder of Humans Under Management