(Bob Baker, AAMA) People feel (and remember) the pain of loss more than the joy of an equal gain.
This psychological dynamic is often referred to in conversations about managing clients through volatility. It’s important to realize that fear can override common sense in investing, but we all know this. And we all tell our clients this.
But what’s the more practical application? Should this fundamental truth change the way advisors approach investment strategy?
Yes. Here’s why.
When you think about a successful investment relationship, what comes to mind? While every advisor builds their business differently, a common theme is clients that are satisfied with the services provided to them.
In other words, a successful advisory business almost always revolves around clients that feel like they are being well-guided toward their financial goals.
What’s the best way to create that feeling? Is it through a portfolio with a high alpha number? What about a strategy with an impressive 3-year return figure?
The answer is, of course, no. [Editor's Note: That said, AAMA has extraordinary numbers . . . you can review them HERE.]
Don’t get me wrong, performance is essential. And the statistics behind a portfolio can be useful in evaluating suitability. But beyond due diligence, these figures tend to fade into the background.
What clients tend to focus on is how they feel as the market ebbs and flows.
Does the portfolio’s behavior align with their expectations? Can they make sense of the management style? Do they understand where growth and decline stem from within the strategy?
To Seek More Stable Client Satisfaction, Seek To Check These Boxes:
Knowing the nature of humans—where fear overpowers opportunity and clarity is sought over ambiguity—we think every advisor should seek to instill a few characteristics into their investment strategy.
Strategies That Perform Reliably
Performance is understandably the first and most often evaluated metric in an investment strategy. And it should be. After all, that’s what the strategy is designed to do—deliver a return.
But what’s in a number? Often times, the 1-year, 3-year, and even 5-year performance figures reign supreme in portfolio evaluation. This is undoubtedly a good starting point, but we advocate a more holistic evaluation. [Editor: again, Bob isn't pointing you at his numbers, but I will. They're right here.]
Take a step back and look at the annual performance of a strategy. Now compare those figures to your client’s risk profile, time horizon, and goals. Does the strategy consistently perform in line with what that client will expect through various market conditions? Would that strategy deliver a comfortable experience while still delivering the growth needed to reach that client’s goals?
This is the definition of reliability – a strategy that meets clients’ expectations, delivering the expected risk-adjusted performance consistently.
Strategies That Are Simple
In the era of smart algorithms, can simple strategies compete?
A quick scan of your preferred TAMP or model marketplace should answer that question easily. But more importantly, consider which strategies are more likely to remove uncertainty from your clients’ minds.
Half of the battle is managing clients’ fear. Uncertainty is fear’s welcome mat. When you remove uncertainty, you create fewer opportunities for fear to override sensibility in the investment experience.
For most investors, that means delivering strategies that they can understand. Investing is already scary. And the world of finance is inherently foreign to the average person. Your clients may struggle to get on board with an algorithm or momentum strategy. But they’ll certainly understand the fundamentals of price, affordability, and earnings.
By keeping it simple, you set the stage for trust and security—for both onboarding clients and managing their expectations (as we’ll discuss in the next point).
Strategies That Are Transparent
Closely related to simplicity, a client-friendly strategy is one that is easy to track and discuss in detail.
Regardless of level of fit, clients will always have questions about their strategies—particularly in volatile markets. The remedy to this challenge isn’t to find a strategy that is never questioned. That strategy doesn’t exist. Rather, it’s to find a strategy that is straightforward to discuss when the questions roll in.
Advanced Asset Management Advisors is a big advocate of fundamental market pricing and sector valuation. We think these strategies are widely reliable, but beyond that, they are REALLY easy to discuss.
Here’s an example:
When a client has questions about over- or underperformance, all we need to do is look at the sector tilts. If we missed upside in a sector that had elevated risk, we can easily point toward the fundamentals and discuss why that level of risk wasn’t appropriate for the portfolio. If we outperformed our peers [Editor: he often does], we can point toward those sector tilts to show exactly why that happened. It’s all about managing risk and reward through clear-cut valuation.
When the process is clear, the discussions tend to be clear as well.
This hypothetical isn’t meant to sell you sector valuation strategies. However, we hope it demonstrates the value of a strategy that is easy to discuss. When evaluating a strategist partner, ask them the same questions you think your clients would ask. The talking points should be straightforward and tangible.
What Do Your Clients Expect?
In most things, people just want their expectations to be met. What do your clients want out of their investment journey? Some may want a more complex strategy. But in our experience, most just want to avoid that life-changing mistake. They want to build wealth reliably. And they don’t want to worry.
For those investors, we think advisors should place a premium on reliability, simplicity, and transparency.
Advanced Asset Management Advisors is an independent, fee-based investing firm that builds and maintains portfolios through fundamental market pricing and sector valuation—a hands-on approach that enables us to seek consistent investment performance for clients.
Click here to learn more about AAMA and their fundamental investment process.