Investors reflect
We’re all trying to figure this out. Individual investors are thinking hard about the entire investment process and the future of their holdings. Tough questions like expected future returns. Like can I meet my retirement goals? Like the value advisors are providing.
Financial advisors are also doing some soul searching
Advisors are doing the same type of soul searching and also asking hard questions. Am I providing value? Am I offering the best service to my clients now and how am I positioned to do that in the future? At least some of them anyway. Bob Clark at Investment Advisor magazine has always dealt with issues.
In his most recent article, Clark describes the history of financial advice. According to Clark, advisors enjoyed a golden age of investment advice which was driven by low taxes, negligible inflation, and a booming stock market.
So, in light of what’s occurring before our eyes, Clark asks:
But what happens if the “Golden Age” is coming to an end? The Federal deficit that exploded under Bush and seems to be spiraling out of control under Obama has the potential to choke off our economic recovery for the foreseeable future. If that happens, creating volatile “trading range” markets with little or no overall gains, investment success will shift away from allocated buy-and-hold portfolios that take what the market gives, to stock picking, market timing, commodities, and dare I say, speculation.
I have no idea whether Clark is right but assuming he is, Clark envisions a financial advisory business that needs to step-up and provide real-time advice that takes advantage of the ongoing volatility in the markets. Not buy-and-hold. If that’s the case, Clark envisions two options:
- hire talent: Since most advisors are more generalists than experts in broad economic issues, Clark suggests that we’d need to hire these types of experts. It’s a possibility — an expensive one, but certainly, there may be room for more Chief Investment Officers at boutique, independent investment houses. Ultimately, Clark feels the cost may not support the benefit for such hires.
- continue to outsource investment advice: Clark weighs in with this answer. In addition to the savings in “in overhead from not managing client portfolios or dealing with backoffice, trading, confirming, reconciling, reporting, etc. more than offsets the additional expense”, Clark feels this solution further places the advisor on the side of his or her clients by helping to manage this process.
I heard from Cathy Curtis (check her out on Twitter as well here) who runs a chic, financial planning firm addressing specific needs of women yesterday who said that “My problem with outsourcing portfolio management -another layer of fees for client…how much are they willing to pay?”. It’s a good point and one that will need to be explored.
So, where does that leave us?
- Financial Advisory business:
- Skillset changes: Will the trends to outsource more actual fund management increase with a demand for more niche, specific skill sets? Or, will advisors start to bring this competency in-house? I tend to think that the former (outsourcing) will trump hiring or becoming domain-experts.
- Value proposition: How do advisors continue to market their value prop? Is being really down, but not down as much as major indices enough? How do fees play into this?
- Investors:
- Do it yourself: Will there be a larger move to DIY (Do-it-yourself) investing or after the pummeling, will investors turn to professionals to help sort things out?
- Buy and hold: With the mantra that buy and hold is dead, is this really a good thing for investors? Indices were way down last year but Citibank was down way more. Do I really want to be picking my own stuff and get into trouble?
I am not pretending to know the answers to any of these questions but the financial advisory business seems to be facing a crucial, defining moment right now as pros and individuals alike are reassessing the roles of financial markets.
Further Reading: Check out an article we’ve written about the future of the investment advisor and where the business for some advisors may lead.
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