“The best interest of the client is not just lip service; it's a way of life.” – John Lohr
Last week we wrote about The Vanguard Effect, and how a forward-thinking company has driven fees and expenses lower across an entire industry. This dynamic, the pending DOL rule and the rise of so called robo-advisors are just a handful of trends causing tectonic shifts in the financial advisory landscape. Firms are being forced to consider how they get paid and what value they truly provide, which is, of course, a fantastic thing for consumers.
Unfortunately many in our industry don’t justify the fees they charge, and all too often it’s the firm who benefits at the expense of the individual investor. Opening an account and creating a passive “set it and forget it” portfolio no longer justifies a 1% (or greater) “management fee”, nor does selecting individual securities to hold in lieu of funds. These exercises simply add no value above and beyond what a consumer can easily do for themselves for next to nothing at an online brokerage. What’s more, most investors don’t realize they’re paying their “advisor” to spend the vast majority of his or her time on business development rather than actual client service. As John Lohr said in a recent article on Seeking Alpha:
The days of the traditional financial representative hanging an investment advisory shingle out, giving a client a 10-question questionnaire, putting the client in a couple of mutual funds and sitting back and collecting 1% are going, going...gone.
All that said, we concluded our insight last week by pointing out that not all fees are created equal, and there are some costs that are still worth incurring. There are still many extremely valuable things a financial advisor can do to deliver tangible long-term value and justify their fee. Here are a handful of our favorites.
Defining and prioritizing objectives
Most people can’t fully articulate what it is they’d like to achieve financially. Conversations around this topic are some of the richest we have with our clients, and getting to the point where we can name, quantify and prioritize specific financial objectives can provide a powerful amount of clarity.
Active asset allocation
We believe there is more value to be added in determining when and how much exposure to have in stocks (or any other asset class) rather than determining which specific stocks to hold. This is particularly true as it pertains to systematically avoiding large drawdowns, which is the whole goal underpinning our MarketVANE trend following model.
Striving for true diversification
True diversification is achieved by combined multiple assets that behave independently of each other into a portfolio. Advisors should proactively look for investment opportunities that will complement traditional investments in stocks, bonds and hard assets.
Truly holistic planning
It’s not all about the investments. Our holistic planning conversations encompass goal setting, psychology, balance sheet structure, spending and savings habits, tax efficiency, insurance and philanthropy. Often times the value added in these conversations far surpasses the investment management aspect of what we do.
Managing behavior and emotions
Investors have more access, transparency and mobility with their investments than ever before. This is good thing, but it can also make it too easy for people to exhibit counterproductive behaviors. Helping clients manage their own behavior and emotions can be an incredibly valuable exercise for advisors.
Making clients’ lives easier
This one can take any number of shapes and forms. It means going the extra mile, maintaining a willingness to being inconvenienced and being open to doing things you don’t get directly compensated for. There’s no better way to surprise your client and add value in unexpected ways than by looking for opportunities to make their lives easier.
In summary, the ease of use and associated costs of investing will continue to move in consumers’ favor, putting strain on many of the common business models in our industry. But there are still plenty of value-add opportunities for advisors who are willing to do the hard work. We still have a long way to go, but we are determined to deliver a remarkable client experience resulting in real, tangible value over time – net of our fee. Our ultimate mission is to empower our clients with the FREEDOM to pursue what makes life truly rich. Or as John Lohr said, “The best interest of the client is not just lip service; it's a way of life.”
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.