The new era of financial advice

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There is a structural change emerging with the type of advice investors need from their investment advisors. Some clients and advisors have transitioned, while most have not.

Sometimes the process of change is slow, while the evidence to change is compelling. That is the case in the world of finance even though financial decisions and success is one of the most significant influencers to your quality of life.

Some of the facts for this column come from an article in the July/August 2014 edition of Financial Analysts Journal titled “The Rise and Fall of Performance Investing”.

Simply put, the business model of providing advice to clients is obsolete.

The old model revolved around the price of a security. Find a money manager who can find mistakes on how the market has priced a security and then buy or sell that security to your own financial gain.

The investment business has and will continue to evolve. Fifty years ago money management was generally very conservative and dominated by large insurance companies and bank owned trust departments. Preservation of capital was the order of the day.

Then there was a shift from preservation of capital to performance investing and the birth of many new investment firms. The investment fees were low and the money managers were purists who applied their skills doing what they loved to do, managing money.

Investment returns were good, money flowed into these firms and the investment management fees started to climb sharply. All of a sudden the world of pure money management was replaced by the “big business” of managing money. Managers began making huge salaries. The best and the brightest flocked to the investment business to make their fortune.

Slowly the skill advantage of a great manager of many decades ago declined. The managers are better now due to enhanced tools and technology but so is the competition.

Today a great manager is just a commodity with very few qualities that differentiate them from other great managers. The value provided by the investment manager has disappeared but the high investment management fees have remained.

Now you have an obsolete investment environment that doesn’t make sense. There are several questions you should ask if you could interview your money manager. All of the questions will or should receive a “no” answer.

Do managers often beat the underlying market in which they invest? Do managers generally cover their high investment management fees with superior returns other than the returns that were a result of the market appreciating in value?

Does it make investment sense to remain a client of an active money manager or would it be prudent to look for alternative investing options that are significantly less expensive?

Again, the answers to all of these questions is no. The glory days of investment management have long passed. The notion of investing with a manager who will discover errors in securities pricing and allow you to gain from that expertise has disappeared. 

The next era of financial advice has arrived. It is based on the values of a client. What is your life plan and what cash flow is necessary to support your lifestyle?

Now the investment world is all about you, your values, what you want to achieve and how the investing process will help you attain that goal.

This value based advice is available now but as I’ve said, few advisors or clients have made that switch. There are plenty of obstacles blocking the change.

The first is money. The simple model of having an advisor pick a manager from the hundreds that are available is extremely profitable.

Often, it is more difficult to have an advisor with enough financial planning, investment and tax skills who can act as your personal financial coach. One – on -one coaching is less lucrative than the one size fits all model of picking an investment manager.

The world of investing and financial planning has changed for the better. The focus is on you and your values and not chasing illusive superior investments.