I’m sitting in a client meeting with the advisor. The “monthly review” meeting. The advisor tells the clients and I, “We know we underperformed a little bit, but there was a good reason and we are comfortable with the portfolio, let me explain.”
It helps to have a more robust picture so let me fill you in on what was happening. Our clients hired us to oversee the investments being made on their behalf. We do not manage assets and won’t tell an advisor, “you are wrong, you should invest more in Emerging Markets,” or some other asset class. However, what we will do are the following.
We will provide a clear and concise evaluation of the performance delivers within the confines of the goals and expectations of our clients.
We will analysis the investment choices, for example a mutual fund, and ask if other options were considered like ETF’s, individual managers, etc.
In this case the advisor had just shared with us that the performance was “a bit lower” than the benchmarks and goals set for the client. However, the advisor and team were managing the portfolio with “risk” in mind. Therefore, although they had underperformed, they expected a pull-back at some point and with this pull-back they would capitalize on it.
At this stage of the conversation, in the meeting, I turned to the client and said, “This actually sounds reasonable but lets hear more.”
I turned to the advisor and team asking, “So, what is your plan for the pullback?”
This is when the conversation went into another dimension and the advisor started explaining standard deviation, utilities, ETF risk and other fascinating optics on risks and the market. What the advisor “did not do” was answer the question fully and with satisfaction.
What separates a good advisor from a great advisor?
This is the perfect scenario you should be asking yourself (or if you are an advisor you should be fulfilling for your clients) as there is a right answer.
What happens if North Korea launches a ballistic missile at Japan? How about South Korea?
The Russians cross through the Fulda Gap in Germany?
A paramedic comes upon a car accident. What does he do immediately when he sees a crash victim? (hint, he starts his ABC’s – airway, breathing and circulation)
In each of these scenario’s there is a playbook. An exact path available for those who must make decisions to have a clear and concise set of options in front of them so their biases and the end result are clearly laid out.
In this meeting the advisor was alluding, sorry, not alluding, clearly stating “their are risks and we are managing them,” but they DID NOT HAVE a plan of action.
What would this plan of action resemble?
– Markets are down -10% with the S&P 500 leading the downside. Based on the sectors and companies, the advisor has worked with the firm or some outside money manager to have a plan on what to buy?
– 2008, lite happens and the markets are down -20%. Based on this scenario the advisors look at specific regions of the world and asset classes to see where PE ratio’s, book values, etc. have real value. Rather than “hiding” and being emotional like so many in 2009 (most went to bonds rather than “staying the course in equities losing out on an up 30% to 40% return) they know their own biases and are ready.
The best advisors have the “scenario analysis” like the pentagon and are ready to do what is needed.
If the markets are truly running in cycles, as they like to tell our firm and our clients, then this gives more credence to their need to have a plan rather than react.
Is your financial advisor one of the best?