Often, when investors are looking for a financial advisor service, they think that they should try to find a fund manager who regularly beats the market. Even some financial advisors mistakenly use that metric to judge themselves.
In reality, beating the market is such a difficult task that the feat isn’t ideal for measuring an advisor’s suitability. Instead, we suggest that you concentrate on creating an investing plan particular to your clients, providing them with best-in-class level service.
How Rare Is It to Beat the Market?
The Spiva Index by S&P Dow Jones is a steady reminder of the foolhardiness of staking your reputation on beating the market. The report for June 2020 shows that during the previous 12 months, 67% of fund managers failed to match their benchmarks for domestic equity funds.
The index looks individually at 18 categories of U.S. equity funds. It also analyzes funds from other countries. Most of the funds in 11 of those 18 categories produced smaller returns than did their benchmarks.
How Difficult Is It to Beat the Market Consistently?
Some investors get overly excited if fund managers out-duel their benchmarks for the year. However, that adulation can usually be tamped down if they were to look at the track record of those same funds over a longer period.
A case in point is the success of growth funds. According to the index, fund managers performed exceptionally well for the 12 months ending in June 2020. During the previous year, 89% fared better than the benchmark for small-cap growth funds, while 83% did similarly for mid-cap growth and 74% for large-cap growth.
If such achievements were annual events, then it would make sense to only focus on trying to beat the market. After all, it would be challenging to obtain new clients and retain your old ones if the fund manager across the street is stringing together such winning seasons year after year.
However, notice what happens when we take a long-range view of growth funds. Over 15 years, 75% of small-cap growth underperformed, as did 74% of mid-growth and a whopping 92% of large growth.
The results of the asset class are typical. Historically, fund managers have struggled to equal, much less surpass their benchmarks over long periods.
Spiva’s research reveals that if, after one year, 149 fund managers are in the top quartile of performers, after the second year, only 49 will remain there. After three years, the number drops to 13, and after four years, it’s down to only two.
Your clients aren’t likely to be too impressed by your having one particularly outstanding year. It’s only remarkable if a manager is above average consistently. Clients want to see what you can do with their money over the long run.
Put the Interests of Your Clients First
Besides fighting the odds, there’s another good reason that smart financial advisors don’t waste their time and energy trying to beat the market: It isn’t usually in their client’s best interest.
The best advisors skillfully craft a portfolio specific to the needs of the client. Many times, the client is nearing retirement and therefore needs a relatively conservative investment strategy. The client doesn’t have enough years left in the workforce to recoup any losses from a high-stakes gamble that could fail.
However, that’s precisely the approach advisors would have to take if they were bull doggedly determined to beat the market year after year. They would have to overpopulate their client’s portfolio with riskier assets, such as aggressive growth stocks whose volatility could spell disaster.
An Example of Doing What’s Best For Your Client
Instead of measuring themselves unfairly against a benchmark, wise financial advisors judge themselves according to how well they’re servicing their client’s needs. So, let’s look again at a client who is nearing retirement.
Clients looking at a retirement that’s quickly approaching want reassurance that their money will be available once they’ve cashed their last paycheck. A smart financial advisor will guide such clients toward more stable assets, such as certificates of deposit and government bonds.
This doesn’t mean that the client’s portfolio can’t include a few of the more dynamic assets, but they would by no means dominate the portfolio. They would be lesser players. If these assets were individual stocks or stock funds, they would also be closer to the blue-chip variety.
But even clients who are decades away from retirement aren’t by default gunslingers who want to take a shot at every heavily hyped investment opportunity that makes headlines. Some young clients are excellent stewards of their money and want a financial advisor who will mirror their cautious approach to investing.
That’s why advisors must get to know their clients. To better understand clients, a financial advisor should have in-depth conversations with them on an ongoing basis. The advisor should also have clients complete a detailed questionnaire concerning their financial status and their goals.
Know Your Client’s Risk Tolerance
Psychology also has a place in this relationship. You can develop a winning strategy for clients, but if they’re uncomfortable with the risk involved, you’ll have unhappy clients. Unhappy clients soon become former clients, so always evaluate your client’s attraction to or repulsion to risk.
As a professional, you well know that some risk is inherent in investing, but don’t assume that clients fully understand this fact.
It would be best if you inoculated them against the shock of even systematic or market risk. It follows, then, that you definitely need to educate them on unsystematic or specific risk. Make sure that you take the time to explain the risk involved with their particular investments in each asset class.
Give Financial Advice for More Than the Stock Market
Financial advisors are far more than stockbrokers. Their financial advice should include the entire scope of the client’s life. This goes far beyond trying to beat the market.
You want to create financial scenarios to prepare the client mentally for as many of life’s possibilities as you can. Of course, even the best financial advisor can’t foresee the future. Still, you can always cover the twists and turns of life common to a typical family, such as the loss of a job, divorce, child support, college education, injury, disability, healthcare, and death.
You want to have these game plans in place so that your client isn’t blindsided when disaster strikes, but can carry on.
Remain Involved With Your Client’s Future
An effective level of involvement means keeping pace with the changes in your client’s life. A financial advisor who’s cultivated a deep ongoing relationship with a client knows about an upcoming divorce before the client’s attorney does.
If you want to help your client in every aspect of their financial life, you’re going to be involved in money matters beyond stock picking.
For example, you’ll help your clients select the type of life insurance that works best for them at their present stage of life. You’ll also advise about renting, purchasing, or selling their primary residence. A trusted financial advisor is available for advice from the moment that clients find out that they’re going to become parents through the kid’s college graduation and beyond.
It’s clear that the role of a financial advisor encompasses more important accomplishments than beating the market. In some cases, it may even preclude beating the market because responsible investing for a client looks at all the client’s needs, not just the stock holdings.
Rather than aggressively buying and trading stocks, a financial advisor is concerned with making sure that clients have the needed savings along with the correct type of bank accounts to build for the future. They should also have in order all documents related to estate planning to ensure that assets are distributed according to the client’s wishes.
One way a financial advisor clearly affects a client’s day-to-day life is by helping that client create a simple but effective budget that can be adjusted as circumstances change. The advisor strives to increase and protect a client’s wealth with tools and techniques best suited to the client’s needs, regardless of whether the stock investments for that year earn more or less than their benchmarks.
Taking Your Financial Advisor Service to the Next Level
Are you determined to make a success of your financial advisory firm? If so, put the concerns of the client first.
Remember that even superstar fund managers who beat the market this year won’t be able to repeat their success again and again.
So, it’s better to let your bragging rights come from having a long line of happy clients. We can help you to have that kind of financial advisor service. Contact the Advisory Wealth Mastery team today to schedule a free business evaluation.