Helping clients make their mark - Column

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It is important for us to benchmark the results we achieve for clients with the portfolios we put together for them. There are two benchmarks that can be used to demonstrate our results to clients on a rolling monthly basis ...
It is important for us to benchmark the results we achieve for clients with the portfolios we put together for them.

There are two benchmarks that can be used to demonstrate our results to clients on a rolling monthly basis over one, three, five and 10-year periods for a typical balanced portfolio - the Mercer Pooled Funds Survey and a 60/40 equity/bond index split.

The comparison should not only compare the return but should look at the level of volatility taken to achieve those returns. It is surprising how few advisers have the confidence to benchmark their results and determine the source of their returns for clients.

There is much more that we do to add value as advisers than selecting shares or fund managers, but we should at least be able to give our investors access to at least the average return over time if we want to stay in business. Demonstrating a competent scientific approach to investment selection and the results of that approach will help investors to remain focused and not to fall victim to so many of the foibles described by behavioural finance.

Without the framework that we are able to provide, too many investors succumb to emotion. Fear and greed are emotions that cause all of us to make poor decisions. They are the investor's worst enemy. Unfortunately, none of us are well adapted to the nuances of responding to securities market fluctuations. Greed keeps clients from rebalancing their portfolio and taking profits appropriately. They ride a boom all the way up and stay with it when it regresses back to the mean. Fear and insecurity lead them to a loss of commitment to the strategy we have set. They find it difficult when it comes to the time to implement the theory with hard cash. It is so much easier for them to buy into something after it has risen substantially. Three years ago at the beginning of this current bull run, it was far more difficult to attract clients than today. The Iraq invasion was in full swing then and the technology bust and terrorist bombings were very recent memories.

Many people think the latest rise in their accounts was the result of their expertise and they are tempted to believe they can continue to do the investing themselves. The evidence is that by trading themselves they detract from performance. In the Barber/Odean study of over 67,000 individual discount broker accounts between 1991 and 1996 they discovered that there was an average turnover at the time of 75 per cent a year. The average return achieved from all this activity was 16.4 per cent a year, which sounds pretty good until you realise the market return over the same period was 17.9 per cent a year. Those individuals that traded more would expect to be rewarded for their extra activity. In fact, those that traded with over 250 per cent turnover underperformed by 6.5 per cent.

I am amazed at the flimsy rationale that so many share investors have for the range of purchases they have made and the portfolio that they end up with that seems to have no rhyme or reason to its construction. Conviction can only be built by attention to true empirical research. Explaining the source of return to clients helps them to understand that price fluctuations don't mean loss over the long term. A longer-term perspective helps to build stronger conviction and commitment even though the process can involve 'two steps forward and one step back'.

Our clients have ready access to a plethora of information on virtually any subject. This can be a blessing and a curse. A good adviser is not one that simply supplies information but rather someone that can supply sound wisdom to the investment process.

It is very difficult for investors to keep their focus on the key variables when they are being flooded with information. We can provide the strict discipline that helps clients avoid falling into the trap of over analysing and give them a sound set of principles through which to view their investment decisions. Investors become impatient with their investments. They become susceptible to 'knee jerk' reactions and they need us to keep things in perspective.

Left to their own devices, too many people fail to plan and they become the victim of their whims and emotions. Without a well-documented strategy investments can quickly get out of kilter. It is imperative to write down the principles and beliefs that will form the basis of the clients' investment decisions before they start to invest.

When advising people on establishing an investment plan we have to be aware that costs must be kept to a minimum. One or 2 per cent saved in costs has quite a staggering impact over time because of the effect of compounding. Minimising tax is another area where we can add value to our clients. Recent changes to superannuation law have created enormous additional opportunities to better manage tax outcomes.

Now is the time for us to communicate our value and to keep our clients on the path to investing success.


Helping clients make their mark - Column
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