On the Road Again

I will be leaving tomorrow morning to speak at the FPA NorCal conference in San Francisco. I understand the conference is sold out again this year and once again about 500 of the top financial planning professionals on the West Coast will attend. I will be speaking about tactical asset allocation as the financial planning industry remains fascinated by the idea that portfolios must be actively managed in order to earn returns in excess of what the market will give you. Many in the planning business still believe it is pointless to try to outperform the markets, although they seem to have no problem charging fees to basically earn the risk and reward that markets will give you for free. I understand that there are still many potential clients who are so overwhelmed by the investment process that they are gladly willing to pay for a firm to basically do what they could do on their own in about one hour. For those advisors who provide buy and hold asset allocation services and charge fees based on assets under management, I suppose the best I can say is congratulations…it's great work if you can get it.

I will be seeing and hearing from many of these advisors after my talk on Tuesday. I’m sorry but in my old age I just don’t believe that “managing client relationships” is the most important service we can provide when we are charged with constructing client portfolios. Yes, you have to be patient to be a successful investor, and yes that includes investors who are utilizing active investment strategies. We believe that excess returns are earned over time - defined as cyclical moves within longer term secular market cycles. Our preferred time horizon to make our bones is between one year and five years. This is completely different than buying and holding a diversified portfolio of asset classes and saying that market performance will be realized over your life expectancy.

When discussing our craft with my fellow planners I like to say that there are two unbreakable rules for successfully managing client relationships. Rule number one is to reduce client expectations as much as possible. Rule number two is to always, without fail, meet your clients’ reduced expectations. The problem with buy and hold investing is that it takes this set of rules too far. By promising expected returns in a time horizon that is so long that it is meaningless, the bar is set too low. The result is that client expectations will always be met…and that is the problem. When investment professionals stop trying to beat the market and get paid to advise their clients to be patient, I believe that consumers should revolt. I can’t wait to mix it up in San Francisco. It should be a lot of fun.