I couldn’t help but notice the headline for Tom Lauricella’s front page article in the Wall Street Journal, called Failure of a Fail-Safe Strategy Sends Investors Scrambling. The article does an admirable job of covering the basic problems and issues with traditional asset allocation…the themes that I cover in the first half of my book. Here’s a quote: “The financial crisis has sent many financial advisers, academics and investors back to the drawing board.” For financial advisors whose business model is to charge fees to manage their client’s assets, this really IS a crisis. They will have to change the culture of their firm, change the message to their clients, and potentially endanger a very profitable business model, all in the pursuit of a solution to a problem that is not easily solved.
Let’s start with culture. All of those advisors with crystal balls in their lobby that they use to explain why buy and hold investing avoids having to “predict the future” will be putting that crystal ball away. They will be left to explain to clients who have been taught over the past 25 years that market forecasts are futile why it is that they (or fund managers that they buy) are now going to engage in exactly that pursuit. Since we made the same transition in 2002, I don’t envy them these conversations, especially for the firms who most vociferously defend passive, buy and hold strategies. To change the underlying fundamental approach to investment strategy is no small matter to registered investment advisors who earn their fees based on the confidence of their clients that their advisor is professional, scientific, “state of the art,” and trustworthy.
But it gets even worse, because once advisors leave “buy and hold” behind, they will have to “scramble” for another investment approach. It is the scrambling that results in major problems for the industry, because advisors literally don’t know what to do next. I believe that advisors will begin a desperate search for quantitative models that will relieve them of the responsibility of making investment decisions. They will turn to much larger allocations to hedge funds and other alternative investments that they can “buy and hold” but offer a different approach to asset allocation. Unfortunately, neither of these approaches will solve the problem of becoming a different kind of investment expert, where the ability to change portfolio asset allocation is done “in-house” based on the expertise of the advisor. Of course, at Pinnacle, we’ve been engaged in writing, lecturing, and executing active management for years. I will be interested to see if the media is interested to talking to us as experts, or if they want to keep interviewing the advisors who “are scrambling.”
