The New Era of Investment Advice: Finding a Clear Path Forward

What about achieving the returns your clients may expect or need for their goals? Many market participants will acknowledge that both stock and bond valuations are stretched. What this has often meant (though the timing is uncertain), is that go-forward returns from overpriced asset classes are lower than historical norms. That is, the returns like the long-run averages that some investors may be expecting, may simply not be in the cards.

There are two rational responses: mitigate volatility and drawdowns, and seek higher than average returns.

In order to be truly considered a diversified portfolio, we believe it must protect against the possibility that stocks and bonds decline simultaneously. How do you protect your client’s capital in that environment if the portfolio consists of long-only, fully invested stock and bond ETFs? Are you going to retreat to cash (a.k.a. market timing)? The fact is that it’s really hard to do, because among other reasons, the portfolio manager has to get two decisions right in real time: when to get out and when to get back in.

What about generating excess return over the index? Well, again, it’s really hard to sustain over time, after fees and adjusted for risk. (See, for example, Morningstar’s Active Passive Barometer 2015 or Vanguard’s “Keys to Improving the Odds of Active Management Success”, 2015) However, there is some good news; a key driver of returns, including excess returns over benchmarks can be attributed not to security selection skill, but rather to what is known as factor exposure or factor beta.  And the ETF landscape has again provided advisors access to reasonably priced factor ETFs, singly or in combination. What has happened over the past 40 years is that the price for beta exposure has been driven toward zero, reducing costs and improving results for clients.

So a new era for advisors and their clients – characterized by complexity, competition, pricing compression and time and resource scarcity – has what we believe is a clear path forward for success:

  • Leverage low cost beta, especially via ETFs
  • Embrace technology and new methods of client communication and interaction
  • Employ factor based and alternative investment strategies, to potentially improve return capture and better diversify portfolios

It’s important in this new era, buffeted by change, not to lose sight of the fact that people still – and will continue to – need experienced, ethical, thoughtful financial professionals rendering effective advice.  Healthy competition and innovation should be welcomed by advisors who truly add value; it’ll make you better at what you do and help drive better results for your clients.

This article was contributed by Palladiem, a participant in the ETF Strategist Channel.
Palladiem is the advisor-centric investment firm; we provide targeted support and insight to advisors. We manage diversified, multi-asset class investment strategies designed to meet a wide range of investor risk/return objectives, supported by our proprietary investment process, forward looking views, capital markets analysis, and alternatives and investment manager research.

The statements herein are based upon the opinions of Palladiem and the data available at the time of publication and are subject to change at any time without notice. This communication does not constitute investment advice and is for informational purposes only, is not intended to meet the objectives or suitability requirements of any specific individual or account, and does not provide a guarantee that the investment objective of any model will be met. An investor should assess his/her own investment needs based on his/her own financial circumstances and investment objectives.