By John Lunt, Lunt Capital
Lunt Capital has the privilege of managing investment portfolios for exceptional financial advisors. These financial advisors are committed to serving and helping their clients. For them, the advisory business is not a sale or a transaction—it is a relationship. They embrace the role of trusted advisor with the responsibility for the financial future of families and institutions. Good financial advisors do not just make a difference, they make all the difference! This is not a moment for a financial advisor to doubt his or her value to the client. Conversely, we believe that the potential for “advisor alpha” will grow as investments become increasingly specialized and complicated.
This is a great time to be a financial advisor and a money manager. The investment opportunity set has expanded, opening access to new asset classes, strategies, and products. The exchange traded fund has revolutionized the ability to bring efficiency, precision, and sophistication to all sizes and types of investors. The good news of an expanding investment pool also represents a tremendous challenge. The investment world has become more complicated, noisier, and potentially more treacherous for the uninformed investor. Unfortunately, the age of instant information has the potential to fuel downright irrational behavior that can wreak havoc on an investor’s financial future.
A financial advisor’s value proposition includes the ability to understand investment complication, to navigate the economic and market noise, and to provide good judgement and common sense in the allocation and management of investments. People assume that most investor mistakes are made during bear markets. Bull markets are also breeding grounds for investor irrationality. Some investors forget history. They may lose patience for an appropriate investment philosophy. They may be inclined to abandon a carefully crafted financial plan. If investors were to travel the investment journey alone, they would likely generate “negative alpha,” or behave and invest in a way that detracts from their ability to reach future financial objectives.
Not every investor wants or needs an advisor. But this does not suggest that no investors need an advisor. Without an advisor, many investors buy or sell at the wrong time, or they embrace incorrect asset allocations. Great advisors convince and persuade investors to do what is in their best interests—remain committed to and sustain an allocation and investment philosophy that will meet their long-term objectives.
In a world of fee compression, we appropriately cheer when an ETF drops its management fee by 5, 10, or 20 basis points. It is well documented that lower fees have the potential to make a difference over time. It is worth recognizing that a financial advisor’s ability to properly allocate an investor, to manage the allocation, and to convince an investor to sustain the allocation through the ups and downs of markets may be worth 500, 1,000, or even 2,000 basis points in a particular year. This is “advisor alpha!” While the scope of the advisor alpha will vary by client and by market conditions in a specific year, this advisor alpha represents the difference between financial success or failure. It is the difference between a comfortable retirement and running out of money. The notion of “alpha” or outperformance requires skills that many investors do not have but are willing to pay for. Remember, the concept of alpha is “zero sum.” Outperformance from skilled advisors and skilled investors suggests underperformance from unskilled investors and unskilled advisors.