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.
Investors are constantly bombarded with financial and economic headlines and anecdotes that trigger emotions ranging from fear to euphoria. It takes skill for an advisor to look at financial markets every single day, and still make appropriate, measured, long-term investment decisions. Skilled advisors learn how to filter market noise. Advisor alpha demands this skill, and it is always accompanied with investment knowledge, a historical perspective, and an honest self-awareness of the advisor’s own susceptibility to irrational behavior.
Great advisors not only possess the skills associated with creating appropriate investment allocations, but they also possess the ability to help investors sustain the allocations! Great advisors are always reminding, always educating, always communicating. They earn and maintain trust. An advisor may create and propose an appropriate asset allocation or financial plan, but it makes little difference if the investor does not accept or sustain the plan. Investors ultimately have discretion. Not every investor will accept advice or behave in an ideal fashion. Some clients might be unhappy or even leave if they hear the truth, but advisor alpha requires total honesty.
Advisor alpha is so valuable, because it requires tremendous courage and conviction. It requires a willingness to maintain an asset allocation that at times misses some of the market upside or captures some of the market downside. It requires a willingness to have hard conversations and an ability to avoid emotional contagion. It requires not only the ability to embrace innovation but also the disciple to follow rules and processes.
The concept of “robo advisors” has sent a shiver through many financial advisors. However, great advisors are embracing technology and digital delivery for analysis, efficiency, and transparency. It is not an either/or question (i.e., either a robot advisor or a human advisor), it is an “and” question (technology combined with a skilled advisor). When the stakes are high and the dollars are meaningful, most investors won’t be soothed by a robotic voice or encouraged by a computer screen filled with numbers. At critical life moments and pivotal market moments, investors will turn to skilled financial advisors with credibility, authority, and perspective.
John Lunt is the President of Lunt Capital Management, a participant in the ETF Strategist Channel.