Advisers need to consider a new value proposition based on alternative skills and expertise, rather than attempting to outperform the market, according to a senior US investment executive.
“The traditional value propositions tend to be based on outperformance so advisers have said ‘choose me because I can help pick better stocks and I can give you that performance’ but they’ve failed to deliver on the promise,” US Vanguard Investment senior investment analyst Donald Bennyhoff said at the company’s roadshow in Sydney yesterday.
“It’s led to a lot of asset and client turnover.
“It’s just not all upside and it’s not just all about skill because everyone is skilful out there.”
Bennyhoff’s Advisor’s Alpha whitepaper determined that no matter how skilled the adviser, the path to better investment results may not lie with the ability to pick investments or strategies.
Current value propositions need to shift from outperformance, which is beyond anyone’s control, to the factors that can be controlled, Bennyhoff said.
“Financial planning can be better positioned using other strategies and focuses,” he said.
“That is what we promise to our client, which is to be an adviser, a holistic wealth manager and a behavioural coach and our service model.
“As advisers, that’s an opportunity to get them back to the financial plan so be that behavioural coach and get through those emotional times to help them from pulling the plug.”
In addition Bennyhoff proposed, TWA [time, willingness and ability] is an appealing service model that should be part of the value proposition and has nothing to do with investment capabilities.
“Many clients are reaching retirement and actually want to enjoy life so many do not want to manage their assets,” he said.
“Investors often make emotional choices at the wrong times – we’re helping them from falling prey to the emotions of the market.”
The senior analyst observed advisers were also making the mistake of attempting to use the same concept of valuing the opportunities or returning opportunities in countries as people tend to do with companies.
Advisers and investors assume that favourable growth domestic product (GDP) and price to earnings (PE) ratios equal better returns in the future, Bennyhoff said.
“What kind of signals do today’s factors, such as real GDP or PE, give us about future returns over the next one, five and 10 years?”
“There’s really no information from GDP growth, in other words, real GDP growth doesn’t give you anything useful about future returns.”
Bennyhoff pointed out there is some relationship with PE but even in the best case, initial PE only explains about a third of returns over the next 10 years.
“While it’s better than some of these other factors, on its own it’s not particularly strong because it means two-thirds of opportunities are based on something else,” he said.
“Be careful as advisers [as] these aren’t unimportant factors, they’re just not as important as many people are led to believe.”
