Speaking at the van Eyk Annual Conference in Sydney on Wednesday, ACD Financial principal Stephen Christie said modern portfolio theory has cut human behaviour out of the question, which is important for two key reasons.
“Controlling client expectations and behaviour, and communicating to the clients,” Mr Christie said.
“It’s like going into a restaurant and they say ‘I don’t care what you want, you’re going to have meat and three vegetables and a small portion of it, because that’s good for you’; modern portfolio theory is a bit like that,” he said.
“So even as an adviser with hand on heart you think they should have this portfolio, you have to manage client expectations and communicate.
“Perhaps give them some McDonald’s fries, as long as it’s a small portion, and it might do them some good.”
Mr Christie said humility is fundamental to the financial advice proposition.
“The market is a tough opponent, regardless of theory; if you’ve been in the market a long time you know it is a tough opponent,” he said.
“The traditional approach reflects that.”
While Mr Christie believes modern portfolio theory has let advisers down in this area, he does acknowledge that it is evolving.
“People have realised there is a wider array of risk premium out there where you can take on risk and get rewarded,” he said.
“We are seeing smart beta strategies where you can replicate trader strategies using a computer.
“So modern portfolio theory continues to evolve.”
