Advisor Disconnect

Schwab has issued the results of an interesting new survey examining the views of high net worth investors (those with at least $1 million in investable assets) and their advisors. Some particularly noteworthy findings follow.  Note the frequent disconnect between advisors and their clients.

  • HNW investors think investing is easier than their advisors do. While 59 percent of advisors think it will be difficult to reach their clients’ goals with the current market climate, only 32 percent of clients think so.  Moreover, fully 25 percent of clients think it will be easy to meet their financial goals compared to only 12 percent of advisors.
  • According to 81 percent of HNW investors, creating retirement income to last a lifetime is their primary investment goal.  Their advisors think that only 64 percent of HNW investors have that as their primary goal.
  • According to the advisors, HNW investors’ primary investment strategies are evenly split (50:50) between capital preservation and asset appreciation.  Fully 69 percent of HNW investors favor capital preservation.
  • Roughly twice as many men as women (41 to 21 percent) are the sole or primary decision-makers, but women are still involved in 59 percent of the decision-making.
  • Only 7 percent of HNW investors say that their desire for advice has decreased since 2008 while 37 percent say it has increased.
  • HNW clients choose a new advisor most often for greater attention/service (66 percent) and to obtain a more holistic approach to their investments (51 percent). However, 37 percent were looking to protect their assets and 37 percent were looking for better performance.
  • HNW investors learn of their advisor via referrals from friends/colleagues (23 percent), family members (17 percent), financial institution (9 percent) or from another professional (9 percent).  Only relatively few HNW clients are obtained through events (4 percent), media (3 percent) or an ad (1 percent).
  • HNW clients listed knowledge (71 percent) and advice (59 percent) as the key benefits of working with an advisor.  But 49 percent listed investment performance.  Moreover, trust (48 percent). service (47 percent), objectivity (43 percent), fiduciary responsibility (40 percent) and independent thinking (35 percent) also received a lot of support.

Some very tentative conclusions from this data follow.

  1. HNW clients think investing is far too easy.  I suspect that means that advisors are not dealing with risk and their clients’ risk tolerances adequately. It also suggests that good advisors are undervalued.
  2. Everyone agrees that retirement income is the primary goal, but there is still a wide disconnect between advisors and their clients.  If advisors are not focusing on retirement income, they are not meeting their clients’ felt needs.
  3. HNW clients want to be safe and rich.  Managing that minefield will continue to be a major problem for advisors.  As a consequence, the value of clear, consistent and detailed communication as to what investment decisions are being made and have been made as well as the reasons for them cannot be overemphasized.
  4. The emphasis by HNW investors on a holistic approach as well as the desire for objectivity, fiduciary responsibility and independent thinking provide further evidence that the era of the product-pushing salesman is over.  It’s like World War II after D-Day —  there would be losses and uncertainties along the way, but the end-result was basically decided.

Voting with their Feet and their Dollars

I have regularly challenged advisors to justify their use of active management. 

It seems to me that anyone in the active management business ought to be able to defend the process of active management with more than a sales pitch — y’know, with data and stuff.

Examples of my challenges and related posts are listed below.

Sadly, the challenge remains largely unmet by the investment world as a whole. However, since I favor active management for a variety of investment types and styles, The Value Project — linked above — provides my response to this challenge.

It is therefore probably not coincidental that one of every three dollars invested in mutual funds and exchange-traded funds through the first four months of the 2012 has gone to Vanguard, according to Morningstar Inc. (and as reported by Investment News).  Investment in Vanguard so far this year is roughly $65 billion, nearly four times more than the next closest mutual fund company – PIMCO.  In ETFs, year-to-date through the end of April, Vanguard had gathered $21.6 billion, while BlackRock’s iShares collected $13.3 billion and State Street added $7.2 billion. As always, Vanguard focuses on passively managed index funds and ETFs. 

It seems clear to me that many advisors are simply not meeting the challenge to active management offered by the likes of Vanguard and, as a consequence, consumers are voting with their feet (and their investment dollars).  Moreover, low fees matter, especially in a low return, low yield world.

Consumers have pretty clearly thrown down the gauntlet.  How will the active management business respond?  Will it respond?

Here’s hoping, but only time will tell.

Worth Watching

This Peter Finch rant, from the great 1976 film, Network, looks almost prophetic today. It could apply in any number of instances, not the least of which is today’s individual investor, who has every reason to say, “I’m mad as hell and not going to take it any more.”

The following slideshow provides 10 good reasons for individual investors to be infuriated.

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