How many times have you had an investment blow up on your clients? Basis Capital? Trio Capital? City Pacific? LM Investments? Tree Farms? CDOs?
Suppose you have a clear conscience and have never collected commission from that lot? Good for you.
What about shares? Had a direct equity go up in smoke despite the best guess of several brokers? Babcock & Brown? Allco Finance? Gunns? ABC Learning? Pasminco?
Maybe you’ve avoided those calamities, but what about more benign bilking of your clients’ returns? Do you have clients’ still sitting in actively managed funds that continue to trail the index?
I’m never shocked to hear news reports of investment disasters, companies going belly up or actively managed funds being taught a lesson by their benchmark. It’s not shocking because unfortunately it’s become too commonplace.
What do I find shocking? This common occurrence of investment disasters or the reality of actively managed funds underperforming doesn’t seem to filter through to some advisers. We still see advisers who continue to place their clients’ money into completely unproven products, or products that have proven to underperform.
In 22 years running an independent dealer group, we’ve never put clients’ money anywhere near those mentioned investment failures. In that time, I’ve also come to understand the futility of paying extra in the hope active fund managers will beat the market.
There’s a simple reason for this – clients must come first when pursuing an investment philosophy. There’s two ways to ensure this; only accepting investment processes that have been proven and only putting your clients’ money into investments where you would invest yourself.
This is why I’ve found asset class investing and its ability to remove speculation from the investment process, to be a god send. By adhering to four key principles, clients’ money will always be invested in accordance with a method that combines academic research and consistent historical data.
If you’re already a proponent of asset class investing you’ll already understand the following:
Markets are efficient – Combine Dalbar’s yearly ‘Quantitative Analysis of Investor Behaviour’ and S&P’s ‘Indices versus Active’ scorecard and there’s ample proof on the futility of trying to improve upon the returns markets already offer.
Risk and return are related – As proven by Eugene Fama & Ken French in their academic papers, ‘The Cross-Section of Expected Stock Returns’ and ‘Common Risk Factors in the Returns on Stocks and Bonds’.
Diversification is imperative – Yearly performance data continues to show there’s no consistently outperforming or underperforming asset class. Furthermore, basic maths reveals the benefit of lowering portfolio volatility through diversification.
Asset allocation determines performance – Over 90% of portfolio performance is determined by its asset allocation. A fact proven in academic studies by Gary P. Brinson, Randolph Hood & Gilbert L. Beebower.
Asset class investing removes those human variables that add nothing for the client. It never relies on someone’s belief that they can time the market, pick the right stocks, or know which asset class will outperform over the next 12 months. This only lowers costs for the client, especially as they’re not paying the small armies of managers and researchers that actively managed funds employ.
Finally, there’s never that risk of wading into an unproven investment product that’s hot one day and featured on 4 Corners the next!
Peter is the managing director of FYG Planners. He is a Certified Financial Planner (CFP) who started in the financial services industry in 1981. A specialist in business development, Peter’s role primarily focuses on providing strategic planning advice to FYG Planners on its future direction, improving the technical skill base of the group, identifying business growth opportunities and services that can be developed for use by FYG Planners Advisers.
