Dynamic Asset Consulting director Matthew Walker has issued a stern warning to the financial advice industry.
Walker, who’s also a director at advice group WLM Financial Services, argued that the current inflation in asset prices – “and not just by a little bit” – is incongruous with the advice industry’s prevalent faith in passive investing, “static” strategic asset allocation and the traditional 60/40 portfolio. The current “starting point” for client portfolios, he explained, “is probably the worst possible combination for most long-term investors relying upon traditional passive or quasi-passive exposures to cash, bonds, property and equities to make them real gains.”
Explaining why, he pointed to the imminent risk of a seismic change in the current investment environment “as near-zero bond rates and inflation have been valued into market prices ‘forever’.”
“Yet a vaccine or vaccines, better testing, and changing government policies will significantly influence the market tenor in coming years,” he continued.
“Highly credible and previously meaningful forecasts demonstrate that the likely multi-year real return from most mainstream assets is around zero! Risks are much higher than normal, and the chances of multiple repeated crises in the coming months and years are very high.”
Despite all this, Walker noted that many advisers “continue to build portfolios as if we were in the 1980s and 1990s when interest rates were much higher and equity return prospects were very strong.” He attributed this to the industry doing “what has always been done.”
“Advisers need to have the courage,” Walker suggested, “to recognise that things have changed and adjust their approach to markets for their clients’ benefit. Without change, more of the same results – or worse – should be expected. Now is the time for change, not after passive investing has destroyed your clients’ capital – and your business alongside it.
“Astute advisers are moving to get ahead of the curve and avoid another GFC-like fallout for clients and their advice businesses. Investment portfolios will need to be more selective when choosing investments, prioritising value-adding exposures, being more dynamic and more active with risk management to avoid large downside risks.”
As part of the solution, Walker pointed to Dynamic Asset Consulting portfolio manager Dr Jerome Lander, who recommended designing portfolio mandates to meet specific goals rather than static asset allocations. These portfolios also need to use a broader asset allocation range than is found on the typical APL.
Designing portfolios to meet more specific needs and goals is also on super funds’ agenda, which is being facilitated by increased use of data analysis. You can hear more about it in the latest season of After Hours.
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