I’ve noticed lately that a handful of advisory and money management firms are pandering to prospective clients by offering return of fee guarantees. These guarantees typically will say that if for any reason you are not satisfied with your portfolio’s performance you can request a refund of your investment management fees. The guarantees are positioned as the investment firm looking out for the clients’ best interests and are often described using words such as ‘accountability’. How righteous! Finally, some people in the money management business are holding themselves ‘accountable’ for investment performance and results. It’s about time! There couldn’t be a catch here, could there? The catch is typically that the return of fees is only for the last quarter.
Pandering of course, is the art of telling a person or group of people what they want to hear. Pandering doesn’t work in the money management business, politics, medicine, or any other industry. Pandering is destined to fail because you inevitably over-promise and under-deliver. Why pander? It’s the path of least resistance, it can boost short term results, and who doesn’t love to be told exactly what they want to hear?
So what’s the issue here? Am I against accountability? Far from it, and in fact, I believe that a healthy money management relationship should hinge on it. That said, the accountability must be genuine and substantial, not flimsy and insignificant. I believe that accountability in an investment management relationship is a two-way street and that it begins with education, which sets proper expectations. Here are some of the bedrock items that clients must be educated on from the beginning:
· Clients who participate in any investment platform must be educated about what it is that they’re purchasing. They need to have proper expectations set to understand that markets go up and down over time. When markets do go down, it doesn’t automatically imply that mistakes have been made or that a model has broken down. The upward and downward movements of markets represent risk and risk makes possible the capturing of risk premiums. This defines the process of investing at its core.
· While all investments have some average rate of return over time, it’s likely that they will never actually experience that exact rate of return in any given year. They will earn returns above and below the average, but likely, never the average per se.
· The magnitude of the volatility that they will inevitably experience and how that will look and feel.
· Clients must understand the asset allocation process, including its inputs/variables, as well as what building an efficient portfolio actually means. Here’s a hint: ‘efficient’ does not mean that the portfolio doesn’t go down in value, and at times, dramatically.
· Assuming that a client’s portfolio is being managed on a fee (percentage of assets) basis, when the client’s portfolio does well, the management firm does well and vice versa. In other words, we’re in this together and our interests are aligned.
If all of the items listed above are legitimately covered and checked off the pre-flight checklist and on an ongoing basis, I can’t see why the paltry promise of a refund of one quarter’s worth fees is at all necessary. The relationship between clients’ success and the money management firm’s success should be all the accountability that you’ll ever need.
The process of client education helps me as a money manager to sleep better at night knowing that my firm’s clients understand clearly what they own, and what their investments’ full costs, risks, and potential benefits are. Education doesn’t end at the purchase date of an investment, however. Inevitably the markets turn downward, people feel anxious, and clients need to be reminded of their long term investment strategy and be talked off of the proverbial ledge. The value of these tough conversations cannot be overlooked as they protect clients from themselves and their natural inclination to react emotionally toward market movements. I believe that this value is largely diluted with presence a gimmicky escape hatch (fee guarantee) that encourages clients to pack up and leave (or sell) just when they need professional guidance most. Ironically, in large part, you pay a professional money manager for their wisdom and perspective. This perspective is never more important than during times of market turbulence, which is exactly when clients are most likely to be ‘unsatisfied’ with how their account is performing. Go figure!
By: Andrew Gonski
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.