How can the investment profession best serve its clients?
At a time when there's no shortage of confusion, and indeed a shortage of growth, it pays to ask. Interesting questions abound in investing, but the important ones stick around.
The way they are answered tends to change though, so in an effort to take the temperature of our industry, we asked CFA Institute Financial NewsBrief readers where they think the sector can best contribute value to clients.
The results are mind-boggling.
Where do you think the investment profession can add the most value to clients?
Asset Allocation Is King.
The vast majority of the 763 respondents clearly view asset allocation and client hand-holding as the two areas where investment professionals can offer the most, with about four out of five participants opting for one of these two choices. This is hardly a revelation. I have spent considerable time and energy writing and speaking about multi-asset investing, of which asset allocation and portfolio construction are critical components, precisely because I believe in that message.
But the magnitude of these preferences compared to the other choices is shocking. A mere 5% (!) of respondents opted for security selection. For a profession that has long considered Security Analysis its bible and Warren Buffett its ultimate role model, we've clearly come a long way.
The asset managers among us now realize their limitations in picking stocks and other securities, and asset owners have recognized these shortcomings as well. The implications of this for today’s investment professionals are quite far-reaching. Finance pros have been trained for and performed a different job, one that many have not done well. And now, alas, they are expected to do something for which they have not been trained!
The solution is not to give up on our heritage altogether, though. That’s why I am both pleased with the overall survey results and disappointed by the 5% figure. Multi-asset investing is about pulling all the levers and adding value in any way we can. So the future star of the investment profession is not an asset allocator or a stock picker. The successful investor will be the one who can do both well.
Asset Allocation Is Not King?
An important caveat to my interpretation of the survey results: Some of my colleagues pointed out that respondents might simply have been influenced by "Determinants of Portfolio Performance," by Gary P. Brinson, CFA; L. Randolph Hood, CFA; and Gilbert L. Beebower, first published in the Financial Analysts Journal.
As later publications indicate, the results from Brinson and company were more about the time series analysis: that, over time, the return variation for a single portfolio of investments, be it the overall market or a number of endowment plans, as used by Brinson and his coauthors, is ultimately driven by asset allocation.
That does not mean that return variations across funds are largely explained by asset allocation, as many who misinterpreted the paper came to believe. As a matter of fact, measured across a number of funds with similar objectives, asset allocation is actually less important a driver of returns than security selection. Roger G. Ibbotson and Paul D. Kaplan, CFA, found that asset allocation only explains about 40% of the return variation in their sample of balanced funds measured over a 10-year period.
The Client Is King . . . Please Hold the King’s Hand.
More than a third (36%) of poll participants thought the investment profession could best serve clients by helping them navigate the emotional roller-coasters that come with investing, steering them away from the impulsive decisions that can damage their portfolios over the long term.
Behavioral finance is accepted in more quarters of academic finance. In practice, this is especially true for wealth managers since retail clients tend to have less experience with market volatility. It is heartening to see that CFA Financial NewsBrief readers agree on this.
So what's the ultimate lesson of these results? The investment world — as previous generations know — has changed, and investment professionals need to develop new skills to deal with a new reality.
An earlier version of this article was entitled "How to Add Value."
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.