Defining Your Role

As an advisor trying to build a successful practice, you have a limited amount of time each day to accomplish a seemingly unlimited number of tasks. Unfortunately, far too many advisors make the mistake of wasting that precious time trying to enhance their clients’ returns above what the market offers.

The fact is, moving money around in the capital markets is one of the least productive ways for advisors to spend their time because it adds no value. The sooner we understand the true role of an advisor, the sooner we as a profession will be able to start creating real value for our clients–and our firms.

Clearly you need to give something of value to clients to build a successful practice. That’s why so many advisors attempt to use “superior” knowledge, experience, or analytical ability to generate stronger returns for their clients through active management techniques. They believe that if they can find an analyst, a money manager, or some other expert who can tell them which stocks are undervalued–a “Tiger Woods of money management”–they will beat the market and their clients will love them. Sound familiar? Some of you even think that you’re capable of doing the job yourself through in-house research efforts.

The question you need to ask yourself is this: Does all that effort making forecasts–or searching for someone who can–make a positive difference for your clients? One of my heroes, Vanguard founder John Bogle, sure doesn’t think so. He and I participated in a recent panel discussion at an AICPA conference in Las Vegas. When one of the CPAs on the panel said he used brokerage firm research to help clients beat the market, I thought Bogle was going to jump out of his seat. Bogle’s re-sponse: “The value of that research is zero, and that’s not my personal opinion–that’s a tautology.”

Bogle nailed it–as did New York Attorney General Eliot Spitzer in a recent USA Today interview in which he argued that “if you begin with the presumption that picking stocks really is almost a fool’s errand, and consequently, that paying someone else to do something he or she is going to fail at, then losing a significant percentage of your return to those fees is, consequently, a very unwise thing.”

You simply cannot create value for your clients where the opportunity doesn’t exist in the first place. One of my favorite examples of this comes from a July 2000 Fortune cover story that asked the top analyst in each market sector for his or her top pick. A year later, Fortune checked back and concluded: “Last year’s All-Stars delivered as many strikeouts as home runs…Of the 28 stock picks, 11 are up and 17 are down.” While the S&P 500 lost 9%, these analysts’ picks sank almost twice as much, an average 17%. The headline on the original article? “Let Them Make You Rich.” Several years later, manyof those stocks’ poor performances are even more pronounced (see chart, “Is There Value in the Stars?” on page 50).

This is just one example, of course, but it’s the type of thing you’ll see again and again if you’re paying attention.

It’s possible, I suppose, that some of you may be capable of consistently knowing when to be in and out of the market or of identifying winning stocks, and can beat the indexes time and again. If so, I congratulate you. You’re extremely gifted and should keep doing exactly what you’re doing. If not–and I know from speaking with hundreds of advisors each year that nearly all of you fall into this category–you’re doing a disservice to your clients and it’s time to stop.

Why Try?

There’s no doubting the overwhelming evidence that active management and research efforts fail to add value. In fact, the studies show that they subtract value. So I often wonder why so many advisors continue working at ways to uncover inefficiencies in the market that simply aren’t there–especially when it’s clear to me that most advisors believe the job cannot be done. For example, not one person challenged Bogle’s statement at the conference. That’s because they know in their guts that it’s a futile task.

I think the problem for many advisors comes from a misperception that they need to move money around to give clients what they want. I’ve met plenty of advisors who recognize that they can’t beat the market rate of return, but are convinced that their clients will desert them unless they go through the motions of selecting managers, picking individual stocks, deciding whether to overweight Japan or Europe, and so on.

These advisors essentially are trying to justify their fees by looking busy and working at something that they know creates nothing positive. But at the end of the day, they can honestly tell their clients about all the research they’ve done on the economy, the markets, companies, and managers. “My clients are happy and my fees are justified,” they claim, “because of all my hard work.”