Why Advisors’ Heads Are Too Big for Their Performance Britches

Many times I’ve pondered the value that an advisor actually brings to a client’s portfolio. In other words, is a portfolio’s performance due to the advisor’s skill or is it of a more random nature?  Over the years I’ve met many individuals with strong opinions on each side of this issue. Although I don’t believe I’ll come to a definitive conclusion in this blog post, it does make for interesting conversation. 

First, let me state that in today’s environment, I believe an advisor can make a difference. I also believe that in general, advisors have an over-blown self-perception of the amount of difference they make, which could come under the heading of overconfidence bias. Why is this bias so prevalent? I think it has to do with the training programs of the big-box firms. The wirehouses commonly taught their new recruits to exhibit confidence. They knew that clients would be more likely to follow someone who appeared confident than someone who didn’t. Makes perfect sense to me. 

Moreover, these companies reasoned that they would train their FAs and then tell them what to do. In other words, the company would provide direction to their advisors so the advisors could focus on the relationship between themselves and the client. That’s the business model and it seems perfectly logical to me. The period during the 80′s and 90′s was also highly profitable. However, I believe the profitability of this period had less to do with the companies’ direction and more to do with the market’s performance. After all, when the markets were only rising, everyone was successful. And who wouldn’t feel confident? Every advisor looked like a genius. 

After twenty years of “above mean” performance, the past ten have been, well, let’s just say, different. The passive, buy-and-hold strategies made popular during those decades has given way to more of a traders’ mentality. I say this because the stock market has rewarded those who have been more active in getting in and getting out (assuming they have done this at the right moments). Easier said than done. Which brings me back to my initial question: How much value does an advisor add to a client’s portfolio? And where do we go from here?