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At ETF Conference, Reminders on Advisors’ Role and Investors’ Concerns

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Doug Hodge, the COO of PIMCO, kicked off Morningstar’s ETF Conference Wednesday evening with a measured, thoughtful address that spoke of what we’ve all learned about the travails of investing in the post-financial-crisis world.

His speech was chock-full of market and economic data that called into question, for example, the traditional teachings of the capital asset pricing model, which he suggested “doesn’t quite hold up when it comes to distribution.”

Hodge reiterated this point with the not-so-newsy revelation (at least to advisors) that “there are fat tails,” that “black swans do exist” and that in the real world “asset prices don’t always revert to a mean.” The audience—perhaps not all of the 550 registered attendees were in the room—respectfully listened as this representative of the world’s largest bond manager argued that for advisors, “active management is required,” that they should “diversify your return engines” and “employ downside risk mitigation, because there are fat tails and correlations do change.”

He said that “we have much to learn” from the still-newish science of behavioral finance, and urged the audience “to face demographic realities and communicate them to our clients; we have to factor in unanticipated shocks.” Most appropriately for this conference, he recommended that advisors should “use ETFs as tools to remain active and agile” in building portfolios, while ”never losing sight of our fiduciary responsibilities to our clients.”

Then the question and answer session started, and the measured, thoughtful speech was forgotten as several audience members asked Hodge to directly address the government shutdown and its effects on the economy. He was asked about the debt ceiling and whether Social Security recipients would continue to see their benefit checks.

Good-naturedly responding more than once that “this is a tough audience,” Hodge patiently answered the questions. At least one of the questioners, I discovered in the reception following the keynote address, was not an advisor at all, but an individual investor. The Morningstar ETF conference has grown over the years—the attendee number this year was up 20% this year, reaching that 550 number, with 35 sponsors, a Morningstar spokesperson told me earlier in the day.

While most of the registrants are advisors of one kind or another, there is a healthy sprinkling of individual investors as well. So perhaps such heartfelt questions about what will happen to retirees from the government shutdown, and somewhat naïve concerns over whether the Social Security trust funds will be raided to pay for other government needs, was not germane to advisors.

It was also a breath of fresh air and suggested what advisors’ clients may be worrying about right now. Those clients may be experts in the businesses they own, they may be physicians or dentists or attorneys who are at the top of their professions. They may have inherited their money from well-off parents or spouses, or been successful in the corporate world. They don’t know from the efficient frontier, however, or what CAPM is. They probably don’t know who Benjamin Graham was. They may believe that there is some secret to investing that Wall Street insiders keep to themselves. Compared to you, they are babes in the investing and retirement planning woods.

You aren’t babes in the wood, however. While you may be frustrated by some of your clients and their demands and mismatched expectations, they’ve put their trust in you and your professionalism and expertise. Even if you don’t legally have a fiduciary responsibility, all the advisors I’ve gotten to know feel that responsibility deeply. So be a fiduciary to your clients, be patient and communicate, especially in troubling times like these when non-fiduciary charlatans are pushing too-good-to-be-true solutions.

What you do for your clients isn’t easy and may not always be lucrative. There are no easy answers. There are no shortcuts. There are no “secrets” to investing or retirement planning. You know that. Make sure your clients know it not by browbeating them but by patiently educating them through tough times and good times. Use the lessons of this still young science of behavioral finance, as PIMCO’s Hodge suggested, to make it easier for your clients to do the right thing for themselves and their families.

As someone who studied lingua nostra for years, I’m always amused and instructed by the Latin roots of our English words. Fiduciary comes from the Latin word for faithfulness. Your clients have put their faith in you, and you need to be faithful to them.

We—the nation, the profession, your clients and all Americans—will survive this latest embarrassment by our elected officials. Just be sure you’re being faithful to your clients now and when the good times return.


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