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July 28, 2016 at 11:08 AM
Chris looked me in the eye and asked, “Mr. Hummel, what do you do for a living?”
At the time I was part of the consulting world, so I told him, “Well, Chris, I’m a consultant.” He smiled at me and asked, “Do you expect your clients to listen to you?”
“Of course,” I said. He laughed and said, “Well, sir, this is what I do for a living, so it would be nice if you would listen to me.”
We were standing on the second green at Whistling Straits golf course in Kohler, Wisconsin, one of the country’s premier courses. The guy giving me grief was my caddie. On the second green I went to hit a long putt, and didn’t ask for his guidance. He stopped me before I putted (which caddies don’t normally do) because of where I was aiming. I thought I had aimed correctly, but he disagreed. Luckily, I listened, as my aim was so poor that it would have been embarrassing to putt the ball off the green and into the lakefront of an important client’s house.
I tell that story a lot because, ironically enough, being a caddie, a consultant or a financial advisor really isn’t that different. They all get paid to give advice and make recommendations. They also encourage clients to follow their suggestions and, by doing so, often achieve a high level of success. However, with the wild ride caused by Brexit, the rough start for this year’s U.S. equity markets and market experts calling for continued volatility, it’s certainly easier said than done.
Are advisors helping their clients stay the course in 2016? We analyzed thousands of advisors managing client money themselves (rather than those outsourcing to third-party managers) during the period of 2008 through 2015. In almost every period of volatility, when the equity markets suffered a severe decline, we saw advisors moving to cash. We then compared their capture ratios, a tool used to measure investment performance, against a suitable benchmark.
Ironically, many of these advisors explained they moved to cash to protect clients, but they actually ended up capturing 92% of the downward moves. Meanwhile, in positive markets, they gave up 13% against the benchmark, with an upside capture ratio of 87%. This subset of advisors moving to cash often got there too late.
