Americans have been talking a lot about the “fake news” phenomenon, but fake news has been part of the investment world for some time—on TV, online and at cocktail parties. How many “hot stocks” and “can’t-fail strategies” have you heard about over the years? How many clients and prospects have ambushed you with a stock guru’s newsletter? Who hasn’t wished they could be the next Peter Lynch, Bill Miller or Bill Gross?
As the business and service model for financial advisors continues to evolve—with or without the DOL’s fiduciary rule—advisors have been deluged with messages about abandoning the promise of performance. Many of us learned in 2008, quite painfully, that clients who came to you for performance will abandon you when you can’t provide it.
What’s more, with the rise of automated investment providers, clients who come to you for asset management alone may drop you for a robo if they decide that a human money manager is too expensive.
What do you have to offer that’s distinctive—and that is more likely to help you “win” over the market than picking outperforming stocks? As an advisor, you can influence your clients to improve their savings habits, take appropriate risks (and avoid inappropriate ones), manage their tax exposure and stick with a disciplined, cost-effective strategy that will help them achieve their goals.
Easy peasy, right? Well, actually, not so much.
A great source for examining investor behavior is Dalbar, the independent research firm that has been studying investment performance and investor behavior since 1976. Over the years, Dalbar provides evidence that investors typically behave in ways that run counter to their best interests.
The result, of course, is impeded investment performance. Dalbar’s most recent survey, its 22nd Annual Quantitative Analysis of Investor Behavior (2016) found that for the 20-year period ending on December 31, 2015, the average equity mutual fund investor’s annualized return was a mere 4.67%, far less than the performance of the market over all.
In contrast, the Standard & Poor’s 500 Index, often used as a benchmark for the whole stock market, produced a 20-year annualized return of 8.19%. That’s a difference of 3.52 percentage points, a huge disparity, especially over a 20-year period.
Of course, some of this difference in returns may have to do with diversification. But we’re talking equities here, folks, and the various elements of the equity market have become more tightly correlated over the years, not less.
It’s worth keeping in mind that some behavioral finance studies have found that advisor behavior is quite similar to that of investors’.