In today’s market environment, many financial advisors and their clients are happy that their portfolios have performed well for several years. But as equity markets continue to climb, now may be the time for advisors to re-examine portfolios.
Typically, advisors only make changes to client portfolios for good reason, and today, there doesn’t seem to me a good performance-related reason.
The overall volatility of the S&P 500 Index has been at historically low levels in 2017. September’s volatility of daily returns was the fourth lowest on records kept for the past 20 years—and the second and third lowest months also occurred in 2017. To the extent that advisors are making changes, they are doing so on the pricing side, to reach a desired fee. That’s why so many portfolios are moving to passive.
The portfolio that made clients happy over the past one to five years likely won’t make them happy over the next one to five.
When we speak to advisors, we are asking questions to get them to think about challenging the status quo: What are you going to need to keep your clients satisfied with their portfolios in a year, or three years, or five years? Because the portfolio that made clients happy over the past one to five years likely won’t make them happy over the next one to five.
I say that because we’re in the midst of a historically significant bull market. Since the last bear market ended in March 2009, the advance we have seen in equities is the second-oldest on record without at least a 20% drop in the S&P 500 Index. We will undoubtedly experience a market correction at some point.
Advisors know this. When we polled them in late September, asking how concerned they are about a correction in the equity markets over the next six to nine months, 86.4% said they are very or somewhat concerned (of 147 replies).
So serving our clients is a matter of being forward-looking versus backward-looking. Wayne Gretzky talked about skating to where the puck is going, not where it has been, and advisors can do the same by thinking about potential pain points.
Perhaps thinking in this way will involve changing exposure to various asset classes.
Perhaps it will involve focusing on capital preservation.
Perhaps it will involve moving assets from passive to active, because a turn in the market environment could lead to active managers being rewarded for their ability to navigate the market and identify regions, sectors, or stocks that could benefit their clients.
Regardless, there’s resistance to this kind of change, because the economy is on solid footing and the markets are full steam ahead.
So, as an advisor, you have to look at your client and say, “Your portfolio has been performing extremely well, but we suggest taking some money that has been outperforming and putting it in something that is potentially going to return less today, but could provide opportunity later or lessen the impact of a downturn.” That’s a hard sell.
Clients fear that changing is premature. It’s hard to make a case for change when there’s really no compelling reason other than, “Something might happen in the future.”
What I highlight to advisors is that we’re not necessarily suggesting that clients make a dramatic change today; but it is good to let them know you’re thinking about the future. By doing so, you’re staying engaged with them.
So, when there is a trigger—perhaps a market downturn or a geopolitical event that sends a shockwave through the system—you’re in front of it, and you can continue the conversation.
Biggest Global Risks?
We asked advisors which global risks they are most concerned will impact markets and their client portfolios (of 205 replies).
A few weeks ago I talked to a new analyst for a team of 10 advisors. He has a big job, helping manage billions of dollars of assets. I asked him, “What are you looking for if you are going to make a change? Are you looking for asset protection or asset growth? Do you want a way to dampen risks? Are you looking for a differentiated return stream?” He said he’s willing to accept a lower rate of return with lower volatility and a diversifying alpha source.
So, I suggested he consider our global macro strategy, then talked him through where the money might come from. Ultimately, all I did was give him a better sense of how he could use a strategy we have to solve a problem that he started to see.
Obviously, year-end is a good time to have this conversation, because investors are thinking about the changes they might make over the next quarter to keep their portfolios in shape over the coming year.
But you have to have conviction in what you’re doing. A couple years ago, we started to have early conversations about emerging markets well before the run-up. We were early, but we were right, and many of our clients thanked us for putting emerging market equities on their radar before they normally would have.
But getting out in front of something, even if it means being a bit early, is part of our job as investment managers, just as it’s part of an advisor’s job. It’s easy to do it after the fact; but clients benefit the most when you’re forward looking.