Lee Robertson: Are planners too focused on the long-term?

Lee Robertson

It is pretty well accepted that human nature is stacked against us. As advisers we are no strangers to the idea investors naturally have a tendency to buy when things are good and sell when they get scared.

In an ongoing attempt to combat this, the financial industry has worked hard to evolve over the past few decades. The trends we have witnessed can be categorised into two eras of advice.

In the first era, we focused far too heavily on returns.

I entered financial services in the late-1980s. Markets were booming. Investors were anxious to find the best adviser or the best fund, and advisers and fund groups were hungry to attract new investors. Commissions were high. Direct mailing, billboard and newspaper advertising was everywhere, focusing virtually entirely on performance.

With so many options, what knowledge did an investor have to choose one manager over another? It came down to the promises made to them, which were typically along the lines of “my portfolio selection is better than theirs”.

But this first era of returns-led advice and management largely died with the discovery of the inconvenient truth: that no one really has the magic performance bullet. Everyone is subject to the same fluctuations in markets and performance.

In the second era, advisers turned to long-term goals-based investing.

This was a natural response to the dawning expectation that, despite all the performance promises of the first era, there was just no viable way to set expectations for investors.

Planning professionals seized upon long-term goals-based investing and we still use this approach heavily today. It is entirely appropriate to assist a client to consider the longer term.

However, I just wonder whether we are starting to ignore the human nature element just a little too much. Has the pendulum’s overcorrection away from performance promises caused us to begin ignoring returns completely? If this is the case then I fear it will lead to problems for managers, advisers and clients.

For while, like I have said, it is entirely correct investors focus on the long term, it is also true they react to risk in the short term – and emotional reactions to risk are the number one killers of long-term financial goals and results.

“Has the pendulum’s overcorrection away from performance promises caused us to begin ignoring returns completely?”

Is it right to consider a third era, where we put short-term risks at the heart of our discussions as well?

Many of us should now be more savvy in the behavioral coaching role. Should we be discussing in greater detail how far a client’s portfolio could fall within a shorter timescale, before they are tempted to make an emotionally-charged, poor investment decision?

This could mean putting short-term risk first in client decisions; quantifying risk alignments from the start and setting clearer expectations for both our investors and fund managers. A more definitive understanding of risk and returns over the short, medium and longer term should inform investors more clearly than what is often heard, which is simply to ignore the markets and it will all be fine in the long term.

Clients deserve more than this generic hope-for-the-best strategy. If we frame discussions correctly it would give investors much more confidence to stick with their agreed strategies and make minor adjustments as necessary.

Lee Robertson is chief executive at Investment Quorum