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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


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There are 3 comments at the moment, we would love to hear your opinion too.

  1. I always start with a discussion about how much a client could lose in the short term, this will determine whether they should invest at all. Once there is an acceptance of risk suitable portfolios can be designed for all timeframes and clients are comfortable in adverse market conditions.

    Two of my largest portfolios are 50% in fixed term deposits, the risk of losing capital was greater than the need to make gains. The answer is to engage in the risk discussion with every client, rather than pigeonhole with ready made solutions which is not planning but product selling.

  2. I think you are right. As Keynes said “In the long term we’re all dead”.

    All this lifetime cashflow has always seemed to me either to try and show the client how clever you are or to justify a bloated fee. “The future is not ours to see”. What of job loss, promotion, ilness, marriage, family and all the other unforseens that make a fool of long term planning? Keep monitoring and adjusting – that’s the way to plan in my view.

  3. Thanks, as ever, for taking the time to read and respond my article gents and I am glad that it struck a chord, even of for different reasons. I do completely agree, as per the thrust of my article that the whole risk and potential for loss in the shorter term as well as longer is a key part of an investment discussion with clients. I dont absolutely agree with Harry’s point on lifetime cashflows for clients, we use them extensively with clients and the feedback we get on them is very positive. Some clients, although not all, like the visualisation of their finances and we work with them to ensure that it is a dynamic report which adapts to all the unforseens that Harry describes that come along. Not every client wants or needs or and nor do we insist.

    Thanks again for taking the time to respond, it is always appreciated.

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