Over the past five years, the lines have blurred between genuine investment competence and the bull market induced “flavour of the time” selling of products which delivered short-term returns because of market bubbles and short-term momentum.
Too many clients, investors and advisers seemed to confuse the latter with the former and we do not want to return to that way of advising and investing when the current storm abates.
For the vast majority of investors, there is a need for advisers to manage their return expectations realistically. Investment returns are cyclical. A view seems to have grown up that one can beat or avoid these cycles. Whether this was a Government-induced fantasy (the removal of boom and bust) or more plainly a triumph of greed over fear is open to debate. Either way, it has led to the current crisis being a much more painful experience than it might have been.
Equity, fixed income, balanced or multi-asset investing should not in my view be driven by overly short-term performance perspectives. To achieve a performance level of substance over the medium to long term does not mean that there will be only positive years.
It means there will be periods of outperformance and periods of underperformance and over the term these will produce an overall result. None of this should surprise investors, advisers or regulators.
This reinforces the importance of genuine investment competence as a key issue in product provision and investment advice for our industry. The recent RDR conclusions (or is it another consultation?) seem to reinforce this view by the regulator.
Advisers need to be competent in understanding client needs, assessing risk tolerances, evaluating and presenting investment and product choices, helping clients review their progress over time and responding to changing client situations. Critically, advisers should also be able to manage client expectations and provide reassuring counsel in tough times while equally toning down any irrational exuberance in the good times.
It gives me some comfort to observe that a number of advisers are now more open about their inability or lack of desire and resource to become an investment manager.
There is a growing awareness that a different set of skills and resources is required to be an investment manager. For example, we have a team of more than 40 highly skilled and trained people and a range of sophisticated risk management/portfolio construction and perform-ance measurement tools at our disposal.
This enables us to run a range of sophisticated, managed, multi-asset and multi-manager portfolios for advisers and their clients. It is unlikely that the vast majority of advice firms in the country could also afford to run such a resource.
For the benefit of all our clients, it is essential that advice firms work with the fund management houses that have the skill, resources and commitment to deliver investment products. When sold well to clients, these products can deliver results that meet their expectations.
Robert Noach is head of financial institutions at Schroders