(Forbes) With the trade dispute between the United States and China showing signs of easing, the equities markets rumbled for much of May, with the S&P shedding more than 6%. This followed a four-month stretch to open the year when the index was up over 17%.
While the markets have recovered — and then some — since then, May’s losses sparked renewed jitters among investors, many of whom have enjoyed relatively smooth sailing in the wake of the financial crisis, a period marked by uncommonly low volatility. Based on my experience, though, financial advisors tend to take sudden market shifts in stride, believing that ups and downs are part of the deal.
Last April, I informally polled advisors in my database, asking them whether deteriorating market conditions warranted a shift in strategy. An overwhelming majority said no. To them, the best, time-tested approach is to “ride it out.” Retail investors, according to the same informal poll, didn’t consider “riding it out” as the best way to manage a portfolio, preferring instead that their advisor make changes when market conditions change.
More recently, I checked back in with my investor and advisor contacts, asking them the same question, thinking that attitudes may have shifted given the recent wave of volatility, not to mention the tremors of late last year. The results were not surprising. Among retail investors, views have seemingly hardened. An overwhelming majority said they expected their advisor to make portfolio adjustments when market conditions change. What’s more, most also said they wanted math and science to serve as a guide — versus an advisor following a gut feeling or piggybacking onto something a so-called guru said on television. A gap remains between what clients want and what their advisors actually do when stocks go sideways or down.
To be clear, short of going to all cash, no financial advisor can shield you from volatility altogether. What they can — and should — do is take steps to limit it. Why smart money does this is something I’ve discussed in the past. However, what if your advisor is ill-equipped to do this for you?
Up until recently, many advisors tied their value proposition to their investment acumen, telling clients their expertise allowed them to create customized portfolios and boost returns. However, this skill set has become increasingly less valuable in an era when third-party providers have commoditized the asset management process, flooding the market with a range of highly sophisticated alternatives that save advisors time and money without surrendering returns.
Therefore, every advisor has access to investment models that make their jobs easier — meaning that anyone still trying to act as their own portfolio manager has opted to do business the hard way. One byproduct of that is it makes it far more difficult to react quickly to market turmoil, since that would require making portfolio modifications for each client.
If you’re like most investors, chances are you’ve never lost sleep over your advisor’s business model, if you’ve thought about it at all. But this issue matters, because without the processes and infrastructure in place to be able to fine tune perhaps hundreds of investor portfolios simultaneously, an advisor cannot operate efficiently, and during downturns, that sort of discord could mean your assets are being frittered away.
So, next time you meet with your advisor, ask them if they are using investment models to help manage your portfolio. If they say no, they'd better have a good explanation.