Clients Want It, Advisors Need It, Advisors Adopt It

Last year was a watershed for the financial advisor community: it marked the year when philosophical prejudices about investment management acquiesced to the practical needs of advisors as small business owners.  More plainly, after nearly twelve years of lackluster performance and a growing sensitivity among clients to downside risk after two market bubbles, it seems that many advisors are conceding the need for a more risk-managed investment solution to protect client assets, and, in so doing, protect their own businesses.  We observe the following:

Clients Want Risk Management.  A recent survey by Invesco / Cogent Research indicates clients have dramatically shifted their focus from wealth accumulation to risk management.  In similar fashion, a survey by Jefferson Financial indicates that clients are more comfortable with a tactical investment strategy than a Buy & Hold strategy.  Given the weak performance of the markets over the last twelve years, a permanent decline in home values and increased concerns about job security, it should come as no surprise that clients don’t want to take risk with their savings account (a.k.a. their safety net).  Indeed, during the summer market swoon in 2011, our own wealth managers at Pinnacle Advisory Group observed a number of clients re-calibrating financial plans to reflect a lower risk tolerance.  Those clients realized the “idea of risk” sounded much better when markets were healthy than the “reality of risk” feels today.


Advisors Need Risk Management.  Here we are twelve years into a secular bear market and there is just as much risk as when it began.   We suffered through the end of the tech bubble in 2000 and the real estate bubble in 2008 and now, in 2012, we potentially stand in front of a global sovereign debt crisis.  Having seen this movie twice already, advisors are understandably skeptical of the effectiveness of the Buy & Hold strategy.  They realize that pursuing the same failed investment strategy may deliver the same failed result.  They also realize that clients may lose their patience and declare “three strikes and you’re out!”

Advisors Adopt Risk Management.  As advisors, adhering to more traditional passive strategies may be intellectually appealing; but advisors are also practical small business owners who recognize that those strategies have not been effective for their clients or their businesses.  Accordingly, we observed a much broader spectrum of advisors exploring and adopting more risk-managed strategies during the summer of 2011.  Some advisors took baby steps by raising cash, others decided to try tactical investing themselves, and still other realized they should outsource the effort to someone with more training, more experience and more resources.  As the chart below illustrates, quite a few advisors shifted gears in 2011.

Putting aside the strong adoption of more risk-managed tactical asset allocation strategies in 2011, the ground remains new.  Advisors will continue to experiment on their own and some, according to Bob Veres, will inevitably fail.  When considering a risk-managed tactical solution, we recommend advisors consider the areas of due diligence listed below.  We also recommend they take a look at an article we published titled “Why TAMPs Don’t Measure Up”.

Track Record.  Keep in mind that most tactical strategies emerged in response to the 2008 market crisis and remain relatively untested.  Also realize that many managers adopted tactical in name only in order to capture the interest of advisors and drive sales.  Instead, take the time to identify the handful of experienced tactical managers with proven long-term track records (like our own at Pinnacle Advisor Solutions).

No Black Boxes.  Black box solutions always work until they don’t.  A great many of those black box solutions are rigid quantitative algorithms that crunch the numbers given them without consideration of other factors.  So they usually break when things change – when markets are dysfunctional – and that is exactly the time you most need them to work.  Look for managers that run quantitative and qualitative investment strategies: the former to keep emotions in check and the later to keep the models in check.

Robust Communication.  If an advisor is going to transfer responsibility to a third-party, there better be a robust communications platform that enables the advisor to stay informed and communicate effectively with the client.  In our note “Why TAMPs Don’t Measure Up?” we note that one of the great complaints by advisors is that the TAMPs and/or money managers are barely communicative when they are soliciting assets let alone after they already manage the assets.  At Pinnacle Advisor Solutions, for example, we view the advisors we work with as strategic business partners, not assets.

Flexibility.  Finally, your investment manager ought to be able to accommodate the flexibility that an advisor needs to set cash reserves, set cash withdrawals, tax locate securities across household accounts and handle legacy low-basis security positions just as the advisor would were he/she to manage the assets themselves.  Unfortunately, so many funds and separately managed accounts are “one-size fits all” solutions.  At Pinnacle, we are advisors.  We built our practice and our investment management to handle client accounts as advisors.  It can be done.  Don’t settle for less.

Pinnacle Advisor Solutions is a new division of Pinnacle Advisory Group that offers comprehensive, custom and private-label business solutions to emerging independent financial advisors who are committed to growing their firm profitably and developing the practice they always wanted. Designed by advisors for advisors, these solutions are proven in the field to (a) free advisor time to grow their firms, (b) produce alpha and reduce downside capture in volatile investment markets, (c) build equity in the business and (d) improve compliance.  In addition to more than twenty-years of experience growing its own firm to more than 700 families and over $1 billion AUM, these solutions incorporate more than a year of direct interviews with independent financial advisors.  (  

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