The marketing of smart beta and factor-based investing is everywhere, leaving advisors wondering if the next best thing is really what their clients need – and more importantly, what they don’t.
“I would stress that it is important with all these new choices that people understand exactly what they are, and also what they’re not,” says Don Bennyhoff, senior investment analyst for Vanguard Investment Strategy Group. “I don’t think any of these are a magic formula to defeat underperformance. They may have a role in some people’s portfolios, but maybe not in others.”
It is a common issue he hears from advisors, because the marketing promotes it as being better, and that everyone needs to be using them – but that isn’t the case.
“The marketing out there is very powerful – there is a lot of money at stake, and frankly there is nothing easier to sell to someone than something that they don’t already have,” Bennyhoff told WP
. “There are a lot of incentives to sell something that is ‘new and improved’ but it is really in the advisor’s best interest that they fully understand what it is they are selling to the client. Clients are hearing those messages too, and that is why they are turning to advisors for help.”
For Atul Tiwari, the managing director of Vanguard Investments Canada, there should be a discussion on what exactly smart beta and factor-based investing is really all about – both for the client and the advisor.
“There is nothing wrong with smart beta or factor-based investing. We just say that it is important that advisors and their clients understand that it is not indexing,” says Tiwari. “Whether you call it smart beta – I use the term ‘strategic data’ – all of those are active investing, and that is because you’re not strictly following the broad market. You are applying some sort of screen or factors right at the outset. And once you make a decision on those factors, you’re making a bet. Sometimes it works out well, sometimes it doesn’t.”