Financial planner says evidence does not back up majority of index-beating claims
Returns-obsessed advisors have been told to instead focus on what really matters – people’s lives.
The fierce debate on fees and how money managers can provide value in this digital, robo age has split opinion.
Some believe active will swing back to prominence if and when a downturn kicks in, while others have criticised advisors for resting on their laurels and not making the industry better.
Jason Pereira, partner and senior financial consultant at Woodgate Financial, is an outspoken critic of those in the wealth space who fail to see the big picture when it comes to the increasing commoditization of professional advice.
He maintains advisors must channel their energy into cementing an attractive value proposition but said they are in trouble if that revolves solely around beating the index.
He said: “Show me a single academic study that shows that any broker – let’s call them what they are – is able to sustain long-term returns that are better than an index. There is not a single one out there.”
Pereira, instead, points to research that shows how hard it is for active managers at the top of institutional wealth management firms to outperform and scoffs at claims from those further down the food chain.
He said: “What in God’s name makes any advisor - whose job is split between client management and running their own team and picking stocks and everything else they do - think that with zero resources, poor execution and poor interactive information, they are going to do better than the mutual fund managers that they are poo-pooing for not outperforming the index. It makes no sense.”
The Toronto-based financial planner said robos have laid down the gauntlet by giving modern portfolios a 50 basis points starting price. Upgrading to stock selection gets more expensive and he admits the focus on returns should, therefore, get more intense.
But he said: “I will challenge people to prove that their returns are better than what people can get alternatively with active management that has better resources passive management that has lower costs.”
At the heart of Pereira’s argument is that an advisor’s role should come down to effective financial planning and satisfying client’s need.
He said the biggest misconception is that people think they are paying for returns when it’s really all about risk exposure.
“The reality is we can’t control returns but we can control risk exposure,” he said. “First and foremost, the value proposition starts with viable financial planning. It’s not about chasing numbers for numbers sake, it’s about [clients] wanting to be set up for life. So, let me figure out how to get you there at a level of risk you are comfortable with.
“And you know what, maybe you don’t even need to take the most risk. It may say that your risk tolerance says you can take 80% stock but you can actually do this if you take 40% stock, so there is the trade-off. What are you comfortable with? And more often than not, when you show them that you can reach your goals and take a lot less risk, they are like, 'I’ll take option B'.
“The biggest issue is we need to focus on what this is really about – people’s lives and getting them what they want. That’s what the fees should be for.”