I love it when someone asks an adviser, "So tell me, how have you done?" Typically, this question is asked to better understand an adviser's returns from a product or solution in comparison to the individual's desired returns. They ask this question based on either historical data or their own experiences, including their risk tolerances, investment objectives and even media exposure.
On the other hand, a required return is a return estimate resulting from an individualized and dynamic planning process. It takes into account each client's unique set of circumstances. There is not a composite or one-size-fits-all category. Importantly, a required return is typically inflation adjusted, since spending and savings patterns are always influenced by prices moving higher.
For example, a balanced portfolio of 60 percent stocks and 40 percent bonds over the past 50 years has had a nominal return of 9.51 percent. However the real, or inflation adjusted, return was only 5.10 percent.
I fully understand the line of questioning and generally lay the blame at the feet of my industry for frequently thumping our chests saying "Hey, look how good we are!" Luckily wealth management is changing, and the focus is more on planning and required returns - not product returns.
Nevertheless, this focus on desired returns vs required returns remains problematic. One expecting a desired return of 9 percent to 10 percent from the U.S stock over the next 10 years might prove to be too optimistic. Additionally, one expecting bonds to return 7.45 percent over the next 10 years (their return over the past 50 years) might have trouble assembling a diversified portfolio when the 10-year Treasury is only yielding 1.46 percent.
This is where coaching and planning comes in. Today's wealth management clients are requiring their advisors to deliver a more holistic wealth management approach as a service rather than a product sale with all the bells and whistles.
The good coaches tend to be the ones that introduce this approach during the very first meeting by explaining that this is the best way to achieve long term objectives. Under this scenario conversations change, focus changes and even the written material changes.
I am not suggesting that investment performance is not important. Rather, I prefer to talk in terms of achieving a client's required return than pure investment returns. Said another way, the majority of the conversation ought to be about what is going on in one's life that could impact their long term plan versus how a large cap growth manager beat their benchmark by 25 basis points.
So what are the types of things you should demand from today's advisors:
- Financial Plan. Even if you have multiple advisors, you need to have one plan in place and communicated to everyone.
- Investment Policy Statement. Defines your investment objective and risk tolerances, including the types of investments which can and cannot be used.
- Service Delivery Expectations. You should clearly understand how, when and by whom the advisor's service will be delivered, even on a daily basis.
- Thorough understanding of your tax situation. This would include both retirement and non-retirement assets. Some clients do not want to extend tax returns, so certain types of investments might be excluded.
- Depth of the Team. Understand who is there to assist you and your family if your advisor is unavailable or leaves the firm. What are the team's qualifications?
- Follow-up after every conversation and meeting. Demand a written follow-up to every meeting and conversation. This material is critical to mutual understanding, future meeting productivity and planning reviews.
- Family Governance and Educational Resources. Understand what family governance and educational resources are available.
So when someone asks me "how have I done" I just say really well and smile knowing our families are doing well!
Andy Muldoon is a senior vice president at The Trust Company in Chattanooga.