We have been in a bull market since the GFC. Because of this prolonged cycle of bullish prosperity, many financial planners have become guilty of providing complacent investment recommendations.
Most strategies in the market are too ‘cookie cutter’ and are not resilient enough to survive a downturn or an end of an investment cycle. What’s more, these strategies do not seem to adequately compensate the investor for the actual risk being taken. Are we really doing our best interest duty with the investment strategies that we are dispensing?
Looking at the current state of things, we have observed three investment ‘wrongs’ many financial planners are guilty of:
01 Crowding into one strategy
Many financial planners have the mentality of ‘if it ain’t broke ... why fix it?’ and as such, many financial planners crowd into same strategies for the past decade thus causing risk to be misanalysed and misrepresented. This results into the funds to become improperly diversified investment portfolios that holds more risk than anticipated (especially in the case of a future downturn). An example of this is the proliferation of financial planners recommending index investing for retiree accounts due to its low-risk nature. What’s more, it has been working well for the past decade. As this investment strategy is easy and convenient, many financial planners crowd into this seemingly ‘effective’ strategy. This complacency may place many retirement accounts at risk as index investing is most effective during a bull market.
With many signs pointing to an imminent bear market, what happens then?
02 Short Term Focus
Living in the now is a great thing; however, this should never be the case in providing investment advice. Many financial planners have a rather short-term focus when providing advice. For instance, financial planners automatically label bonds as a defensive asset for a portfolio. However, with a prominent debt bubble in the market, a bond’s true risk is much higher, which in turn makes it less defensive in the long run. Not only are bonds not defensive in the long run, bond returns may no longer be adequate and appropriate to compensate investors in the long term.
Sure, it's good or appropriate now, but what about in the long term?
03 Providing 'cheap' strategies instead of 'good' strategies
The past decade has made the ebbs and flows of the market to be somewhat consistent. Because of this, financial planners have focused more on creating cheap and easy strategies than actually coming up with a good and effective strategies that put their clients in a better position. For instance, many financial planners currently choose ‘best rated investments with the cheapest operating cost’ instead of actually choosing investments that hedge against interest rate risk, inflation risk, sequencing risk, market downturn risk.
Sure, its cheap, but is the strategy actually good?
The most interesting thing to note is that many financial planners do realise these mistakes but choose not to deviate or do something about it as they feel that there are not substitutes available.
There is always a better way of doing things. With our fiduciary duty to our clients, there is no excuse to be ‘lazy’ and live in a perpetual state of denial that things will stay the same forever. Markets are in a state of flux and we must prepare our clients for whatever change the future can bring. We have to fight against the status quo and go the extra mile for our clients. We must have a long term focus. We must truly consider risk on all fronts and how it will affect our clients. We should stop the cookie cutter investments and truly diversify – by picking an array of assets and sectors thereby future-proofing our client's portfolio.
Stop making the same mistakes.
It's time for a better way. Your investors deserves better.
DynamicAsset focuses on forward-looking active management with the specific aim of achieving investor goals. Our goals-based investment approach actively manages portfolios to achieve specific outcomes, be it cash flow, risk or return. In turn, we create risk resilient, portfolios that have significantly higher probabilities of meeting investor goals through a less volatile investment growth trajectory. It's time for a better way.
It starts with Dynamic Asset.
