Smart Risk Magazine Spring 2018 | Page 6

INVESTMENT ADVISOR 6 SPRING 2 0 1 8 RETHINKING THE ROLE OF AN Investment Advisor BY: Maili Wong, CFA, Smart Risk Investing • IF YOU think an Investment Advisor’s role is to predict the future, think again. Investment Advisors (IAs) may not have a crystal ball, but they may be very good at designing a smart strategy to help preserve and grow your portfolio to meet your needs and goals. The job of an IA is actually quite different than in the past. Years ago, it was not unusual for an individual to hire an advisor to pick stocks or gain access to IPOs (Initial Public Offerings). Investments were often made based on reactions to news events, “hot” stock tips or even anecdotal stories. The challenge with this approach is that without research and scientific evidence backing each decision, it was difficult to stay invested when the markets got volatile 1 . Rather than having a strong process or disciplined investment strategy, the advisor or investor could be more likely to sell on a whim. This may not be a good idea because while it’s true that a dip in price for a stock or fund could give rise to an ongoing downward trend, it could also be a temporary blip that will resolve itself in the next day or two towards significant long-term gains. In this case the investor would be better off weathering the downturn and holding on. The introduction of better, more disciplined approaches and new technologies over the past decade have enabled investment managers to track their investments much more actively with a lot more information, giving rise to the trend – or shall I say tidal wave – toward transparency. A huge buzzword in the 1 industry today, transparency means that both investment advisors and their clients see a much richer and more complete picture of how their investments are performing, as well as a more holistic view of how these investments are aligned with their overall goals. Along with this trend has emerged a new – and I would argue much better – type of IA-client relationship. An important component of transparency is trust. An investment advisor should not be afraid of disagreeing with you if it means acting in your best interest, admitting to mistakes or sharing open communication about all issues related to your portfolio. You and your IA should be able to communicate openly not just about investment ideas, but about your hopes and goals for your lifestyle, family, retirement, long-term care options and other major choices you may face. Of course, as in any profession, IAs vary, with a wide range of investment approaches, communication styles and personality traits. Some IAs might take direction principally from their clients, follow long-standing investment approaches or primarily promote products that are issued by financial companies they represent. Others may employ a more progressive, evidence-based approach that allows them to systematically and objectively evaluate individual investments and how they are aligned to each client’s unique investment goals. Here’s an example in the medical industry that illustrates the potential advantage of a more progressive approach. If you are a heart patient needing surgery, would you choose a surgeon that does the operation in a “way we’ve always done it” manner, or one who will research the latest methods and technologies and offer a newer approach backed by evidence and successful outcomes that may be more appropriate for you? A newer approach backed by research and successful outcomes could open the door to a better result and faster recovery – factors that could definitely impact which option you would choose. I see the role of an investment advisor as multi-faceted. While none of those roles involve forecasting the future – clearly not possible despite what someone may tell you – when fully embodied, they will help you make better and more informed investment decisions. Their job includes understanding their client’s needs, risk appetites and circumstances and creating an effective investment strategy around them. Here are seven hats I think every good investment advisor should wear 2 : • • • • The expert that develops client- specific expertise and risk-aware strategies to help clients meet their goals. The independent voice that advises clients objectively without becoming a salesperson. The listener that gives clients plenty of space to discuss their goals, dreams, concerns and fears and provides practical long-term solutions to accommodate them. The teacher that explains the fundamentals of investing to clients, . “A Five-Factor Asset Pricing Model”, Fama E. & French K. (2014). • 2 . “The Seven Roles of an Advisor.” Parker, J. (2015).