INVESTMENT ADVISOR
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SPRING 2 0 1 8
RETHINKING THE ROLE OF AN
Investment Advisor
BY: Maili Wong, CFA, Smart Risk Investing • www.smartriskinvesting.com
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
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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 :
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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).