Asset Mis-allocation

As professional advisers, we know how important asset allocation is to long term investment returns. A client without a proper understanding of what risk is and what it isn't, doesn't know this. By getting this wrong, clients are destroying more of their own wealth than fees ever will. Why is this not talked about more?

I believe that when it comes to wealth destruction, the guns are pointing in the wrong direction. Instead of pointing at our fees, they should be pointing at asset mis-allocation.

Running the numbers on the most recent 30 year investing period, it was interesting to see that the extra returns you get from nudging a portfolio's equity allocation up by 20% completely covered a 1% annual fee! Everything else you will ever do for this client will be free!

Almost all great businesses have a "story behind the story", their secret sauce as it were. The Urban Massage app has made inroads into the luxury spa industry by providing a win-win-win for the masseuse, the business, and the customer. But their real secret is that they have increased the wages for the masseuse by 4 times, made possible by not needing to rent expensive premises and invest in bloated equipment. Pepsi famously have a lifetime contract to exclusively supply their drinks at all restaurants in the YUM YUM Brands line. And closer to home, Vanguard have succeeded by having a ruthless focus on investor outcomes, amongst other things enabled by being a mutual company.

I believe our secret sauce, the story behind our story, is the courage to have difficult conversations with our clients and push back at their natural misconceptions around money and investing.

One such conversation is about nudging them away from asset mis-allocation. Our clients need to understand where market returns come from, and it's our job to coach them in becoming investing literates. And yes, they need to understand what volatility risk is, and how we deal with it. This doesn't mean that every client needs a full equity portfolio, the best portfolio is the one you can stick to.

Another difficult conversation is about fees. How we charge and why we charge it. What we provide for that fee, and what the true cost of not working with us might be. We are not wealth destroyers.

Have the difficult conversations early on. Include them in your onboarding process. Do the hard work up front, and you could have an ideal client for life.

Let's not leave this business with regrets. Let's show clients what is possible, rather than them finding out what could have been.

To watch the full talk, click here.

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