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Ditch benchmarks in client conversations, advisers told

Advisers are being urged to talk to their clients about the performance of their investments in terms of their goals, rather than referring to benchmarks and indexes.

Thursday, November 17th 2016, 6:00AM 12 Comments

by Susan Edmunds

Adrian Kwa

ANZ’s head of advice transformation Adrian Kwa said goal-based investing offered a more focused approach that addressed the most important issues for investors.

They would often have a range of goals, both short and long-term – and advisers could tailor their portfolios to suit the desired outcomes.

If a client needed money for their kids’ education in a couple of years, a percentage of the portfolio could be separated off and allocated to that goal, with the correct asset allocation. Its performance could then be judged on how well it was on track to achieve the target.

Adviser Jordi Garcia said it was a method he already used. “A benchmark is just a yard stick, that’s all. To be honest, most clients don’t have a realistic expectation for benchmarks. If you ask a client what their expected return from an investment will be they can’t answer that because they have nothing to gauge it on.”

He said he would often break goals down to the income that clients would need to support their lifestyles.  “Nine out of ten clients have no idea where to start or how to look at investments but they can say ‘I like to go out to dinner every night and that costs me $100,000 a year’ – that they can relate to very quickly.”

He said benchmarks were used in internal discussions but rarely taken out to clients.

IFA president Michael Dowling agreed benchmarks could be problematic.

“Eventually they will not work for the individual. This is because the focus is on having the fund in play all the time to constantly out-perform the benchmark,” he said.

“In my opinion the point of money is to support your lifestyle. Once you understand how much you need to support your lifestyle goal, it could mean you can achieve your goals by taking less risk rather than more.

“The benchmark could be invested with rolling timeline, some as long as 40 years for instance, this will always be disconnected with your personal investment objective - either being too short if you are investing at an early age or for multi generations, or too long if you plan to access the funds sooner.”

IFA chief executive Fred Dodds said goal-based investing required a financial plan from an adviser.

“This would then lead to short-term, mid-term and long-term solutions and they would get them with planned investments and each goal would no doubt have a different risk profile.

“This would fit with the advantages of using a competent adviser who would first bring organisation to the situation and then prioritise the goals - isn't that just effective financial life management. It would for sure involve regular discussion between adviser and client - and that's all good.”

Tags: ANZ investment

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Comments from our readers

On 17 November 2016 at 10:49 am R1 said:
This whole article smacks of an excuse not to engage with clients about how the advisor has performed against an appropriate benchmark and also other advisory firms. Simply setting goals and measuring performance against them makes it very easy for dodgy advisors to coach clients to lower expected returns than the risk they are taking with the clients funds and creaming off higher fees (BAU some might say).

I have never worked for a company that did not use benchmarks as a reference for performance and why would we ever not use them as a reference for portfolio performance for our clients? The simple answer is we think the client is stupid and we can hide our poor relative performance while we charge high fees.

More dodgy weasel words from an industry reluctant to be accountable to its clients for its performance and fees. Given that this article comes from a bank I would be very interested to hear the FMA's comments on this one. I expect to hear nothing as they probably think this is 'fair'.
On 17 November 2016 at 12:19 pm Brent Sheather said:
This is indeed classic stuff from the fund management industry and the adviser association. The thrust of the argument seems to be if you can’t beat the benchmark don’t mention it to your clients. Funny thing is everybody else uses benchmarks to assess performance. A giant step backwards for sensible advice.
On 17 November 2016 at 1:22 pm Graeme Tee said:
These are ridiculous comments: professional investors all use benchmarks so why shouldn’t professional advisors? If fees are high managers and advisers charging them will always hugely underperform any benchmark. That surely is the underlying rationale for these comments.

Next thing we will see CPD credits be given by a professional association for “how to ignore benchmarks in favour of focussed investing”.
On 17 November 2016 at 5:33 pm winstonkey said:
Geez you commenters are cynical.

All someone has to do is put "misleading sales practices" and "bank" in the same sentence and you start questioning motives.......... It's not as if we have ever seen it before.

Mind you, judging by the complete disaassociation from reality that you see in this story:

then nothing would surprise.

Lets run through the facts:

1. ANZ has just sold their Asian wealth business
2. ANZ has just put their Australian wealth business up for sale
3. ANZ announces "no plans to review ownership of NZ business"....... hahaha...... pull the other one, it has bells on it........

On 21 November 2016 at 7:28 am Pragmatic said:
Prior to being called the MSCI, the Capital International benchmark was designed by a funds manager to provide an institutional yardstick for comparison of their large cap, long only, fully invested (predominately) US equities funds. Since that time, the use of benchmarks have exploded to all investment capabilities – largely led by the institutional gate-keepers who prefer to pigeon-hole traditional managers.

In the retail world, mum & dad investors see little use for traditional benchmarks. Ask any of your clients what is important to them, and I’d be unsurprised if they didn’t note “preservation of capital” (don’t lose my money), and a return that is in line with their risk tolerance. There benchmarks tend to be the $100 that was first handed over to an adviser, together with the rate of their term investments.

From a more philosophical perspective, I think that there is merit in adjusting the rhetoric to suit the audience that we’re talking to. Whilst traditional benchmarks continue to be used in the institutional space, they are largely meaningless for the retail audience.
On 21 November 2016 at 10:01 am R1 said:
Hey Pragmatic; let's just keep the investing public in the dark and milk them of their future returns while taking more risk than is necessary so we can pay ourselves fat fees.

Your condescending tone really is annoying. We have an obligation to inform our clients and up-front explain the benchmark(s) we will compare their portfolio to and why they are relevant. If we use something like a 90 day bill benchmark for a diversified portfolio then we should expect the FMA to be onto us like a ton of bricks. For each asset class there are easy to understand (when properly explained) benchmarks that can be used and this can easily be translated into a benchmark for the overall portfolio, in-line with the asset allocation.
On 21 November 2016 at 12:14 pm Brent Sheather said:
Let’s be honest, there are two reasons why unethical advisors would want to ditch benchmarks. Firstly, most active funds underperform their benchmarks and secondly, the higher the fees the more likely the fund is to underperform the benchmark. Very simple and very sad that despite the rhetoric many advisers are still not putting clients’ interests first. Let’s hope the FMA is watching closely.
On 21 November 2016 at 12:15 pm Another AFA said:
Pragmatic - well said and I support your comments.
On 21 November 2016 at 4:36 pm Pragmatic said:
Apologies R1 – my intention is not to appear condescending. My intention is to present a background around why the global investment management industry has wrongly convinced investor clients that their goal should be to try to consistently outperform the various stock & bond market indices, when the relative performance of a client’s investment portfolio (ie: beating the indices) has absolutely nothing to do with the real investment performance benchmark which is meeting a client’s future consumption requirements.

A few decades ago, most investment managers structured client portfolios by using such a ‘goals-based’ or ‘asset-liability’ approach. The general performance of ‘the markets’ had nothing to do with how they structured their clients’ portfolios.

Unfortunately with advances in technology has come the referencing back to a mass of global capital markets indices. The investment industry, and by extension consumers, have become obsessed with ‘beating the indices’ instead of simply meeting each client’s unique set of investment objectives. I still attend industry award ceremonies, whereby accolades are handed out to those Managers who delivered a negative real performance – yet outperformed a meaningless index.

The irony of ‘relative investment return seeking behaviour’ is that it actually drives investors ‒ and their advisors ‒ to source investment managers who assume heightened levels of investment risk in order to ‘beat the index’, or in a growing number of instances, firing investment managers when they’ve had a few quarters of relative underperformance (despite the fact that their philosophies and processes remain intact).

The unfortunate reality through the lure of ‘relative investment performance’ is that many have paid the price of not meeting their future consumption requirements. You don’t need to look much further than defined benefit schemes who have seriously unfunded liabilities because their portfolios were designed to ‘perpetually chase relative returns’ instead of focusing on matching their assets to future pension obligations, or those investors who have had to defer retirement because they were ‘chasing relative returns’ instead of focusing on the accumulation of a capital base that would fund a future quantified retirement income for them.

The solution is for the advice industry to get back to the basics’ of being true fiduciaries and get focused on structuring portfolios for clients that actually help them meet their future consumption requirements (subject to each client’s tolerance for risk to income and/or capital).
On 21 November 2016 at 4:42 pm Pragmatic said:
My apologies, I had just pushed send, when this relevant item of news came through:

“The concern for stock investors, especially passive ones, is that bond-sensitive stocks form a record 60% of the S&P/ASX 200 Index due to the financialisation of Australia’s economy of recent decades, which has seen bank lending balloon from 85% of GDP in 1991 to about 160% of output now. The unwinding of the distortions on stock markets magnified by central banks thus threatens a record part of the ASX.”
On 22 November 2016 at 9:00 am Brent Sheather said:
Hi Pragmatic

Your pseudo-science doesn’t impress. For a start “needs” expand to meet funds available. You don’t “need” that round the world tour on Royal Caribbean but given the choice over a life time, of paying $100,000 in extra fees or keeping the money for yourself to fund the trip, most rational people would take the latter option.

More fundamentally your “needs” analysis ignores the fact that satisfying “needs” is a function of four variables:

• Returns
• Fees
• How much you save
• How long you save for

Over the broad sweep of time dividends have grown at an average of inflation plus 2% or GDP less 1%. Today therefore given current yields including buybacks the Gordon Growth Model says the long run return from global equities will be about 6% pa pre-tax, pre-fees, pre inflation. Fees of even as low as 1-2% pa look rather important. Therefore to achieve their “needs” a rational consumer will look to minimise fees given that saving more probably isn’t an option for most people and is certainly less intrusive on their lifestyle. This is common sense and really shouldn’t need to be spelt out to anyone. Just yesterday an executive from the FCA stated the obvious when he said that financial advisors were an important interface between fund managers and clients and a key aspect of their job was getting a good deal for their clients i.e. minimising fees. Your last paragraph alludes to this and the obvious strategy to “get focussed on structuring portfolios for clients that actually help them meet their future consumption requirements” is minimising fees, in the context of correct asset allocation.

To be quite frank my view is that your pseudo-scientific derivation of the asset liability approach simply serves the “needs” of the industry rather than those of the client.

Brent Sheather
On 22 November 2016 at 10:36 am Pragmatic said:
Thanks Brent. Entertaining as always.

I deliberately avoided straying into the debate surrounding fees, and have attempted to focus on the equally important issue surrounding the reliance on benchmarks. For the purposes of continuing that discussion, I’ll direct you to our recent exchange on fees…

As we are constantly reminded of your appetite for academic research, I’d suggest that you review “The Cost of Constraints: Risk Management, Agency Theory and Asset Price” by Ashwin Alankar, Peter Blaustein, & Myron S. Scholes.

Theirs is less pseudo-science, and tackles aspects of my previous comments well.

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