TEXT ON SCREEN: PIMCO
TEXT ON SCREEN: PIMCO EDUCATION, Delivering alpha: The value of professional advice with John Nersesian (11 minutes)
TEXT ON SCREEN: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. The information presented in this video is intended for use with investment professionals only. Some references in this recording may be region specific, dated and not applicable for all viewers.
TEXT ON SCREEN: John Nersesian, Head of Advisor Education
Hi, I’m John Nersesian, head of advisor education at PIMCO. Thanks for joining us today. We’re going to be discussing a really important issue. It’s delivering alpha, the value of professional advice, the benefits that clients derive in working with competent advisors like all of you.
I believe that there are really two important qualities that we need to possess if we want to continue to grow and manage an effective advisory business.
TEXT ON SCREEN: TITLE – Imperative qualities for financial professionals
IMAGE: Icon of a bar chart with six bars, arranged in a staggered pattern; underneath is the phrase “Seek to deliver competent, deep financial expertise”
The first is obvious. We're responsible for delivering the competent, deep financial expertise that clients demand in making their financial decisions today.
But there’s a second quality that’s equally important above and beyond delivering this kind of high value advice.
TEXT ON SCREEN: TITLE – Imperative qualities for financial professionals
IMAGE: Two boxes are side by side, with the one on the left containing the same icon of the bar chart, with text underneath reading “Seek to deliver competent, deep financial expertise.” On the right, another box has an icon with an open hand, palm facing upward, with three plus signs floating above it. Underneath it reads “Define the value of professional advice.”
We have to allow clients the opportunity to appreciate the value of the advice we provide. Let’s make sure that we’re effective at both in order to deliver a great experience for our clients.
I believe that there’s a disconnect. Most investors, if we asked them or called them today, would suggest sure,
TEXT ON SCREEN: TITLE – The disconnect: What clients think their advisors do for them.
IMAGE: Line art drawing of a man and woman, side by side. A bubble callout appears, containing the phrases “Asset allocation” and “Investment guidance.”
I seek out financial advisors to help me with the basics of asset allocation and investment selection, and that is the general stereotype as to what each and every one of us provide to our clients.
But I know that what you do goes well beyond that, and while investment management is often a cornerstone of that advisory relationship, great advisors like all of you go above and beyond. We provide our clients with a number of ancillary benefits that collectively produce great outcomes for our clients.
TEXT ON SCREEN: TITLE – The disconnect: What advisors actually do for their clients.
IMAGE: Line art drawing of a man and woman, side by side on the left-hand side. A callout box appears on the right-hand side, listing ancillary benefits: business planning, charitable giving, education, insurance, estates, family governance, loan credit management, retirement, risk management, tax considerations, and wealth transfer
We help them not only with their investment management but with tax minimization, with appropriate lending guidance, with strategies on how to fulfil their charitable giving, family governance, risk mitigation. The list of services goes on and on.
Clients are looking for more today. I mean, think about the evolution of our role. Think about the evolution of our industry. Clients demand that their financial advisors help them with more than just investment management guidance.
We’ve examined that the services required or desired by today’s wealthy families, and we’ve compared that against what’s traditionally provided. Take a look at the list of services.
TEXT ON SCREEN: TITLE – The evolution of advice; SUBTITLE – The gap: Services expected vs. services received
IMAGE: A horizontal bar chart appears, with a vertical list of 16 services. Each service has two bars, one showing the percentage of clients expecting it, and another for what percentage of clients receive it. For each service there’s a gap. Financial planning tops the list, with 96% of clients expecting it, with another bar showing only 70% receiving that service. The second bar shows 96% of clients expect wealth transfer advice while living, but only 24% receive it. For trust services, it’s 96% versus 24%. For business succession planning, it’s 80% versus 1%. Only investment management shows a relatively small gap, with 95% expecting it, and 88% receiving it.
Clients today of course want counsel on investment management, but they also want advisors who can help them solve for their liability management function, business succession planning, their corporate benefit programs, risk mitigation, lending capabilities, and tax minimization.
So then the question might be, why do today’s wealthy clients choose a financial advisor? What are they looking for?
TEXT ON SCREEN: TITLE – The evolution of advice; SUBTITLE – Top factors when choosing an advisor
IMAGE: The figure is a bar chart showing six top factors when choosing an advisor. A bar on the left shows how 73% cite as a top factor “Provides transparency in interactions,” the tallest bar in the chart. The next bar shows how 67% say a top factor is “Takes time to understand needs goals, and risk tolerance.” The other bars are as follows: 66% say “Provides prompt follow-up on requests,” 61% say “Explains financial analysis in a clear, straightforward way,” 59% say “Keeps an eye on portfolio and reaches out when there are problems or opportunities,” and 59% say “Performance of investments relative to the overall market.”
Well, the technical competency, of course, is an important characteristic, but competency in and of itself is not enough. Today’s clients want to work with advisors who they know care about them, who demonstrate empathy, who take the time and the energy to understand not just their financial circumstances but their goals in life, their concerns, the purpose of their wealth, and the ultimate legacy that they’d like to leave behind.
There’s more to this business. There’s more than what we can do to help our clients than simply managing financial pools of capital. How do we quantify the benefit of the work that we do? Well, there have been a number of studies done on that exact subject.
TEXT ON SCREEN: TITLE – Communicating your value; SUBTITLE – Breakdown of estimate value of financial advice per year in the U.S.
IMAGE: The figure is a table listing eight advisor functions in the left-hand column, and estimated value of financial advice for each as estimated by Morningstar, Vanguard and Envestnet studies. For example, Morningstar’s estimate for the value of financial planning advice and dynamic withdrawal strategies is 0.70%, while Envestnet’s is 0.50%. Morningstar estimates 0.67% for asset class selection, compared with Envestnet’s 0.28%. Vanguard estimates lower cost investment selection to contribute 0.45%, while Envestnet estimates 0.82%. The chart also breaks down estimated values for system rebalancing, tax-efficient withdrawal ordering, asset allocation, behavioral coaching and tax loss harvesting.
Morningstar, Vanguard, and Envestnet all identified a number of various advisor functions that each contribute to successful investor experiences. And in their attempt, they actually quantified the value that an advisor delivers to the individual client.
I’m a big believer that the greatest cost to today’s investor is not the nominal fee that we charge them for the financial counsel we provide. In many instances, the greatest cost to today’s investor is the cost of the mistakes they would make, the uninformed decisions, that they would reach without professional guidance or help.
We’ve provided some examples of the kind of work that you do that maybe you take for granted but collectively provide great value to your clients.
The first is portfolio rebalancing. That disciplined methodology that you use to help keep clients on track, to make sure that their portfolios don't drift unintentionally, that their risk exposures don't automatically elevate during periods of strong returns.
TEXT ON SCREEN: TITLE – The potential benefits of professional advice; SUBTITLE – Portfolio rebalancing illustration after a market decline.
IMAGE: On the top left of the image, a pie chart shows an initial allocation of $1 million in January 2008, comprised of 30% fixed income, 25% large growth, 25% large value, 10% small cap and 10% international. A table in the top middle shows the losses for each asset class for the year 2008, while a pie chart on the top right indicates the asset allocation in January 2009: 42% fixed income, 20% large growth, 21% large value, 9% small cap, and 8% international. A table on the bottom shows the amounts needed to be shifted in the 2009 portfolio to reach the target allocation.
Portfolio rebalancing is tough because it requires the investor to do what is emotionally difficult but financially productive. We know that portfolio rebalancing can add to return, plays a significant role in reducing overall volatility, but maybe the greatest benefit of your involvement in instilling a portfolio rebalancing methodology is the discipline that it provides.
Successful investing is counterintuitive. It feels good to add money during periods of market strength, and sometimes we become afraid during periods of market weakness. Portfolio rebalancing requires me to stay true to my intended asset allocation mix and to ensure that my activities and decisions provide long term benefit.
Second example that I’ll provide is family governance. I know, for many investors, the primary focus is earning, saving, investing in order to accumulate enough capital to achieve their financial goals: education funding, retirement planning.
But at some point in our clients’ life, there has to be more to the equation.
TEXT ON SCREEN: TITLE – The potential benefits of professional advice; SUBTITLE – Family governance—choices and the effect on children
IMAGE: Governance is broken down into three columns representing different types of choices: financial, intellectual choices and spiritual/emotional. Each is represented by an up/down arrow pointing to good choices up top, and poor ones on the bottom. “Financial acumen” is at the top of financial choices, while “uncontrolled spending and trust-fund babies” is shown at the bottom. “Goal-driven” and “focus” are at the top of the intellectual-choices column, with “lack of direction” and “conspicuous consumption” at the bottom. “Independence, wealth generation, confidence and gratitude” top the emotional/spiritual column, while “lack of self-esteem,” and “entitlement” are at the bottom.
They seek our counsel to make sure that their money has purpose, has value, for not only themselves but for the people they care about.
Many successful advisors have begun to incorporate a component or an offering that includes family governance, the potential to educate children to acquire not only the financial skills required to effectively manage capital but also to adopt the values that are important to the family.
Here’s another example of the great benefit that each and every one of you provide that collectively helps improve investor outcomes.
TEXT ON SCREEN: TITLE – Behavioral Guidance considerations
IMAGE: A line graph shows the fluctuations of a $100,000 portfolio from 2006 to 2010. Working from a base of $100,000 in 2006, it peaks at almost $120,000 in the first half of 2007, and bottoms around $90,000 in early 2008. The market recovers by 2010 to $111,694. Along the trajectory, the chart indicates various emotions of the investor. Those who panicked and sold near the bottom and bought back in after much of the recovery achieves a portfolio worth of just $93,320 in 2010. The chart also uses bars to show monthly inflows and outflows, with the latter being the greatest in early 2008. Three bulleted items are listed, showing how investors favor recent returns, follow trends, and chase performance.
We call this behavioral guidance, and we’ve provided you with an example as to how investors are often affected by many behavioral biases including recency, the temptation to over allocate capital to investments that have done well recently while ignoring the longer term trends or opportunities before them.
It’s more comfortable to add money to asset classes after periods of recent strong results, and it’s probably satisfying to liquidate investments after periods of underperformance. Successful investing, however, is counterintuitive, and it requires discipline and emotional stability.
There are significant benefits that we provide our clients who ultimately choose to engage a professional advisor, and we try to quantify them in the study shown before you.
TEXT ON SCREEN: TITLE – The potential benefits of professional advice; SUBTITLE – The cost of bad behaviors
IMAGE: Two bars side by side show the difference in annual performance over 20 years between the S&P 500 and that of investors. The S&P has returns of 6.06%, compared with just 4.25% for investors. The difference is shaded on the investor bar, labeled as the “behavior gap.”
You can see that the average investor over the last 20 years earned a return of over 6% but unfortunately, the average market participant underperformed.
Why? Well it’s these emotional choices. It’s the difficulty of understanding the complexity of the financial landscape. I’d like to believe that an important part of our role is to help the investor close that gap between the returns that they are entitled to receive through market results as opposed to the individual returns that they would achieve on their own.
So the question is, how do we communicate these great capabilities? And I’m sure that each and every one of you have your own abilities to communicate your value. We’ve gleaned a number of best practices across the work that we do in the industry, and we’ve identified a few that we’ll share with you now.
TEXT ON SCREEN: TITLE – Best Practices
IMAGE: John speaking on left-hand side of screen. John runs through the list of best practices, shown on the right-hand side.
Number one, less is more. Clients come to us not for additional complexity or homework, they come to us to help simplify what is already complicated. They come to us for help in making what is somewhat irrational more logical, to make the financial management experience both more productive but more pleasing as well.
Number two, less me, more you. What does that mean? Well, certainly our capabilities and our experiences are part of the story. Let’s make sure that we communicate our value in a client centric manner, what we’re able to do to provide benefit to the end investor.
Third, let’s focus less on features and let’s focus more on the benefits that our clients derive through the features and services we provide. Next, let’s make sure that our message is both differentiating and compelling, that we become an obvious choice for financial counsel, where the fit is appropriate.
And then last but not least, let’s make sure that we take advantage of imagery. Whether we’re using written materials, whether we’re articulating our message verbally, whether we’re using electronic forms of communication, let’s try to find ways to communicate our story in the most effective manner possible.
Thank you for spending a few minutes with us today to examine this very important issue of delivering alpha through professional guidance and advice. I hope that you found the conversation to be helpful.
To learn more about our abilities to support your efforts in this regard, please feel free to reach out to your PIMCO account manager or to visit our PIMCO website. Thanks for your time today.
Text on screen: To learn more visit Advisor Education at pimco.com or speak with your Account Manager
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Please note that this video contains the opinions of the manager as of the date recorded, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
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