Over the past decade or so, the asset management and advisory businesses have become far more challenging. The forces of creative destruction have been hard at work, calling into question both the value add and fees charged by investment professionals at all levels. Further, the drumbeat of technological progress promises that investors will increasingly turn to cheap, automated solutions for their asset allocation and portfolio construction needs.
While asset allocation advice may become more commoditized, we know that true due diligence cannot be automated. There is no system – stars, Q-scores, or otherwise – that can eliminate the need for a thorough diligence process. But make no mistake, it is difficult work. It is time consuming and costly, tedious at times, and often unrewarding (the outcomes are skewed to the downside). Additionally, having been on that side of the table for a good portion of my almost 25 years in this business, I can say with certainty that it can seem like a game of asymmetric warfare, whereby the manager’s information edge is exploited, showcasing all positive attributes and hiding all flaws. And that is a mistake.
In this business, successful outcomes are achieved through a true partnership between asset managers and advisors. Advisors can’t take shortcuts, they must ask the hard questions, and they must know exactly what they are investing in and the associated risks. But asset managers have a duty that goes far beyond playing the role of the beauty contestant. Asset managers must educate, be transparent, and provide access to investment professionals who can work with advisors to set proper expectations. The full extent of the risks born should never be hidden. Quite the opposite, they should be widely communicated.
We recently hosted advisors from around the country at our bi-annual due diligence forum. Our team went through detailed presentations on exactly what we do, why we do it, and the expected outcomes from our efforts. We go granular because we’ve learned something of great value over the years – knowledgeable investors are long-term investors. As David Swenson at Yale has said, “Casual commitments invite casual reversals.” We don’t want money from investors who’ve never spoken to us, because at the first sign of a period of underperformance, they’ll head for the exits, possibly harming existing investors.
Recently, investors have been hurt by funds and ETFs that contained risks that few imagined. Whether or not the managers involved understood the true risks in their portfolios is an open question. But if they didn’t they were ignorant, and if they did, they were negligent, at least in terms of their duty to communicate those risks to their investors.
This is a partnership. One doesn’t succeed without the other.
Read out latest blog post, The Process of Winning >