In light of the growing popularity of adding a consultative element to the giving of financial advice, along with the availability of do-it-yourself financial planning, the author of this article believes it is time to examine the potential pitfalls in the consulting process. He suggests that the methods financial advisors are using may, in fact, be a factor in the decision of some clients to abandon a professionally designed strategy and strike out on their own financial planning path.

The way investment services are delivered in this country has undergone profound change in the last decade. One of the most significant changes has been the shift from the product-oriented sales approach to the consultative approach for providing financial services. A symptom of this change has been the trend toward fee-based advice. But the importance of this change has less to do with the way financial advisors are compensated than with the ideological framework that is at the heart of the consultative services movement. Consulting services can be paid for either on a fee or a commission basis. The true significance of this change is found in the fact that the focus is no longer on product-oriented storytelling, but rather on client needs. In the consultative services model, client interests come first.

Along with this new ideology has come a new methodology for providing investment services to individual investors. The new methodology is modeled on the consulting process used for years by institutional investment consultants in providing services to their clients, primarily employee benefit plans. The process involved:

1.     A thorough profiling of client’s needs, goals, experiences, preferences, time horizon (often infinite) and other relevant characteristics such as risk tolerance

2.     Creation of a statement of investment policy or other written guidelines setting forth a strategy for achieving the clients’ goals, while taking into account the factors identified as significant in the profiling process

3.     Selection of investment managers to implement the investment policy

4.     Periodic monitoring and reporting of results

The consultative approach to providing investment advice caught on and grew rapidly in many parts of the financial services world, but particularly among financial planners and independent financial advisors. In fact, the culture of this relatively small corner of the financial services world is defined today by the consultative approach to advising clients. Clients responded positively to this approach because, for the first time, their needs were the focus of the interaction with their financial advisors.

Ultimately, the financial services behemoths took note and initiated a rapid migration to the consultative model of doing business. There are still pockets of resistance (most notably the insurance industry), but we are now witnessing the phenomenon of vast armies of formerly product-oriented brokers laying down their arms and being transformed overnight into “financial consultants.” These freshly minted financial consultants are joining ranks with the planners and independent advisors who pioneered the consultative services movement, thus depriving the pioneers of their primary basis for differentiating themselves from their better-financed competitors.

At the same time, we have witnessed a rapid commoditization of investment products over the past decade. For example, at the end of the 1990s, there were six times the number of mutual funds in existence as there were at the beginning of the 1990s. There are now more mutual funds than there are stocks on the New York, American and Nasdaq stock exchanges combined. More and more, we see firms that once exclusively promoted proprietary products open their doors to, and actively promote, the widest selection of non-proprietary products. Soon, thanks to the Internet, clients will have direct access to an unlimited variety of investment products. The days of the product gatekeepers are over. Everyone will have access to everything.

As more financial advisors adopt the consultative model and investment products become more commoditized, the quality of an advisor’s consulting services will become the primary basis for differentiation from other advisors. This is certainly good news for clients, who will benefit directly as financial advisors vie with one another to improve the quality of their services. For financial advisors, however, it means that a thorough review of their consulting processes is in order.

To help with that process, I have identified Seven Deadly Sins of Consulting. The list is by no means exhaustive (our ability to sin is limitless), but I believe it will help financial advisors take a fresh look at how they provide consulting services and provide some very practical ideas about how to improve those services. I believe that the biggest single risk to your client’s financial well-being is the risk that your client will abandon the strategy you have devised for them before it has had a chance to produce results. This risk is especially high these days because there are so many do-it-yourself alternatives and so much pressure on clients to go it on their own. For that reason, the “seven deadly sins” are intended to help you identify consulting practices you employ that might inadvertently contribute to your client’s decision to abandon the strategy you have created for them.

Pride

Financial advisors spend a great deal of their time studying the behavior of markets and the relative merits of various styles of investment and types of investment vehicles. This is a good and necessary part of our profession. Advisors must understand the forces that affect financial markets and the alternative ways to implement an investment program for a client.

The problem arises when a financial advisor stops looking at the different approaches to investing as tools to use when appropriate and begins to believe that there is a “right answer.” You can see this problem manifest itself in the debates between advocates of indexing versus active management, mutual funds versus separately managed accounts, and strategic versus tactical asset allocation. The proponents of these approaches to investing become extremely committed to the academic proof statements showing that their view of the world is correct. But their pride in being right blinds them to some important realities.

First of all, as an advocate of a single approach to investing, you will be right sometimes and you will be wrong sometimes. For example, indexers looked pretty smart for much of the recent past. From 1994 to 1998, the S&P 500 beat the average equity mutual fund manager handily. Even if you account for the fees and expenses that bring down a mutual fund’s performance, the S&P 500 still looked like the right answer by a wide margin. But you don’t have to go back too far in history to find periods when the indexers were “wrong.” The periods 1973 to 1983 and 1990 to 1993 are examples. More recently, the last two quarters of 1999 provide another example. Indexers would argue that those periods are anomalies and that, if you look at results over long periods of time (20 years or more), indexing is clearly the right answer. Mathematically, they might be correct (most of the time), but they miss the most essential point.

Being a consultant is all about getting results for your client. Unfortunately, for the academics (and for those who listen too closely to them), clients don’t make decisions over 20-year time horizons. They react on a much shorter time frame. If you have just told your client that indexing is a superior strategy and then we move into a period like 1973 to 1983, you will be wrong in the client’s eyes, you will lose credibility and increase the risk that your client will abandon the investment strategy you created for them, even though, over time, the strategy would have produced the financial results the client needed.

An excellent illustration of this problem appeared in an article by Roger Gibson titled “The Rewards of Multiple-Asset-Class Investing,” published in the March 1999 issue of this journal. In his article, Gibson asserts that multiple-asset-class investing is superior to other strategies on both a risk and return basis. Pretty strong stuff. He demonstrates this superiority by examining the quarterly returns of four asset classes (represented by the S&P 500, EAFE (Europe, Australia and Far East Index), NAREIT (National Assocation of Real Estate Investment Trusts) and the Goldman Sachs Commodity Index) for the period 1972–1997, and concluding that a portfolio consisting of 25 percent of each of these asset classes beats any one of the asset classes alone on a risk-and-return basis. Leaving aside the fact that Gibson’s multiple-asset-class portfolio would be a pretty unpalatable brew for most clients, there is another problem with his conclusion. Like most proofs of the superiority of a particular investment style, it depends heavily on the time period examined and the data used.

If you look at the data a little differently, the picture changes. In Gibson’s study, the annualized return of the multiple-asset-class portfolio was 14.4 percent, compared with the S&P 500’s return of 13.3 percent. The multiple-asset-class portfolio had only about two-thirds the risk of the S&P 500. Gibson is clearly right—the multiple-asset-class portfolio is superior on a risk and return basis. However, if you add 1998 to the study and look at monthly instead of quarterly data (clients usually receive custodial statements once a month), the S&P 500 outperforms the multiple-asset-class portfolio 13.8 percent versus 13.3 percent. If you look at the data on a rolling one-year basis, the average yearly return of the S&P 500 is 14.7 percent versus 14 percent for the multiple-asset-class portfolio, and the S&P 500 outperforms the multiple-asset-class portfolio about half the time. The S&P 500 is still riskier, but it has better returns. In fact, during the past three years, the S&P 500 would have outperformed the multiple-asset-class portfolio every year. So, which strategy is superior? Ask a client. Gibson quotes one of his multiple-asset-class clients as saying: “I would rather follow an inferior strategy that wins when my friends are winning and loses when my friends are losing than follow a superior strategy that at times results in my losing when my friends are winning.” What was Gibson’s response? “There is pain in being different.”

Perhaps a better response is to put our pride aside and admit to ourselves and our clients that we don’t have all the answers. Markets are inherently unpredictable and we do not know what strategy will be superior in the future. And even if we did know which strategy would be superior mathematically, as Gibson’s client demonstrates, that strategy might be far from superior from the client’s perspective. If our most important task is keeping our clients on track with their investment program over the long haul, then our primary concern should be satisfying our client’s needs, not guessing what strategy may be the big winner in the years to come.

We should stop talking about the relative superiority of various approaches to investing and focus on identifying the strategy that is most likely to meet the client’s long-term return objectives, while satisfying the client’s preferences and needs. If clients ask questions about the relative merits of different types of investments, we can bring out the charts and give them a history lesson, but make sure it is properly labeled as history, as opposed to a prediction about the future.

By focusing on client goals, objectives, experiences, biases, preferences and risk tolerance, we can have a much more meaningful conversation with our clients and avoid the risk that our client loses faith in us because our “right” answer turns out to be wrong for a while. We are much better off talking about the future in terms of the range of likely outcomes and the probability of reaching the client’s goal than we are trying to convince the client that we can see the future. There are many tools available today to help us have this type of conversation with our clients. We should use them.

Sloth

The concept of risk and its proper role in creating investment strategies for clients appears to be one of the most misunderstood areas of investing. Measuring risk is complex, far more complex than measuring return. We talk about risk and return as though they were two dimensions of an investment that could be measured like the length and width of a rectangle. But return is an objective, quantifiable fact, while risk is experiential and subjective.

Because understanding risk is difficult and quantifying it even more difficult, we have looked for ways to simplify risk and reduce it to a manageable variable. We have tried to find easy, shorthand expressions of risk such as standard deviation, beta, Sharpe ratios and other mathematical abstractions that do not, in any meaningful way, capture the concept of risk as our clients experience it.

Unfortunately, there is no easy way to capture risk mathematically. That is because risk is really a measure of pain, and each investor experiences pain in a slightly different way. So providing excellent consulting services to our clients requires us to do the hard work of going beyond mathematical abstractions and engaging our clients in a wide-ranging discussion about the pain they might feel in different investment situations.

Researchers in the field of behavioral finance offer some interesting perspectives on risk as our clients experience it. Through experiments going back many years, they have demonstrated that most people feel the pain of loss about 2 to 2.5 times as intensely as they feel the pleasure of gain. This asymmetry of risk is important to understand when dealing with clients, but it is only the beginning. Behavioral finance also teaches that clients experience risk differently at different times and in different circumstances. For example, clients may be less risk averse when they are dealing with what the researchers call “house money.” This refers to the phenomenon one observes in a casino where a gambler takes greater risks with his winnings than with the money he had in his pocket when he walked through the door of the casino. Likewise, investors tend to be more risk averse with the money they invest originally than with the money that represents the gains on their investment.

A recent study by the Decision Science Research Institute further underscores the complexity of measuring risk in the investment context. In that study, financial advisors were asked questions designed to assess the likelihood that they would invest in a variety of different types of investments. Not surprisingly, the study confirmed that the likelihood of investing is highly related to the perception of the risk/return characteristics of the investment. However, the study also revealed that the evaluation of an investment is most strongly related to perceptions of return and that perceptions of risk are a secondary factor and far harder to measure. This was attributed to the fact that perceptions of risk are multidimensional and are not applied consistently from investment to investment. The volatility of an investment is considered as a risk factor, but so are the psychological demands associated with ongoing monitoring, predictability of performance, potential loss of capital and perceived adequacy of regulation. The study also concludes that, because of the multidimensional aspects of risk, at least some of the emphasis in current financial planning practice on the measurement of “risk tolerance” may be misplaced.

So how can a financial advisor use this information to improve the level of his or her consulting services? First of all, be aware that mathematical abstractions such as standard deviation do not capture the concept of risk as your client experiences it. You would also be well advised to delve into the world of behavioral finance to improve your appreciation for how your clients experience risk. In addition, you should recognize that simple risk tolerance questionnaires are merely a starting point for a fuller discussion you should have with each client about their perceptions of, and sensitivity to, risk. And finally, recognizing that downside volatility is disproportionately painful to clients, you should spend considerable time educating them and preparing them for the inevitable downdrafts they will experience. Yes, it’s a lot of work, but in a world where success is determined by the quality of your consulting services, it’s well worth it.

Lust

“Past performance is no guarantee of future returns.” Virtually every investor in America has seen this warning. Yet most of them fail to take heed because they lust after yesterday’s eye-catching returns. In a sense, this is understandable. Investors are exposed to a barrage of advertisements, articles and pitches—all touting the past performance of various managers, funds and stocks. The message is everywhere: “performance matters.” It is not surprising that investors implicitly accept past performance as a valid basis upon which to make investment decisions.

A recent study by the Dalbar investment consulting firm showed (once again) the danger of this approach to investing. Dalbar compared the returns of various indexes with the returns achieved by the average equity fund investor and the average fixed-income fund investor for the period 1984 through 1998. During that period, the S&P 500 returned almost 18 percent annually, long-term bonds returned over 12 percent, small company stocks returned just over 11 percent, intermediate-term bonds returned over 9 percent and T-bills returned almost 6 percent, while inflation averaged 3.26 percent a year. Yet the average equity fund investor received just 7.25 percent annually and the average fixed-income fund investor achieved 6.33 percent annually. During the same period, the average equity fund returned 13.5 percent and the average fixed-income fund returned 8.8 percent.

How can this be? How can investors do so poorly compared with the indexes and average fund returns? Dalbar chalks it up to inept market timing, but I don’t believe that is the reason. The term “market timing” suggests some sort of analysis or system for determining whether markets are headed up or headed down. I don’t believe the investors in the Dalbar study have anything resembling an analytical or systematic framework for their investments. They are simply chasing past performance. They invest in the funds that have produced high returns, those funds fall in value, and the investors panic and sell out. It’s that simple. There’s no market timing involved at all. It’s just buy high and sell low.

Professor Richard Thaler of the University of Chicago conducted a study that underscored the dangers of investing based on past performance. He took all the stocks on the New York Stock Exchange and ranked them based on their returns over a five-year period. He then formed two portfolios: one with the 35 stocks that went up the most over the five-year period and one with the 35 stocks that went down the most. He followed the two portfolios for five years. You guessed it. The portfolio of losers outperformed the portfolio of winners by about 40 percent.

At our firm, we performed a similar study using Morningstar mutual fund rankings. We reached the same result. We looked at the performance of all funds that had a five-star rating (the highest) on December 31, 1994, and compared their performance with that of all funds that had a two-star rating on the same date. (See article on page 110, “The Persistence of Morningstar Ratings.”) We tracked performance from January 1, 1995, through June 31, 1998. During that period, the two-star funds averaged 20.1 percent annually, while the five-star funds returned only 17.3 percent, a fairly wide margin of difference. There is just no way around it—buying yesterday’s winners is a strategy that is unlikely to provide good results tomorrow.

So what does this have to do with you? You are a trained professional and would never succumb to the temptation to chase yesterday’s winners. Well, that’s good, but just remember that lust is not a sin committed only by nonprofessionals. The mentality of the herd affects us all. It certainly affects your clients. That’s apparent from the Dalbar study. And be aware that the constant barrage of media exposure given to past winners fuels the fires of lust in the hearts of all investors. Deal with this issue up front before you end up dealing with it in a defensive posture. Show your clients the Dalbar study and tell them about Professor Thaler’s study. There are many other examples of the dangers of chasing past performance. Make sure your clients are forewarned so they will understand why you did not invest their assets in yesterday’s beauty contest winners.

One strategy that you might try with your clients is asking them to go cold turkey on the consumption of financial news. The media are powerful and their influence on people’s behavior is immense. Unfortunately, that influence is mostly negative. One story you might want to share with your clients is about a study done by Paul B. Andreassen, then a psychologist at Harvard. He formed four groups of investors and asked two of the groups to make mock investments in a stock with a fairly stable share price. The other two groups were asked to make mock investments in a stock with a fairly volatile stock price. One of the groups investing in the stable stock and one of the groups investing in the volatile stock were given a constant stream of actual news reports about the companies in which they were to invest. The other two groups got no news. The investors who got no news performed better than those who received news, and the investors who received no news and traded in the volatile stock performed over twice as well.

Gluttony

Many investors have gotten fat on the returns offered by the financial markets since the early 1980s (the investors in the Dalbar study being a notable exception). From the beginning of 1982 through the end of 1999, the Dow rose from 875 to 11,497. The S&P 500 gained 2,100 percent over the same period. The old saying, “a rising tide lifts all boats,” and Woody Allen’s statement that “90 percent of life is just showing up,” are both apt here. The market’s stunning performance has created an entire generation of bull market geniuses.

Not only did investors do well just by being in the game, they felt very little pain along the way. Between 1900 and 1984, there were 28 bull markets and 28 bear markets. Only four of these bull markets were longer than 1,000 days. Only one of the bear markets was shorter than three months. Between 1984 and 1999, however, there were three bull markets, all of which were longer than 1,000 days. There were only two bear markets and both were shorter than three months. Who says, “no pain, no gain?”

Actually, the picture today is not quite so rosy for many investors. For some time now, the most visible U.S. equity market indexes have been driven by a relative handful of stocks. For example, in 1999 the Dow gained 25.2 percent while the S&P 500 rose 21.1 percent. At the same time, however, 53 percent of all Nasdaq stocks were down as were 62 percent of all NYSE issues and 54 percent of the stocks included in the S&P 500. The problem is that whether your client actually did well during the course of the bull market or not, clients tend to think they should be receiving returns close to the returns of the Dow and the S&P 500. This is what behavioral finance advocates refer to as a frame-of-reference problem. The Dow and the S&P 500 have become what are called “anchors,” and clients use these anchors to assess their investment results.

This represents a serious threat to your clients’ financial well-being because it means that they are probably feeling like they could and should be feeding on the returns of the Dow and the S&P 500. In fact, this has been a relatively hard thing to do recently unless your clients’ portfolios are constructed around a small group of richly valued large growth stocks. This tendency of clients to be influenced by anchors like the Dow and the S&P 500 is a powerful one; today it is very likely leaving them feeling frustrated by their inability to feed on the “market’s” returns.

Education and awareness are the keys to avoiding this problem. Look for and recognize the anchors that influence your clients’ frame of reference. Help your clients understand what the indexes are and what drives their performance. Help them see their portfolios in the broader context of their own financial goals. And avoid creating frame-of-reference problems through the overuse or misuse of benchmarks (see next “sin”).

Anger

Financial advisors make extensive use of benchmarks to measure the performance of their clients’ investments. This is good because benchmarks, if used properly, can be useful tools in a financial advisor’s arsenal.

But nothing makes a client angrier than a quarterly performance report full of managers or funds that have missed their benchmarks. Unfortunately, because of the way benchmarks are often used, this is an all-too-frequent occurrence.

The first reason stems from the fact that we typically classify managers and funds as falling within a single style category (such as large-cap growth) and then use a single index as a yardstick against which to measure the manager. One problem with this is that many managers and certainly most actively managed mutual funds don’t fit quite so neatly into a single category. For example, the Dreyfus Appreciation fund is typically categorized as a large-cap growth manager. Yet attribution analysis shows that this fund often invests in both large value and large growth companies. For this reason, the fund cannot be easily judged by reference to the Russell 1000 Growth index, which is often used as a benchmark for large-cap growth managers.

We also handicap managers by comparing them with benchmarks on a quarterly basis. Managers often make moves in their portfolio that take more than a quarter to pay off. In the meantime, a manager is likely to fall short of their benchmark, even though the manager may look just fine, relative to the benchmark, over a longer period.

These are just a few illustrations of problems that can arise from using benchmarks to measure manager performance. Should we stop using benchmarks? The answer is clearly no. But should we reassess how we present them to clients and consider the messages we are sending through these presentations? Definitely.

We can start by reviewing the benchmarks we use to make sure they make sense. Single-index benchmarks are often less-than-totally satisfactory yardsticks for active managers. Consider the use of multi-index benchmarks that more accurately reflect a manager’s true investment style.

Another idea would be to de-emphasize benchmarks in your performance reports. You can use benchmarks any way you want in assessing managers, but is it wise to show clients everything you look at in monitoring the managers’ performance? You naturally interpret manager performance relative to a benchmark in a way that your client does not. In the client’s eyes, if the manager misses the benchmark, the manager has somehow failed. And, because you selected the manager or fund, you have failed, too. Consider whether you are undermining your client’s confidence in a sound investment strategy and creating unnecessary doubt about your own advice by benchmarking every manager and fund in your client’s portfolio.

Another thought would be to benchmark the overall portfolio in a way that is truly meaningful to the client’s investment strategy. Let managers stray from their benchmarks as long as the overall portfolio performance is meeting the client’s long-term goals. Show portfolio performance relative to the client’s long-term return objective and show where that performance falls within the range of likely outcomes. As long as the client is on track to reach his or her goal and returns fall within acceptable boundaries, let the portfolio ride. Short-term failures to meet benchmarks often are overcome over longer time periods.

In any event, you should give serious thought to how you use benchmarks in your practice. Make sure that you minimize the likelihood that you are undermining your client’s confidence in a sound long-term strategy. It is far better that your clients live through a couple quarters of sub-benchmark performance by their managers than that they abandon their strategy because they think their portfolios are full of “bad” managers.

Greed

In 1738, Daniel Bernouli hypothesized that the rational person would make economic decisions in a manner designed to maximize their overall state of wealth. In other words, a person’s natural greed would drive them through a rational process designed to maximize the utility of each decision. As applied to investments, this means that the rational investor would look at his or her entire portfolio and make investments based on the impact those decisions would have on the overall value of the portfolio. Unfortunately, Bernouli was wrong.

Studies from the field of behavioral finance show that investors tend to compartmentalize their investments and analyze performance narrowly on an investment-by-investment basis. This tendency, referred to as “narrow framing,” causes investors to be more risk averse than they should be. Let’s look at how this works. First, how would you feel about accepting a bet where you had a 50 percent chance to win $15,000 and a 50 percent chance to lose $10,000? Now assume you have a net worth of $2 million. How would you feel about a bet that would give you a 50 percent chance to increase your wealth by $15,000 and a 50 percent chance that your wealth would be decreased by $10,000? In both cases, the bet is exactly the same, but most people are far more willing to take the chance once they have expanded their focus from the outcome of the bet itself to the impact the bet would have on their overall net worth.

For another perspective on the same issue, consider this proposition: Would you flip a coin where you would receive $200 if you called the outcome correctly, but would lose $100 if you were wrong? Most people don’t like this bet very much. But how would you feel about this bet if you got to flip the coin 100 times? Most people would jump at the chance.

These examples demonstrate the power of getting your client to overcome the natural tendency to look at the world narrowly, and instead look at their investments in the larger context. Narrowly focused clients are more fearful and experience significantly more regret than clients who understand that investing is a process that involves a series of well-placed bets made over a long time period. Not every bet pays off, but as long as the overall state of wealth improves, all is well.

This concept has many practical implications for financial consultants. First, clients should be encouraged to look at their investments broadly. This message should be reinforced at every opportunity. An important example would be quarterly performance reviews. Spend less time analyzing individual investments and more time on overall portfolio performance. Don’t focus on a client’s various accounts (such as a taxable investment account, individual retirement account or 401(k)). as separate pools of wealth. Look at these accounts on a consolidated basis. Talk about investing as an ongoing process and let your clients know that it’s okay to lose a coin toss now and then.

Envy

Everyone loves a winner. People envy winners and yearn to be winners themselves. Nowhere is this more true than in the world of investing.

Terance Odean, a professor at the University of California at Davis, has studied investment behavior on a wide scale and has concluded that this desire to be a winner is very strong in investors. He refers to the manifestation of this desire as the “disposition effect.” This is a tendency that investors have to sell their winners and hang on to their losers. By disposing of an investment at a gain, it becomes a winner and the investor experiences the positive feeling associated with winning. On the other hand, by holding on to losers, investors avoid admitting their mistakes.

Obviously, the “disposition effect” alone can undermine a successful long-term investment program. But Odean has identified another unfortunate tendency in investors that can work in tandem with the disposition effect to seriously harm your client’s investment program. That is the tendency of investors to trade too often and with bad results. Odean found that when an investor sells a stock and then buys another one, the stock that was sold outperforms the stock that was purchased by an average of 3.2 percent over the next 12 months and by an average of 3.6 percent over the next 24 months. The gap becomes even wider when you eliminate nonspeculative trades made to raise cash, cut taxes or rebalance the portfolio. After eliminating nonspeculative trades, the stocks that were sold outperformed the stocks that were purchased by 5 percent after 12 months and 8.6 percent after 24 months.

Odean’s research also demonstrates that the more an investor trades, the worse their performance becomes. Odean found that investors typically turn over approximately 75 percent of their portfolio every year. He also found that a 70 percent turnover results in performance that is 3.7 percent less than an index of all NYSE, AMEX and Nasdaq stocks. When turnover rises to 200 percent a year, the results are even worse: 10.3 percent below the broad market index. This is consistent with a study done in 1999 by the North American Securities Administrators Association (NASAA) that found that 70 percent of day traders “will almost certainly lose everything they invest.”

This research has significant practical application for investment consultants. Discuss the disposition effect with your clients. Encourage them to be patient and forgo the gratification of selling off winners prematurely. Likewise, help them overcome their tendency toward what Odean calls “regret avoidance” and assist them in paring the losers out of the portfolio in a timely manner. Don’t turn a blind eye if your client has taken to actively trading a portion of their portfolio. Share with them Odean’s findings on the effects of high portfolio turnover on performance. Encourage your clients to be patient and exercise the restraint and discipline necessary for a successful investment program.

Conclusion

Excellence in consulting requires the ability to understand how clients think about investments and to see the world through their eyes. We must make every effort to use our understanding to help our clients reach their long-term goals. In our effort to add value to our client relationships, we should be sure that we do not inadvertently cause our clients to lose faith in their long-term investment program and thus abandon the program before they have reaped its long-term benefits.


Scott A. MacKillop is president of PMC International, Inc., Portfolio Management Consultants Inc.'s parent company, based in Denver, Colorado.