Why risk-adjusted returns matter

Ron Fisher, RTRP • Nottingham, MD
Fisher Financial Services • LPL Financial
Read full biography below

Proactive Advisor Magazine: As you made the transition to financial services, what was your basic philosophy on client investments?

I got into financial services when modern portfolio theory was really taking hold and advisors in general were primarily making investment decisions based on a client’s risk tolerance. We made selections of investments in various asset classes to build a reasonably diversified portfolio. It was basically a style-box approach to diversification and asset allocation.

The issue with that—as many of us learned during and after the dot-com crash—was the high degree of correlation between many of those investment selections. Many advisors had too heavy a weighting in large caps or technology, for example, without a very effective risk-management program in place. This was a common issue for investors and advisors, and, unfortunately, many portfolios suffered steep losses.

Did you make any changes in your thinking based on that experience?

I would have liked to immediately—it was very difficult having conversations and meetings with clients when their portfolios were performing so poorly. It was a pretty lengthy evolution for my practice to get to the point of utilizing true advisory practices and separate account management. That came to full fruition when I started working with LPL. One of the primary reasons prompting my move there was the great flexibility they offer in terms of advisory platforms and the resources to accommodate a wide range of client portfolio objectives. It also provided the ability to select from a variety of third-party money managers and incorporate active investment management for my clients.

How do you explain your philosophy regarding active management to clients?

I begin with a broader conversation about what they are currently doing financially, working through reasonable goals and objectives with them, and then looking at investment alternatives, along with tax strategies, retirement and legacy planning, and appropriate insurance or annuity products.

The goal I have for every client is to help improve investment performance while looking to mitigate risk. I explain that passive strategies that track the market may no longer be effective in today’s investment environment. First, there is the pure performance component of subjecting portfolios to the kinds of drawdowns we saw in the early 2000s and the last recession. But there is also the emotional and behavioral component, and I go over that with clients. Many individual investors underperform using a passive investing approach—they tend to sell at emotional bottoms and hesitate to re-enter when conditions warrant. That leads to chronic underperformance over the long haul, and it is very well-documented.

I ask clients four basic questions when we are talking about their investments, whether it’s retirement accounts, rollovers, or other nonqualified money:

• Do you think you could use some help in choosing the right investment strategies?
• Do you have the time and expertise to actively monitor the performance of your investments?
• Do you feel uneasy watching wild fluctuations in your account value?
• Do you know when to make changes to your investment allocations?

“With our third-party managers, there’s no cherry-picking strategy models or trading rules for higher-net-worth clients.”

The answers usually get people really thinking about what they have done in the past and what they are doing now in terms of their investments. This segues into a discussion of a more actively managed investment approach, with, if appropriate, the potential use of third-party money managers.

We are trying to highlight what we call risk-adjusted return. It’s a conversation that we emphasize with clients: Our goal is to achieve a reasonable rate of return on the assets that we are managing for them, while trying to avoid the large portfolio losses that can derail their investment and retirement planning.

What are the benefits to your firm in moving to more of an advisory model?

Let’s start with the overall objective of enhancing a client’s long-term investment performance. To use a sports analogy, we can put the best team on the field in various positions. Some money managers have an area of specialty, and others have broader strategic alternatives. We are able to pick the ones that we feel are the best fit for our clients.

Another advantage is in efficiency and the day-to-day management of client accounts. We know we have experts watching the market every day, making necessary adjustments according to their strategies and models. That is a great reassurance as an advisor—to be backed up by those professionals. It also means that with most of our managers, the size of the account is not an issue. Someone with a $30,000 account gets treated the same as someone with a $300,000 account in terms of service and portfolio management. There’s no cherry-picking of better strategy models for higher-net-worth clients, or more active management or different trading rules, than with lower-net-worth clients.

The third point is closely related to what I just discussed. There is also no disadvantage for a client dependent upon their risk profile. Whether they are extremely conservative or very aggressive, we can find the right actively managed approach for them using professional money managers.

Finally, I believe the fee aspects of an advisory model work to both the client’s benefit and ours. It is fair and equitable and fully disclosed. It allows us to better plan our revenues based on more consistency over time. But it also means that we are working off the same objectives and there is no agenda of selling investment products, which is still an area of some mistrust in the industry.

I tell clients that our success is tied to their success, in every way. That is something we live by, and I think has contributed greatly to the success of our practice and our robust client referral program.