A recent Jefferson National survey found that 75 percent of financial advisors now believe they can beat the market using tactical asset allocation strategies. They are delusional. It’s not going to happen. Advisors need get off the ego trip and get back to advising.
Tactical asset allocation is a strategy that tries to shift money among different investments at different times based on market forecasts. The idea is to be out of the bad investments and into the good ones before those moves occur.
This strategy has not added value to client accounts in the past and will not add value in the future. Multiple studies measuring mutual fund cash flows prove that advisors have no skill in timing investments and there is no evidence they are getting better at it. In my latest book, The Power of Passive Investing, I summarized several timing studies and conclude that these strategies have reduced investor return by about 1.5 percent annually since 2001.
Nonetheless, a survey by Cerulli Associates shows the number of advisors employing some form of tactical asset allocation is now at 61 percent, up 8.3 percent from 2010. Even advisors who don’t believe they successfully time markets are shifting to it because they think clients will leave if they don’t. “At least some of them fear that if they don’t dramatically change the way they allocate client portfolios, moving away from traditional buy-and-hold investing strategies, they could lose clients,” writes Diana Britton in Registered Rep.
According to the Jefferson National survey, advisors reported that 66 percent of their clients were more confident with a tactical asset allocation strategy than a buy-and-hold strategy. This is sad. It means advisors are not leading, they’re following. Those who justify their shift in philosophy by claiming this is what their clients want are not in the advisor business, they’re in the fee-collection business.
Some advisors have outsourced tactical asset allocation decisions to sub-advisors who run model portfolios using index funds and ETFs. How are these sub-advisors selected? By the most unreliable return predictor possible — past performance. The Jefferson National survey found that roughly half the advisors said that past outperformance was the preferred indicator for estimating future results. There is no academic evidence supporting this methodology.
The odds are low that any advisor can successfully time markets, or choose sub-advisors who can, before fees — let alone after multiple layers of fees. So, why do advisors insist that this active strategy is now in the best interest of their client? They are either alpha delusional or marketing. Both are a disservice.
Alpha delusional advisors have lost their way. They have forgotten what their role is. It’s time to return to advising.
Financial advisors are not market gurus and shouldn’t pretend to be. They add value by having a sound investment philosophy and staying consistent. They promote good investment principles and stay the course in thick and thin. They don’t waver because clients are growing skeptical. Rather, they reinforce their philosophy with solid research and reliable facts. This gives clients more confidence, and that’s advice worth paying for.
