To a brokerage firm intent on maximizing the client/firm relationship, value investing is a step in the wrong direction. It steers investor focus away from "the firm" and directs it towards the advisor. To a large extent, the strategy of promoting the value of diversification and the efficiency of markets has worked. As a result, the financial industry has witnessed an exodus of client assets into the packaged product parade.
Firms promoting packaged products enjoy a more consistent revenue stream and better control over their portion of the "split." In addition, clearing costs for packaged products are lower: Executing transactions inside the basket is cheaper than executing thousands of monthly equity transactions. Firms are also better insulated from a host of other complications, including compliance and supervision. Even trading errors may be reduced or eliminated in a packaged product world.
Client loyalty, along with billions in fee income, shifting from advisor to product adds up to a big win for Wall Street firms. But is it a win for the advisor, or more importantly, the client? Perhaps not.
Advisors need to reexamine their investing approach and ask what works best over the long term. As the last 15 years have proven, over diversification and under diversification can be equally dangerous, with a more balanced approach working best over extended periods. Index funds have their uses, but individual stock ownership and value investing are part and parcel of an inherently inefficient system.
The current environment is an opportune time for advisors to review whether the investment resources they use are helping or hindering their book of business. Investment products should be chosen like investment firms, with an eye on the motivations of all of the parties involved in the transaction.
Once products have been reevaluated, it's time to talk to clients. There may not be $100 lying on the ground, but clients should understand that it never hurts to look.