There is no doubt in Patrick Geddes’ mind that financial professionals are a valuable resource to many who turn to them for help. After all, he is one himself. But Geddes also wants consumers to be wary of what they are buying when hiring one.
“The industry is still trying to sell some skill sets that I would argue are not warranted,” said Geddes, co-founder and former CEO of the Aperio Group, a $44 billion AUM investment manager that was acquired by BlackRock in November.
Prior to co-founding Aperio, Geddes was the research director and CFO at Morningstar. These days he does consulting work and has written a book, "Transparent Investing," which he described as a blend of consumer advocacy and behavioral finance.
"Basically, our brains are wired to make poor investment choices and the industry is this interesting blend of a lot of really helpful resources and situations where people do need advisors,” Geddes said, adding that he believes that in most cases people hire advisors because they need them. But the caveat, he said, is that he does not think they understand exactly what services they are buying.
“What I emphasize is look at the areas where advisors do add a lot of value and be very wary where the data show advisors as an industry are definitely subtracting value, which is basically on the active side, and I am talking about either timing or beating the market,” he said.
Geddes said if investors are looking for a wizard with a crystal ball, they already are in trouble. “You are not going to end up in a good situation if your first thought is, ‘I want to go find an advisor who is going to help me beat the market because that’s what good investors do,'” he said. “You are already setting yourself up statistically for sub-par performance,” he added, explaining that advisors are still trying to sell a “predictive ability” to time or beat the market.
Geddes said during that during a market meltdown, when everybody panics and calls their advisors, the correct advice is to ride it out, but that does not sound appealing. “The parts that the industry sells that I think are unwarranted are implying that I can pick the stocks or I can pick the managers that are going to pick the stocks that are going to outperform or I can modify your risk profile to help ride your through markets ups and downs,” he said.
It would be unusual to pull off any of the above, Geddes said, noting that both institutional and retail investments professionals have a “really bad” record finding the market. He noted that the 60/40 stock-to-bond portfolio ratio draws a lot of criticism for being outdated. “But it’s a really tough benchmark to beat over a long time period and that makes the industry very, very unhappy because you have a default,” Geddes said. “Just sticking with a static asset allocation and indexing is very smart and sound.”