But if the client’s goals in terms of wealth accumulation or preservation are being met, and the total portfolio’s risk metrics are in line with stated preferences, then the total portfolio is doing exactly what it was built to do. There will always be a component of any portfolio that is underperforming, but that doesn’t mean it should be replaced. And replacing an existing investment once again necessitates additional client education, which takes us back to the initial problem that we’ve been discussing—that getting into the weeds can be difficult and may not be particularly productive. In some cases, as we’ve found, that requirement alone can result in advisors avoiding strategies that would be the most beneficial to the total portfolio.
So with that in mind, should financial advisors allow the difficulties of client education alter how they construct portfolios? We would argue against that. As many investors have said and written many times before, it’s the sum of the parts, not the individual pieces that matter when building portfolios.
Clients may be intellectually curious about the components, but they task advisors with meeting some sort of goal, and if their need for information is incongruent with meeting those goals, then education becomes not a help, but a hindrance. The focus has to be on the total portfolio, and on outcome, using all of the tools at one’s disposal to increase the probability of achieving a positive outcome. Change the conversation to focus on outcome, and you just might find that the need to explain the intricacies of say, a market neutral strategy, cease to exist.
Cliff Stanton is chief investment officer at 361 Capital.