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by Ron Surz
on February 18, 2016

Tags: Investing

In his popular book What Investors Really Want, Professor Meir Statman draws analogies between investor behavior and nutrition. For example, we all know that we should eat nutritious low cost meals by dining on health food at home, but that’s just not fun for most of us. We’d much rather indulge in rich foods at expensive fancy restaurants. We want what Dr. Statman calls “utilitarian rewards.”

In keeping with this dining analogy, investment advisors are like waiters, serving the diverse appetites of their clients. Investors want their advisors (waiters) to guide them through their investment choices (menu selections). A good investor experience evolves from the following:

  • Menu: A good financial consultant needs a variety of solutions that meet a wide range of investor needs. Investors don’t see this menu because they want their advisors to recommend a selection. We’ll give you a look behind this curtain.
  • Selection: A good consultant identifies client needs and matches them to a solution that will make them happy.
  • Follow up: A good financial consultant monitors progress toward achievement of goals and recommends changes along the way.

The following addresses each of these investor wants.

Menu of Models

A tasty menu item has quality ingredients and skillful preparation. In investing, advisors create models that are analogous to menu items, with each model designed for a specific type of investor (diner preference). Risk is the quality ingredient and packaging that risk to provide the highest return is the skillful preparation.

Just as restaurants create menus, advisory firms develop families of models with varying risks and expected returns. Most offer specialty items to differentiate them from competitors, like “Black & Blue” charbroiled steaks, or “Mama’s Homemade Lasagna.” Models can be differentiated in two ways:

  • Market views can adjust asset weightings, which is timing.
  • Active managers can be used rather than passive. Investors want active managers, and advisors want to give clients what they want, but most advisors don’t have the time, energy and money that it takes to identify skill, as summarized in our Infographic.

Selecting a Model

Selecting a model is like selecting a menu item. Advisors work with investors to determine needs and risk attitudes – likes and dislikes. They also determine dietary restrictions, namely securities that can’t be held. With an investor profile in hand, an advisor selects a model and enhances it to better suit the investor. Enhancements are like sauces and side dishes, and include features like tax-loss harvesting.

Follow up

Just as waiters help diners through the various courses of the meal, advisors help their clients navigate through life’s courses, monitoring progress toward achievement of objectives and making changes as necessary.

Conclusion

Investors want to make money, just as diners want to be nourished. But both want more. They want to have fun and to brag about the experience. A good menu helps, but good service is paramount.

Bon appétit.

Ronald J. Surz is a partner and CIO of Paladin Financial Technology. He is also president of PPCA Inc.and Target Date Solutions and a partner of TDF Builder, and Sortino Investment Analytics.