Outcomes are the new alpha

October 4, 2018 Categories: The Art of Advising
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Want to know why the tortoise beat the hare? He (or, more likely, she) stayed focused on the finish line. The tortoise was all about the outcome.

In a recent study that we shared, we found investors who built the most wealth did so with a focus on long-term outcomes. Guess what those with the smallest account holdings did? They focused on short-term performance. They acted like hares. The wealthiest acted more like tortoises.

This was no surprise to us. At Russell Investments, we take outcomes so seriously that we’ve structured our business that way. We put our money, literally, where our mouth is.

  • Our Business Solutions program partners with advisors to help them move beyond the rep as portfolio manager model and become holistic, outcome-oriented advisors.
  • And our primary Investment Solutions—model portfolios—are built around investor outcomes, whether that’s growing assets, creating tax-efficiency, or generating retirement income.

We do this because we firmly believe a focus on outcomes is the best way to invest. Because when an investor is seventy years old, they don’t care if they beat the benchmark. Their only measurement for success is: Did I reach my investment goal or not?

How the best advisors may deliver the most value

Our focus on outcomes was developed from decades of experience partnering with advisors. That experience has led us to believe that a key value advisors deliver is in keeping investors from chasing past performance. We believe the best advisors focus on helping their clients stick to their long-term financial plans—their outcomes—and thereby skirt irrational, emotional decisions. To be clear, we believe this focus on outcomes, as obvious as it sounds, is where advisors deliver the most value.

But helping investors stick to a long-term plan takes time. It takes effective relationships. It takes conversation. It requires advisors to spend less time building portfolios and more time holistically consulting with their clients about their targeted investment outcomes, as part of an integrated wealth management process.

This is precisely why we recommend that advisors consider using model strategies. We believe models make it more practical to implement an outcome-oriented approach:

  • Models may free up advisors’ time for consulting.
  • They are engineered toward outcomes and avoid artificial performance chasing.
  • They are responsibly diversified, creating a smooth ride that keeps investors from making bad moves during volatile times.
  • They are designed to withstand the downside, which we believe leads to better outcomes (there’s that word again).

You’re the doctor. Your clients are your patients. Same with us.

It’s easy to understand why advisors give in to the short-term performance temptation. Because short-term performance provides instant gratification. Short-term performance answers the question: What did you do for me today?

But the best advisors don’t take the easy route. They stay focused on the long-term approach.

Imagine that you’re a doctor, and your patient asks your opinion about the latest fad diet. “I heard about it on the Internet,” your patient might say. “The results look amazing. I can eat as much as I want and I don’t have to exercise. Do you think I should try it?” A doctor worth their fee would tell their patient no. They’d tell the hard truth: If the patient wants to be physically fit, they’re going to have to eat right and exercise. There are no shortcuts that work over the long term.

As advisors, it’s always tempting to give our clients what they want, instead of what they need. They may want you to move them into the fund—or worse yet, the individual stock—that outperformed last quarter. They may say, “I heard that U.S. equities are outperforming. Can’t you take me out of global? Can’t you sell all my bonds and move my entire portfolio into U.S. equities?”

The bottom line

As an outcome-oriented advisor, you’ll be ready to stop them from chasing returns. You’ll tell them the hard truth: If you want to reach your investment goals, you’re going to have to stay globally diversified, across stocks, bonds, and alternatives. Because there are no shortcuts that work over the long term. Instead process, discipline and thoughtful communication, especially in challenging market conditions, are the key factors.

We are in a parallel situation. Our clients are advisors, and we’re routinely engaged in the same hard conversations. We get the same questions: “Why aren’t you more overweight U.S. equities?” And our answers hopefully sound the same: Because we’re focused on meaningful, long-term outcomes. Our job is not to beat some short-term benchmark. It’s to help advisors get their clients to their desired outcomes. And there are no shortcuts. Our job, as a responsible advisor to the advisor, is to stop our clients from chasing returns.

Sound familiar? 

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

The Russell logo is a trademark and service mark of Russell Investments.

Copyright © Russell Investments Group, LLC 2018. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.

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