Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

What's The Most Important Role of a Wealth Manager?

November 2009

The notion of a “wealth manager” is relatively new in the financial services field. The term evolved to differentiate an advisor who primarily offers investment advice (the vast majority of advisors) from an advisor who is dedicated to helping clients achieve all of their financial goals through a consultative process.

To help us describe our concept of wealth management at Capital Directions we use a specific formula:

WM = IC + AP + RM

Wealth Management = Investment Counsel + Advanced Planning + Relationship Management

(Note: These components and the consultative process we use to implement wealth management are described more fully at www.capdir.com/individuals.php.)

One thing this formula does not capture, however, is one of the most important roles for any wealth manager: managing client emotions.

The six-month period from mid-September 2008 to mid-March 2009 was an incredibly challenging time for investors to stay the course and stick with their long-term investment strategy. There were been numerous times where investors were tempted “to take a time out until things calm down.”

Industry data is now showing that many (if not most) investors blinked at the market bottom and cost themselves thousands if not millions of dollars. One industry data point that provides a glimpse into investor behavior is the net mutual fund cash flows compiled by the Investment Company Institute. The chart below shows weekly cash flows into and out of mutual funds and then overlays the value of $1 invested in the S&P 500.

Clearly, most mutual-fund investors panicked at the market bottom in March and fled the market in droves. By comparison, it is very interesting to contrast the cash flows of those retail funds with those of Dimensional Fund Advisors – the funds we use extensively to construct our portfolios at Capital Directions. DFA funds are only offered through approved advisors who adhere to a buy-and-hold philosophy, advocate diversification and focus on wealth management.

DFA recently provided me with the following chart that compares their cash flows to industry cash flows during the recent market turmoil, and the difference is striking:

Note the steady orange line at the top representing net cash flows to DFA (+$8 billion) compared with the net $272 billion that flowed out of the rest of the fund industry. DFA attributes this disparity to their advisors/wealth managers who were focused on keeping clients invested during the turmoil. This is illustrated in the next two charts which highlight quarterly cash flows in the retail fund industry (first chart) compared to DFA (second chart):

The differences are striking. While most investors were pulling assets out of domestic and international stock funds and locking in their losses, advisors who use DFA funds were keeping their clients invested and rebalancing their portfolios by trimming fixed income and adding to equity on the significant market dips we experienced in 2008-09. And that is what being a good wealth manager is all about.

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