The mantra “buy low and sell high” is not only the holy grail for investors, it also may be the holy grail for advisor businesses. That’s why Mark Hebner advocates a passive advisory business.
As much as the terms passive and advisory may seem to contradict themselves, Hebner says it’s the best way to ensure client loyalty, build the business of your dreams, and—you guessed it—offer investors better-than-average returns.
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The natural thought would be that investors would make better returns on passive strategies without an advisor. After all, that’s the nature of low-cost index funds. Why add advisory fees on top of that?
Because investors are human and behavioral finance teaches us that they are path dependent.
That means, unlike an institution, they don’t have the stick-to-it-iveness to stay with an investment strategy regardless of market volatility.
Investors tend to react emotionally, primarily to fear and greed. This automatically causes them to get scared when markets are getting trashed (sell low) and rush to get in on the latest trend (buy high), usually when the best money in that trend has already been made.
Passive advisors impose a discipline on investors. For example, after a retracement in the equities markets, such advisors will adhere to a rebalancing program that has them selling bonds (sell high) and buying equities (buy low).
The discipline of rebalancing inhibits the tendency to react out of either fear or greed. And what about those returns?
Hebner reviewed eight different studies on the subject. Average fund investors without advisors captured only 36.75% of fund returns.
Average passive fund investors without advisors captured 82.7% of fund returns. But passive investors who had an advisor captured 109% of a fund’s time-weighted returns over a period of ten years.
Hebner says being a passive advisor
enables you to build relationships with your clients and to admit that you are a fiduciary. His view as a top RIA is that it is the best way to build a profitable business and to groom loyal clients.