Thursday, March 02, 2006

What can you promise new wealth-management clients?

A savvy trust-company exec once told me that affluent investors won't let you manage their money unless you promise them results. That's a problem. Most investment promises aren't worth the hot air required to make them. But the trust-company exec had a solution:

"O.K., I tell the guy. Give us your money to invest, and I promise we'll lose it more slowly than you'd lose it yourself!"

That's still a pretty safe promise to make, according to Mark Hurbert's column in The New York Times:
MOST mutual fund investors have only themselves to blame if their portfolios seriously lag behind the market. That is the conclusion of a new study that says the typical investor has an atrocious sense of timing.

People tend to dump mutual funds just before the funds enter several-year periods of above-average performance, and to buy funds that are about to sag. In fact, the study found that the performance of most fund portfolios would improve markedly if the owners just left well enough alone.

The study, "Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns," was conducted by two finance professors, Andrea Frazzini of the University of Chicago and Owen A. Lamont of Yale.
Lamont and Frazzini note that some investors do seem to be Smart Money when it comes to picking a hot mutual fund, one that will do well for the next quarter. But in the longer run, "individual investors have a striking ability to do the wrong thing. They send their money to mutual funds which own stocks that do poorly over the subsequent years."

The Dumb Money pays a significant cost for moving out of stock funds they consider "cold" and moving to those they consider "hot." They probably cut 1% or more off their annual return. And that's in addition to the 1% or more by which managed funds tend to lag the market because of annual fees and expenses.

When you help HNW investors avoid being Dumb Money, you do them a service.

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