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Helping Investors Measure Progress and Stick to Goals

By Eric Daugherty

Asset management firms currently have a huge opportunity to help investors help themselves. In the process, the firms stand to win the loyalty of customers long-term.

As anyone who's tried to lose weight, train for a marathon, or reach an audacious goal knows, one way to motivate yourself is to publicly proclaim the goal. Then, the real or perceived power of peer pressure and a supportive community come into play. When I ran one of my first marathons, I proclaimed my time goal to friends and family very broadly. When I was suffering during the race, the thought of my support group tracking my progress online, and the fear of letting them down, was powerful motivation.

However, support only helps when we are willing to reveal our current situation and our goals. This motivator never comes into play when it comes to finance, because we keep our situation so closely guarded.

I ran across this interesting article that highlights a NetworthIQ, a site that encourages sharing one's net worth with others; one goal of that comparing with others may spur more positive saving and investing behavior. The notion of baring our income, net worth, or lack thereof with others seems so radical. But, with American savings rates so low over the last few decades, and millions unprepared for setbacks and/or retirement, I can't help thinking that we would be better off with more comparisons, support, and information.

Perhaps asset management firms could and should play a role here. We already trust them with information regarding our finances. My primary financial institution knows a lot about my earnings, my wife's, our net worth, savings habits, and how we compare to others "like us" (age, income, family size, etc.).

As a financial planner, I know that the best financial advice most people need is "Save More". Yet, motivation for saving more, thus far, needs to be intrinsic to the individual. Tools such as stickk.com, Quicken, and mint.com, help one create and monitor goals, help to make goals visible and trackable, but they still rely on "self-reporting".

Most people know they need to save more, yet they don't do it. In How We Decide, by Jonah Lehrer, the author gives many examples where our emotional brain frequently overrides the rational brain. To make more rational financial decisions, we need more information, motivation, and support. Asset managers could be doing a better job providing all of these to their clients. If Amazon can tell me what books I'm apt to like, why aren't my asset managers telling me how my portfolio or savings rate compares to others like me?

While I do not think we will see everyone disclosing his or her net worth online anytime soon, I do hope that we will see burgeoning communities to support good saving and investing behavior, and I hope we will see asset managers supporting clients with more tools for comparing their behaviors to those of the broader public.

The Growing Importance of Fees and Fiduciaries

by Eric Daugherty

Investors are catching on. It's more of a subtle shift in plate tectonics than a tidal wave, but I sense a shift nonetheless. As a Certified Financial Planner certificant, two things have caught my eye recently that firms should be thinking about long-term - fees and fiduciaries.

Fees first. We have blogged about the importance of scale for mutual fund firms before, and how asset managers will need to provide low-cost commoditized funds (read: beta) or very differentiated products (alpha-chasers) to justify higher fees.

Just look at the graph below and focus on the colors. Over the past ten years, net flows are moving towards fewer, bigger fund complexes, and towards ones with a focus on low fees. If you run the same analysis by fund, you find that lower fee funds have reaped a wildly disproportionate share of flows.

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I expect this shift to continue. Investors and their advisors seem to be figuring out that investment costs matter, and come out of their returns. There certainly continues to be a trend towards more scrutiny on fund fees, as the Supreme Court recently remanded the Jones v. Harris Associates case back to lower courts for reconsideration.

What is taking a little longer to sink in for investors is that not everyone in our industry has their wellbeing as primary concern. Not everyone who holds himself out as a financial advisor is a fiduciary. A fiduciary is charged with holding the client's interests above his own. Other non-fiduciary advisors only need to meet a standard that their advice is "suitable" - a big difference.

So what? Investors are often surprised to find out that some non-fiduciary advisors are more interested in making money from them than for them. They're surprised that a fiduciary standard is not in place for all financial advisors.

Well, while the fiduciary standard described in this New York Times article has not been included in any passed legislation, it has come up with increasing frequency in the last twelve months, and I think it has some legs to it. Firms need to think about how said fiduciary standard, if/when passed, will impact the advisors that sell their funds. The firms can get ahead of this by helping their advisors tell the story of how they (the advisors) and the firms' products really are in the best interest of the clients (presuming, of course, that they are). In our recent review of firm websites that support advisors, we saw virtually no collateral supporting advisors in telling the fiduciary story. I expect we will see more next year at this time.

As a passionate advocate for investor education, I look for signs of hope that our industry will move towards creating more wealth for our shareholders, even if it means claiming less for ourselves. Both the trend towards lower fees and the movement for a fiduciary standard are steps in the right direction, and are shifts that firms should note and plan for.