Outcomes are the new alpha
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.
Outcomes are the new alpha
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 advisers to help them move beyond the rep as portfolio manager model and become holistic, outcome-oriented advisers.
- And our primary Investment Solutions—are built around investor outcomes, whether that’s growing assets 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 advisers may deliver the most value
Our focus on outcomes was developed from decades of experience partnering with advisers. That experience has led us to believe that a key value advisers deliver is in keeping investors from chasing past performance. We believe the best advisers 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 advisers deliver the most value.
But helping investors stick to a long-term plan takes time. It takes effective relationships. It takes conversation. It requires advisers 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 advisers consider diversified multi-asset funds. We believe these make it more practical to implement an outcome-oriented approach:
- Multi-asset funds may free up advisers’ 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 advisers 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 advisers 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 advisers, 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 adviser, 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 advisers, 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 advisers get their clients to their desired outcomes. And there are no shortcuts. Our job, as a responsible adviser to the advisor, is to stop our clients from chasing returns.