Gibson Capital: Getting Clients To Stick To The Plan by Robert Huebscher

Roger Gibson’s Asset Allocation, Balancing Financial Risk is in its fifth edition and stands as a seminal resource for the advisory profession. His firm is now focusing on how to keep clients from abandoning their investment strategy during times of financial stress – and how to minimize the regret clients feel when performance is disappointing.

Chris Sidoni spoke on September 20 at Bob Veres’ Insider Forum conference in San Diego. He revealed Gibson Capital’s latest technology, designed to provide advisors and their clients with an interactive experience that illustrates the benefits of diversification and the costs of inopportune and unplanned shifts in their investment strategy.

Gibson Capital
Photo by stevepb (Pixabay)
Gibson Capital

Sidoni is a partner and the director of investment research at Gibson Capital, located in Wexford, Pennsylvania. He manages all aspects of client relationships and guides the firm’s due diligence and investment research efforts.

[drizzle]The textbook approach to portfolio construction, Sidoni said, is for advisors to develop capital market expectations, use optimization to create an efficient frontier, obtain risk tolerance information from the client and align that tolerance to a series of efficient portfolios.

“But this misses the opportunity to engage clients in the portfolio design,” he said.

Instead, Sidoni presented an approach where advisors can graphically illustrate the benefits of diversification and how those benefits amplify over time. Advisors should work with clients to select the appropriate portfolio based on those illustrations, he said.

Advisors should have two goals, which Sidoni said are addressed by his process. Portfolios should meet their clients’ investment objectives over time and clients should stick with their chosen strategy. A collaborative doesn’t guarantee that clients will adhere to their strategy, he said, but it reduces the possibility.

If you wonder whether your clients are vulnerable to the risk of abandoning their strategy, Sidoni offered a simple test. “If they talk to their golf buddies or to their friends and family about their investments or check their performance often, they are more susceptible to this risk.”

The newer tools Gibson Capital is building

Sidoni said that advisors should be focused on making investors more knowledgeable and sophisticated and presenting tools that will make this happen.

Advisors can shape risk tolerance, he said. But risk tolerance may be personality-driven and therefore permanent, although he said that some element of that tolerance is transitory. He calls this “risk perception.”

At the initial meeting with clients, Sidoni and his team focus on whether the client wants equity-like capital gains versus interest-generating investments. They come to a tentative target, assessing the tradeoff between volatility and income, and make a preliminary decision on the split. They also discuss the investment time horizon as it pertains to how much risk a client can tolerate.

Advisors need to create a realistic reference to understand portfolio performance, Sidoni said. He talks with clients about asset allocation and the benefits of broad asset-class diversification, along with its drawbacks. This is where the time-lapse graphical illustrations are used. He uses four asset classes (U.S. equities, non-U.S. equities, fixed income and commodities) and he shows the performance of two-, three- and four-asset-class portfolios. He shows clients a time-lapse view of risk (standard deviation) and return starting in 1972, which shows that higher diversification (using more asset classes) provides higher return and lower volatility.

Indeed, rather than presenting the abstract, mathematical case for diversification, this approach illustrates how and why diversification works. By looking at specific time intervals, it shows whether diversification worked, by comparing return and risk on single- versus multiple-asset class portfolios. For example, clients will see the ascendency of Japanese stocks in the 1980s and U.S. stocks in the 1990s. Sidoni said this demonstrates that “changing leadership and rebalancing produces the diversification benefit.”

Read the full article here.

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