Morningstar Advisor - August/September 2011 - 48

Morningstar Conversation
Marty Flanagan
president and CEO, Invesco
If we found that somebody was misusing a product
or didn't understand a product, we would
engage very, very quickly, because it's not in the
investor's best interest, it's not in our firm's best interest, and it's not in the
industry's best interest.
Stock-Pickers or Asset-Allocators?
Culloton: Bill, Vanguard has also put out
research recently that implies advisors might
be better off not trying to choose securities
or do asset allocation with the goal of trying
to beat the market-which for a long time has
been the goal of many advisors. Are advisors
better off trying to do the security selection
on their own, or are they better off focusing on
the broader planning topics?
McNabb: Marty and I may end up differing
on this, I don't know. Vanguard believes very
strongly that the real value-add is in the
discipline and getting the client to the right
strategic asset allocation. We've done a
fair amount of work over the last decade,
re-evaluating the [Gary P.] Brinson work and
updating the data. We still come to the same
conclusion-asset allocation overwhelms
everything else when it comes to long-term
performance. The research that you're
describing we refer to as " the advisor's alpha. "
What we've tried to convey to advisors is that
going out and telling your clients you're
going to pick superior-performing funds and
underlying investment strategies is a very,
very difficult task, and one in which the odds
are stacked against you.
On the other hand, telling your clients that
you're going to make life really easy for
them-you're going to get them to the right
strategic asset allocation and, oh, by the
way, you add a ton of value just by the fact that
you will keep them to that asset allocation
48 Morningstar Advisor August/September 2011
by rebalancing periodically in a strategic way.
The rebalancing itself more than likely pays
for most of the advisor's fee. Everybody knows
it, but we've all dealt with investors when
times are particularly challenging. [They say]
" Well, I know I should be 60/40, but I'm feeling
really good about the stock market right
now. I'm going to let it ride " and all of a sudden
they're 65/35 or 70/30, and they push
their advisor to let them do that, or vice versa.
As we came through the crisis, there was
tremendous pressure- " I just can't take
it anymore, I don't want any equity exposure. "
And the advisors who served their clients best
were those who kept them on a long-term
strategic asset-allocation plan. To me, that is
where the value gets added. So, you're right,
that's the approach we're emphasizing. I
think there are certainly other people out there
who take a different approach.
Flanagan: The absolute right answer is that the
financial advisor should be meeting the
investor's goals. And I think that's where we,
as an industry, miss it at times.
The asset allocation matters a lot. And from my
point of view it comes out of this process of
understanding the client's needs. What is their
investment objective? What's their time
horizon? What's their risk tolerance? And my
view, where it might be a little bit different,
is that building a portfolio can be achieved with
multiple vehicles. The vehicle is not the answer.
It's really the asset allocation inside, and really
the investment quality.
I started my career working for John Templeton,
so my core is an active mind-set. But the
truth of the matter is that there's a place for
both. And both are very, very important. And I
would say that would be sort of a personal
maturing in my career. I once had a passionate
belief about deep value investing, but I've
learned over time that there are many ways to
meet investment objectives. And you need all
of the skills to pull that off.
McNabb: I certainly don't disagree that there
are many ways, from an investment strategy
standpoint, to get there. Vanguard also
believes strongly that active can play a role.
Our general point has been that it's fine
to do that, but at the end of the day, you are
trying to [reach] a set of goals.
The goal is key. For most people, getting the
asset allocation right first goes a long way
toward the goal. As you get more refined, that's
where you can get into some of the more
subtle distinctions: Do you have a passive core
and active satellites? Or, do you take a little
bit more active risk because you've saved so
much more than you're ever going to be able to
spend? You can get into some really interesting
nuances. But for the primary set of goals,
getting the right asset allocation is going to
drive whether you're successful or not. And
that's the point of the " advisor's alpha " concept.
Flanagan: I look at the world pretty simply. And
I generally think the world's more complex, not
less complex. People have less time, not more
time. So, the value of advice for individuals is
Morningstar Advisor - August/September 2011

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