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One needn’t look far to find reasons to worry about the markets. With the Fed raising rates by 1.25% over the last two months, interest rate fears – with attendant recession worries – are running rampant among investors. And the markets are pricing in those fears and worries, with dramatic drops of 10% or more in June alone.
During times like these, our clients are looking to their financial advisors to provide calm, reasoned counsel that is based on something other than raw emotion and guessing. Let’s use Dimensional Fund Advisors’ approach to investing as an example. I have no commercial relationship with Dimensional, but its story illustrates how advisors can build trust with their clients through an effective narrative.
Advisors who are part of the Dimensional ecosystem have access to world-class research based on empirical evidence, and that should be of great encouragement to both advisors and their clients. But Dimensional advisors have another great tool in their belts that too often gets overlooked: a really great story to tell.
We never get too old for stories. And especially in the current volatile market, our clients benefit greatly from hearing a story like Dimensional’s – which gets better the longer it continues.
Prize-winning research
A great place to start telling the Dimensional story to your clients is with its “once upon a time” beginnings in the groundbreaking research of Eugene Fama and Kenneth French, the developers of the three-factor model for understanding equity returns. With this pioneering, peer-reviewed financial model, a relatively simple, easily implemented method for constructing equity portfolios began to gain acceptance among financial professionals. Fama’s visionary research was recognized worldwide in 2013 when he shared the Nobel Memorial Prize in Economic Sciences for “empirical analysis of asset prices.” It’s hard to get a stronger endorsement for the validity of research – any type of research – than a Nobel Prize, but the Dimensional story has that kind of credibility already built-in.
Of course, a great idea is only that until someone figures out how to implement it. And in 1981, David Booth and Rex Sinquefield did just that when they launched Dimensional Fund Advisors, basing their investment philosophy on the teachings of Fama and French, under whom Booth and Sinquefield studied at the University of Chicago. With some $659 billion in AUM, Booth and Sinquefield’s application and extension of the ideas of Fama and French have proven their value to investors all over the world.
What it means to your clients
The Dimensional story is built on empirical research, and it has taken the science of investing to a new level. Understanding the Fama-French factors of market capitalization (size), value versus growth, and market risk as “dimensions” of expected return that could be realized in a portfolio, Booth and Sinquefield designed mutual funds configured to capture these dimensions. They reasoned that a disciplined strategy of emphasis on these dimensions in equity portfolios, adhered to over time, would give patient investors better opportunities to allow market pricing to work in their favor.
Tell your clients about the importance of Dimensional’s robust investment philosophy. Instead of chasing performance, Dimensional Funds afford your clients the advantage of an approach built to take advantage of how markets work – not one that tries to predict their direction. Too many investors get caught up in a relentless search for the “best fund,” based on which manager had the highest numbers most recently. But with nearly 80% of active fund managers failed to meet their benchmarks since 2010, that approach is not likely to be a recipe for long-term success in your clients’ accounts.
Here’s how the folks at Dimensional explain it:
Rather than attempting to predict the future or outguess others, we draw information about expected returns from the market itself – leveraging the collective knowledge of its millions of buyers and sellers as they set security prices.
Trusting markets to do what they do best – drive information into prices – frees us to spend time where we believe we have an advantage, namely in how we interpret the research, how we design and manage portfolios, and how we service our clients. We take a less subjective, more systematic approach to investing – an approach we can implement consistently and investors can understand and stick with, even in challenging market environments.
Consistency and discipline, in up markets and down markets: Isn’t that the story you want to be telling your clients?
And it keeps getting better
And the story is still going, as the analysts and researchers at Dimensional continue to study, revise, refine, and expand their asset and market modeling philosophies to remain on the leading edge of financial research. In 2012, the company added a fourth dimension – profitability – to its model, and as recently as 2019, they have added a fifth: investment (the difference between companies that practice a high rate of re-investment and those with lower rates). In other words, the story at Dimensional is one of ongoing, relentless self-improvement in a quest to deliver the very best possible client experience.
If you are a financial advisor with an evidence-based approach to investing, whether or not you’re with Dimensional – the important part of “this story” is that you have a story to tell (your investment philosophy). You communicate the value of that philosophy through the good times and the bad. When you do this, you create confidence in your approach that is backed by evidence. This offers your clients transparency and reliable guidance year after year. You want your clients to trust your expertise absolutely, and value your commitment to their best interests and access to the latest research. You want them to know that you are doing your best for them, every day, as you bring to them the benefits of professionalism, fiduciary care, and world-class investment practices.
Make your investment philosophy a central part of your story. It’s a story you can tell with confidence, a story that can help your clients stay the course even during unsteady market environments, a story built on solid financial science, and a story that stands the test of time and economic cycles. It’s the story you want your clients to hear.
Gretchen Halpin is the co-founder of Beyond AUM, an agency that provides field-tested, data-driven marketing, growth, digital alignment, and experience solutions to financial services firms across the nation, including wealth managers, financial planning firms, and RIAs & BDs. We work with firms to achieve world-class outcomes for their brands and professionals and drive success in the business beyond the AUM number. Gretchen is a regular contributor to media outlets such as Forbes and a speaker at industry conferences including eMoney and Invest in Women.
Want to learn more about how to come up with modern marketing and business development tactics to create opportunities for clients and prospects to engage with your firm? Reach out to the Beyond AUM team!
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.