Howard Marks, one of the world’s great money managers, has a simple message for financial advisors: focus on defining and managing financial risk for your clients or risk extinction.
In an interview, Marks, co-founder of Oaktree Capital Management, said advisors could be replaced by automation if they don’t do something more for investors beyond investment performance. What does he think they should do? Manage risk.
Marks: In all parts of the investment industry—as in the rest of the business world—the key question will be, “Can humans do something that machines can’t?” If so, I believe humans will stay in demand and be able to charge appropriate fees. If not, machines will take over.
Much equity management has transitioned to index/passive funds, not because passive performs so well, but because active managers have produced inferior results and charged high fees. Better results and/or lower fees will make advisors viable and successful. Anything else assumes the clients are naive.
I think advisors can do a better job than machines [on helping their clients manage risk]. A skillful advisor who reflects the client’s preferences and knows how to implement them should always be a valuable resource.
Question: How should financial advisors help clients adjust their asset allocations in different market environments?
Marks: First, advisors should help every client establish an explicit normal risk posture. Second, based on the thinking that I mentioned earlier, they should decide whether the risk in their portfolio today should be above, below or at the normal level. After doing that, risk can be adjusted. There are many ways to do so, by moving both between asset classes and within asset classes. Raising or lowering cash is binary—either right or wrong, with no gray area—and it’s difficult to do right. Fortunately, there are many ways to adjust risk without manipulating cash.
StratiFi’s risk management software can help you do just what Marks recommends.