The Importance Of Investment Counselling

By Mark Barnicutt on September 5, 2011

Charles Ellis recently wrote an article in the August 2011 Issue of the Financial Analysts Journal titled, “The Winner’s Game“.

In this article, Ellis does a great job of outlining the key issues that face the global investment management industry as well as what he believes is a solution — or “Our Future Promise”.


  • The Investment Profession, when the services provides help investors achieve their realistic long-term objectives, can be a noble profession.
  • The evidence indicates, though, that investors are suffering serious shortfalls.
  • Part of the problem is that investors make mistakes, but they are not alone.  The real fault lies not with investor clients but with the investment profession due to Three Errors (See Below).
  • The field of ‘investment management’ has two major parts: The Profession & The Business.
  • While the Profession is about doing what’s right for investor clients, the Business is about doing what’s right for investment managers.  In other words, like other professions, there is a constant struggle between the values of the profession and the economics of the business.
  • Investment professionals need to be successful at both in order to maintain the trust of our clients and the viability of our business.  In the long-run, the latter depends upon the former!
  • Ellis believes that the investment management industry is losing the struggle to put our professional values & responsibilities first and our business objectives second.
  • The investment management industry can stop losing this struggle if we redefine our mission to emphasize the investment counselling value of our profession – and our understanding of investors & investing – to help clients be successful in meeting their investment goals.


i. Falsely Defining Our Mission:

  • We have falsely defined our professional mission to our clients as ‘beating the market’.
  • Massive changes have transformed the markets & investment management so greatly that for most investors, beating the market is no longer a realistic objective as more & more people are recognizing.
  • Done properly, Investment Counsellors can add far more to clients’ long-term returns than Investment Managers/Portfolio Managers can hope to produce.
  • Successful Investment Counsellors will help each client understand the risks of investing, set realistic investment objectives, be realistic about saving & spending, select the appropriate asset classes, allocate their assets appropriately, and most importanly, not overreact to market highs or lows.
  • Counsellors can help their clients stay the course & maintain a long-term perspective by helping them understand what managers are intending to achieve over the long term, understand the predictably disconcerting market turbulence, and be confident that reasonable long-term investment results will reward their patience & fortitude.

ii. Incorrectly Odering Our Priorities:

  • The values of our profession have become increasingly dominated by the economics of our business.
  • Given that the investment management business has wide profit margins, modest capital requirements, minimal business risk and virtulaly assured long-term growth, investment management organizations have become prime acquisition targets for giant non-investment financial service organizations such as banks, insurers & securities dealers.
  • As investment management organizations get bigger, it is not surprising that business managers have increasingly displaced investment porfessionals in senior leadership positions or that business disciplines have increasingly dominated the old professional disciplines.
  • Business disciplines focus the attention of those with strong career ambitions on increasing profits, which is best achieved by increased ‘asset gathering’ even though investment profesionals know that expanding assets usually works against investment performance.
  • In large financial service conglomerates whose judgements of division-by-division results are understandbly profit focused rather than investment focused, business success will be detemined by the consistency of and rate of increase in reported profits..  And the bigger the business, the more likely it is that the focus of senior management will be on increasing business profits.
  • At investment organizations around the world, the two most important internal changes have not been in investment research or in portfolio management. They have been in new Business Development (ie: to get more business when performance is favourable) and in Relationship Management (ie: to keep more business longer, particularly when performance is not favourable).  These changes respond primarily to the realities of the business as  a business, not to the needs of the profession as a profession – nor to the needs of our clients as investors.
  • As a result, when business dominates, it is not he friend of the investment profession.  If and when, as so very often happens, successful asset gathering eventually overburdens an organization’s professional capacities for superior investing, results achieved for investors will fade.
  • In addition, actions aiming to increase an organiziation’s results as a business, such as cost controls, fee increases and drives for greater productivity, increase the chances that the organization’s professional results will suffer.

iii. Dropping Rigorous Counselling:

  • The investment industry has somehow lost sight of our best professional opportunity to serve our clients well and shifted our focus away from effective investment counselling.
  • While the largest institutional investment clients have expert staff who are surely able to take on all of their responsibilities without assistance from professionals with training & experience in the complexities of working on the architecture of an optimal long-term investment program, most investors, particiular individuals as well as investment committees at small & mid-size pension funds, foundations & endowments are understandably not experts in contemproary investing & may not have broad experience. Many need help.
  • Some of the help clients need is in understanding that selecting managers who will actually beat the market over the long-term is no longer a realistic assumption or a ‘given’.
  • Far more important, investors need help to gain a realistic understanding of the long-term & intermediate prospects for different kinds of investments – risk & volatility first, rate of return second – so they will know what to expect and how to determine their strategic portfolios & investment policies.
  • Still more important, most investors need help in developing a balanced, objective understanding of themselves and their situation: their investment knoweledge and skills; their tolerance for risk in assets, incomes & liquidity; their financial & psychological needs; their financial resources; their financial aspirations and obligations in the  short & long run.  Investors need to know that the problem they most want to addreess and solve is not beating the market. It is the cominbation of these other factors that creates their own reality as investors.
  • What is right for most investors is importantly different from a ‘lemming-like’ struggle to beat the market.
  • As a  result, the most valuable professioanl service we could provide to almost all investors is effective Investment Counselling


  • Increasing the fit of investment service to the long-term objectives of each investor – moving from caveat emptor product sales to more durable, shared-understanding service relationships – would increase the duration or ‘loyalty’ and, thereby, the economic value of client-manager relationships.
  • Increasing the duration of client-manager relationships would benefit both clients and investment managers substantially.
  • As a result, we owe it to ourselves and to our profession to redefine our professional mission to include sensible investment counselling so that we and our clients can enjoy a shared understanding  & succeed together.
  • If we take appropriate action, we can enjoy future success as a trusted profession and as individual professioanls. While doing right by our clients, we will be doing right for ourselves when we guide our clients to success in reaching their investment goals.

To read the complete article, please click here.

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