Where Does Performance Fit In The Sales Process

Where Does Performance Fit In The Sales Process?

They say don’t sell on performance… but that’s simply not practical.

Financial advisors and asset managers, alike, are in a business that revolves around performance. What’s more, performance understandably ranks as a top criterion for investors when assessing the value of their financial advisor.

So how do you strike a balance between selling on performance, which seems like a necessity, with the more strategic and sustainable practice of selling on process?

It comes down to understanding which performance figures to emphasize, and how to position those figures within your client conversations.

We’ll discuss that here. But first, let’s talk about your clients and what they expect.

Morningstar ran a study in 2018 that sought to identify differences in what clients found most important in their advisory relationships, and what advisors thought their clients would find most important1.

For now, let’s focus on the value clients ranked as the most important. Here are the top five:

Values investors rank as the most important from financial advisors:

  1. Helps me reach my financial goals
  2. Has the relevant skills and knowledge
  3. Communicates and explains financial concepts well
  4. Can help me maximize my returns
  5. Has a good reputation and positive reviews

The key takeaway here is that investors do care about performance (advisors in the study heavily underestimated the importance of “maximize my returns”), along with the confidence you can provide them during the investment journey.

But another important distinction is that the top value isn’t necessarily about beating the index. It’s about getting to a pre-defined goal, and getting there efficiently. Performance takes on a broader definition here, one that encompasses reliability and predictability (we know you can’t predict the market, or the performance of a model, but that doesn’t change the fact that investors seek reliability within their portfolios).

So how do you deliver investment recommendations in a way that makes sense to investors, but that doesn’t set your firm up for backlash when markets change, or during periods of volatility?

Simple – when you speak about performance, seek to tie those returns to a goal and validate them with a sound investment strategy that can be easily understood and tracked.

We’ll show you how we do this at Advanced Asset Management Advisors—as an example, not a sales pitch.

How we sell performance without cheapening our investment story

First and foremost, do not sell short-term performance numbers unless your client has an ultra-short time horizon or expects to operate as a day trader.

A 1-year track record is a great testament to how an investment process works in a particular market environment, but there are too many variables that could factor into an unduly large or small return figure. There are similar issues with a 3-year track record, as market cycles can prop up or pull down a performance figure, and very few of your clients only seek to remain invested for three years.

Selling on short-term performance introduces an unnecessary risk into the advisor-client relationship. It anchors their expectations to something that probably isn’t sustainable. If your strategy is well-suited for the current market environment, by no means should you hide great performance. Just temper the expectations with a long-term view.

We like to center our conversations around longer track records—five, 10, or even 20 years.

A 10+ year track record is likely going to give you a fair view of how an investment strategy is going to perform over the long run. These longer track records are also more in line with the typical investor’s time horizon. We feel this better sets expectations for clients, a positive for everyone involved.

However, simply choosing a longer track record isn’t the most important part of the sales process. Rather, the key component is to recognize that three of the top five investor-ranked values revolved around confidence and clarity, not just performance.

To create a more complete picture for the client, you need to bring that performance figure to life. How do you do that? By making it extremely clear how that figure was produced.

Share the strategy that was used to create that long-term performance figure, and make that strategy extremely clear for someone who might not be an investment professional.

For Advanced Asset Management Advisors, our job is relatively easy here. We are an old-school fundamental manager. We rely on the fundamentals of market pricing and sector valuation to guide our investment decisions. That means we tilt our equity allocations toward more attractive segments of the market while we limit exposure to riskier segments. On the fixed income side, we analyze the market and determine the appropriate amount of credit risk and maturity, and set our portfolios accordingly.

The story is simple and trackable.

When you look at our performance track record, we can generally point to any given time and tell you exactly why we under- or over-performed the market. Equally important, we can also explain why that performance fits into a wider risk-adjusted goal, and how our portfolio actions sought to support that goal.

They say a picture is worth a thousand words. That’s because a picture helps you visualize the matter at hand. You aren’t left on your own to piece information together to create the picture in your mind. That’s the same principle here. You might not be able to explain an investment process (or multiple, in the case of a UMA portfolio) with a picture. But you can work to take as much guesswork out of the client’s mind as possible.

Performance is table stakes, comfortability and suitability are king

We all know we must perform—it’s what gets you a seat at the table.

What sets the winners in our industry apart is the ability to create and maintain confidence with those we serve.

We’ve been doing this for more than 20 years through a straightforward, transparent, and stable investment process—one which we can use to seek returns that make sense to clients, long-term.

We think advisors should follow a similar pattern. No matter what strategies you use, you’re going to have to sell performance. Focus on longer-term figures and seek to make sense of those figures with each strategist partner’s investment story (your strategist partners should help you out here!).

When you do this, you’ll create clarity, confidence, and best of all, comfortability that will improve your client relationships and enable more sustainable asset growth within your business.

1Morningstar, The Value Of Advice: What Investors Think, What Advisors Think, And How Everyone Can Get On The Same Page

The information and opinions in this report have been prepared by the investment staff of Advanced Asset Management Advisors (AAMA). This report is based upon information available to the public. The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but AAMA makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute AAMA’s judgment and are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as a recommendation to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation would violate applicable laws or regulations.

Stay Up to Date

Want to stay up to date with fundamentally-driven market insight, economic analysis, and practice management advice? 

Sign up to receive regular roundups of our content, delivered conveniently to your inbox.