The claim that "behavioral coaching" adds 150 bps of return is particularly interesting. For purposes of discussion let's say that the canonical behavioral issue is, in their words,
Persuading investors not to abandon the markets when performance has been poor or dissuading them from chasing the next “hot” investment—this is where you need to remind your clients of the plan you created before emotions were involved.
Their headline description of what their study actually shows is (my boldfacing)
Based on a Vanguard study of actual client behavior, we found that investors who deviated from their initial retirement fund investment trailed the target-date fund benchmark by 150 bps. This suggests that the discipline and guidance that an advisor might provide through behavioral coaching could be the largest potential value-add of the tools available to advisors.
In other words, taking it at face value, the 150 bps lag was "found," but the value of behavioral coaching to avoid it is only "suggested."
Here's the problem.
1) If the investor is not willing to stick to the advisor's plan, then the advisor must have put them in a plan that was difficult to follow
2) Just because there is evidence that failing to follow the plan resulted in underperforming the plan by 150 bps does not
show that behavioral coaching can recover that 150 bps.
3) The evidence for that 150 bps is based on only five years of data, 2008-2012, admittedly a varied period in terms of variety of market behavior, but still only five years.
4) The behavioral coaching advice is almost surely "stay the course and don't sell into a downturn." This isn't automatically good advice for everybody under all situations. It can be bad
advice when dealing with a client with an asset allocation that far exceeds their risk tolerance
. During the downturn, the advisor does not know how bad it will ultimately be and does not know whether it will exceed the client's risk tolerance before it is over. Certainly
, it is better not to break at all, but the best way to achieve that is to design in a margin of safety to make sure that extreme loads do not create too much stress in the structure in the first place. Among the population of investors who ultimately did sell, there must have been some
who disregarded their "coach" and sold at the blue arrow... and others who were coached into hanging in for a while, only to sell ultimately at one of the red arrows. (If you don't remember, even if you hung on at the first red arrow, hitting the second one was mighty
sickening). Hypothetically, then, behavioral coaching might have made things worse for some
6) Even if you could show that behavioral coaching improved the average
performance of jittery clients during a downturn, it might have increased the dispersion
of results. Behavioral coaching can't have succeeded 100% of the time, an any analysis has to include an assessment of the frequency severity of the failures.
One mustn't credit the advisor for successes while blaming the client for failures.
7) A piece of anecdotal evidence that behavioral coaching does not have a 100% success rate is provided by Cass Sunstein
, the co-author of a book on behavioral economics! Very, very few people who sell in downturns are willing to talk about it
, but he did. He sold, not during 2008-2009
, but during the -19% correction in 2011. In retrospect that correction seems so small that many have forgotten it. According to his account, he actually called his coauthor, Richard Thaler, for advice, and Thaler told him "reread our book." Nevertheless, he sold anyway.
My other example, sorry to keep trotting out the same too, but it's hard to find them, is Daniel Solin, who has acknowledged that he
sold during 2008-2009 at the same time he was telling his clients not to
. Unfortunately he didn't say what his clients actually did.
Note: in their introduction, they do go on to say
In addition, Vanguard research and other academic studies have concluded that behavioral coaching can add 1% to 2% in net return,
but they do not present or cite that research.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.