The benevolence of up-markets

There's a truism as old as time (or at least as old as the business of Other Peoples Money) and it concerns the benevolent effect produced by up-markets: Financial advisors love them more than anyone else.

This is the case for the following three reasons:

1. Billing off a higher base: Most advisors and money managers are paid based on their assets under management or AUM. When the market rallies, so too do most of the account values under their wing. This means they are charging their customary fee percentage but the base is a larger number.  There are two ways for an advisor to raise AUM, the first is the hard way - getting new clients, convincing existing clients to dump other relationships, networking, prospecting etc. The second way is the easy way - merely staying put  through a bull market. The increase from either pays the same.

2. A rising tide hides all mistakes: In a rally, a broad-based one at least, even the loser investments can start to look and feel like winners. They get dragged up thanks to the environment and the advisor who chose them gets a second chance to rethink that purchase decision. Easier to sell ugly merchandise into an up tape than book losses into a malaise or a correction.

3. Customer confidence improves: Advisors tend to be looked at in a more favorable light when the investment markets are acting well and things seem to be ticking along without a problem. Portfolios flourish on auto-drive, dividends are paid, gains are taken and conversations can turn from the stressful to the friendly - "Playing any golf this weekend? How's Jayden doing at Cal State this semester?"

As evidence of this last point, I point you towards a Marist Research survey published this week of 175 individuals with investable assets of $1 million or more, excluding primary residence.

Here's Julie Steinberg writing at the Wall Street Journal:

Millionaires appear to be more satisfied with their treatment at the hands of their wealth advisers. Just over 85% said they’re satisfied with their investment firm, up from 67% in 2010. The advisers themselves are also commanding more respect. Nearly three-quarters of respondents are pleased with how their advisers have managed their portfolios through difficult economic times. That figure jumped from 59% in 2010.

This amidst a backdrop of only 28% believing that the economy is healthy. In other words, they're not confident overall but they're extremely confident about their finance guy or gal.

Good vibrations in the market, especially those emanating from the third quarter of this year, go a long way toward solving lots of outstanding issues in a very benign and gentle way. Seasoned advisors fight through the tougher times (Fall 2011, Winter 2008, etc) knowing that times like these are never far away.

Source: Millionaires More Satisfied With Advisors (WSJ)