This article was first published in the National Post earlier this month. It is a lightly edited version of a speech that Tom Bradley gave at a Portfolio Management Association of Canada dinner for the 2023 PMAC Awards for Excellence in Investment Journalism on June 21.

When I agreed to do this, I thought I’d reflect on my 40 years in the investment trenches. I’m hitting that milestone next month and have been keeping a list of lessons learned. It seemed like the perfect time to do a “40 lessons from 40 years” type of thing.

But as I thought about who would be here, I realized there was a particular theme I wanted to talk about more. One that I’m focusing my attention on these days.

We’re all trained to look for inefficiencies in the market so that we can take advantage of overlooked stocks, structural dislocations and underappreciated trends. We’re like heat-seeking missiles in this regard.

Well, I’m here to tell you about one of the biggest inefficiencies there is, and one that’s not easily arbed out and is staring us in the face. I’m talking about investor behaviour: the actions taken by regular Canadians, the end users of investment products many of us manage.

When I say ‘inefficiency’, I mean the biggest cause of slippage to client returns. I’m talking in the broadest sense. Mrs. and Mr. Smith earning a net return of four per cent a year instead of six per cent, and therefore accumulating $1 million for retirement instead of $2 million.

Providing great investment management is important. Charging reasonable fees is a given. But it all goes for not if the ultimate consumer uses our products and skills incorrectly.

The penny dropped for me when I saw a study of returns for the clients of an eminent U.S. money manager. The firm had an excellent record and at one point was named Investment Manager of the Decade, but the study showed that the clients of the firm hadn’t done nearly as well. Indeed, they’d done poorly.

I think you know why. Money flooded into the firm when results were good and flowed out just as quickly when they were bad.

When studying history, what’s consistent through all market cycles is the part that human emotions and behaviours play. It’s a reliable and recurring inefficiency and is the biggest swing factor for investor returns. And yet, somehow, it’s mostly ignored by more talented investment professionals than me.

This was reinforced a few years ago when I was serving on a regulatory committee. Around the table were most of the big manufacturers in the country: fund companies, ETF sponsors and banks. I had a chance to ask the group what work they were doing to assess how the investors, the buyers of their products, were doing. In other words, the money-weighted rate of return (MWRR) of their funds as opposed to their published time-weighted return (TWRR). The reality versus the promise.

It was comical. There was silence. A wall of blank stares. Some didn’t even know what I was talking about; as if I was talking another language.

This revealed a serious industry shortcoming, and the opportunity we all have.

If you’re not yet clear what I’m referring to, let me give you some examples. I’ll start by going back 25 years. You’ll remember how investors jumped on the tech bandwagon. Most got on it late and rode it down, but it wasn’t just chasing past glory and being undiversified that caused the damage.

Just as big an issue was the hangover of the tech wreck. People were disillusioned and, as a result, were underinvested for years. They went up with substantially less in stocks than they went down with. As you know, that’s a bad formula.

Similarly, after the financial crisis, many investors were out of the market for years, if not forever. BlackRock did a survey a few years later and the cash and GIC levels were remarkable. Cash-like investments were over 60 per cent of investment assets.

Think about the impact of that.

Contrast that with the post-pandemic period: 2021 was 1999 on steroids. In my 40 years, I can’t recall a period with such rampant speculation. People rolling the dice. Shooting for the stars. In the matter of 12 to 18 months, we had manias around cannabis, crypto, meme stocks, non-profit tech stocks, short-dated options and SPACs. All part of a bigger trend towards day trading on an app.

There were investors who made money doing some of these things, but most didn’t, and some got killed.

But the slippage comes in many forms, not just during these remarkable periods. We see it all the time. Investors sell their stocks because they’re spooked by U.S. politics or, as mentioned earlier, go all in on a new trend.

In the latter case, some portfolios have done quite well. Dividend portfolios that only owned Canadian banks, utilities and REITs, or ones focused solely on the FAANG stocks, benefitted from declining interest rates over many years. But not all undiversified portfolios do.

I’ll never forget meeting a new client in 2013 or ’14 who came to us with two-thirds of her portfolio in precious metals. The percentage was that high even though the stocks had fallen dramatically from their highs.

These kinds of things have a big impact on returns and in most cases, overwhelm the impact of an investor picking a first-, second-, third- or even fourth-quartile manager.

Where am I going with this? We need to do a better job of building the foundation on which our wonderful profession is built on. This is an exciting opportunity.

For instance, before we claim victory because we’re in the first quartile, we need to check to make sure our clients are also in the first quartile.

Rather than puff out our chests and tout our skills when our numbers are good, we need to use that glorious moment to help educate clients on how investing works. Why then? That’s when we have a halo over our heads and clients are hanging on our every word. Bob Hager was the master of using periods of strong performance to talk about the warts in the portfolio and the challenges ahead.

What’s in it for you by doing this? It’s an investment in the future. Clients will be easier to serve in the years ahead. They’ll trust that they’re getting the straight goods and be less prone to crippling mistakes. And, dare I say, they’ll be stickier.

Let me go on. I want to make it real.

We can improve client behaviour by being disciplined about reporting returns, focusing on the long term and doing it the same every time. This, opposed to jumping around and picking the number on the page that makes us look best.

Before we say “if the market goes down,” we need to catch ourselves and say “when the market goes down.” I learnt this from Dan Richards. Substituting that one word makes a world of difference in setting expectations.

We need to align our advertising and product launches, both of which send a huge signal, with what’s best for the clients. Think about it. In weak markets, what gets promoted? It’s safe products with limited downside. They’re featured at a time when, in all likelihood, the firm’s investment team is buying stocks at reduced prices and dialing up risk. Is this good for client returns? I don’t think so.

And, finally, before we make a market call, think about what it’s doing to our client relationships. Holding ourselves out as knowing where the market is going feels good for about 30 seconds, but sets unrealistic expectations for years. Clients need to know the market is like a bad boyfriend, or girlfriend. It’s unpredictable, overly dramatic, irrational at times and totally unresponsive to our needs.

This applies to the media in the room, too. I implore you to stop publishing short-term market calls. It’s hurting Canadian investors.

In conclusion, let me say that we can’t know what the market is going to do, but we can make sure our processes and client interactions reinforce sound investor behaviour. It puts our clients, our businesses and our profession on a better footing.

That means not portraying ourselves as knowing more than we do.

Not promoting market timing, sector rotation and frequent trading.

Providing clear, consistent, jargon-free reporting that tells clients what they need to know.

And aligning promotion and product launches with what our portfolio managers are doing, not what clients are feeling.

I saw a quote last weekend, which I’m guessing relates to Father’s Day, from an Italian philosopher and novelist, Umberto Eco. He said, “I believe that what we become depends on what our fathers teach us at odd moments, when they aren’t trying to teach us. We are formed by little scraps of wisdom.”

We need to operate our businesses knowing that everything we do, everything, even the scraps, impacts client outcomes.

I want to thank Katie and the PMAC team for giving me this soapbox today. PMAC is an organization we should all get our shoulder behind. It needs our support because regulators, governments and our friends in the media need to hear that there’s more than just 10 mega firms in this industry.

Thank you for listening.