The ClientWise Blog


Posted by Chris Holman on May 18, 2010 8:55:00 AM

Pollyanna was a best-selling 1913 novel that was adapted to a 1960 Disney movie starring Hayley Mills (who won a special Oscar for her role). Pollyanna's philosophy centers on an optimistic attitude of life that she learned from her father called the "The Glad Game."

In popular lingo, a "Pollyanna” is pejoratively used to describe someone who always seems to find something to be "glad" about...even if this belief is unreasonable or illogically optimistic.

In an illuminating article in McKinsey Quarterly, it was demonstrated that equity analysts have been overly optimistic for a generation. For the past 25 years, equity analysts' earnings-growth estimates were found to have been 100% too high. The sanguinary projections have generally ranged from 10-12% annually, compared with actual growth rates of 6%. The only time they've been right in recent memory has been during the strong-growth years of 2003-2006.

The discouraging bit for investors is that this optimistic attitude has continued despite a series of rules and regulations, instituted ten years ago, that were intended to improve the quality of analysts' long-term earnings forecasts, prevent conflicts of interest, and restore investor confidence.

Of course, not all blame should be directed towards the analysts themselves. This all appears to be part of a grotesque minuet that is performed between Wall Street analysts and industry executives...many of whom go to great lengths to satisfy Wall Street's financial expectations rather than report the on-the-ground realities of their own industries.

The important takeaway for investors is that they will need to do more of their own homework, which is not realistic for the all-too-busy American today. The bigger takeaway for financial advisors is that investors will be increasingly seeking to pay someone honest and reliable who could do it for them. In order to serve their clients and potential new clients and truly fulfill their role as wealth advisors, advisors must step into the breach and protect their clients from the Pollyannish optimism of the equity analyst culture.

For financial advisors, this situation begs some obvious coaching questions:

  • Are you taking full advantage of today’s financial culture by communicating your role as a trusting, reliable full service wealth advisor?
  • How are you protecting your clients from the "Pollyannas" of Wall Street?
  • How are you positioning yourself with your clients? Are you on their side of the table...or the opposite?
  • How do you currently explain today’s market expectations? What could you be doing differently to explain actual, rather than inflated, results?
  • For those advisors who work for investment firms who use equity analysts who are consistently and optimistically wrong…what is your role with regard to serving your clients?

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Topics: Investing