Diversification is a fundamental principle of investing - examples of the concept date back as far as Talmudic texts estimated to have been written over 3,000 years ago, stating "Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." The diversification principle received a further boost in the recent era when Harry Markowitz's Modern Portfolio Theory supported the notion that the volatility of a portfolio may be less than the volatility of its parts, such that the introduction of even a high-return high-risk asset to the portfolio may improve the portfolio's risk-adjusted return (or even outright reduce its volatility). Yet at the same time, both the rabbis of the Talmud and Markowitz would probably agree that the first step of investing your assets is even more basic: make sure you own stuff that has a reasonable expectation of providing a useful return in the first place. Unfortunately, though, we seem to have lost sight of this rule in recent years!Read More...
Is CFP Board Weakening or Strengthening the CFP Work Experience Requirement?
In mid-August, the CFP Board issued some proposed changes to the CFP Board work experience requirement, including differentiating the work experience requirement for those personally deliver financial planning, from those who work in a supporting, supervisory, or teaching role. Up until now, all experience has been treated the same; but under the proposed rules, those who support, supervise, or teach will need more experience than those who personally deliver planning. Yet at the same time, the proposed changes make the differentiation by reducing the work experience requirement for those who personally deliver financial planning from three years, down to only two years. Is this strengthening the standard, or weakening it?Read More...
Perspectives on Investing in Australia – And The Distorted U.S. Markets!
Investors in the U.S. have become increasingly numb to the reality of investing here - a world where stocks pay a dividend barely over 2%, and short-term bonds or CDs give a yield barely more than 0%. Accordingly, we have few options for return aside from investing in risk-based assets to seek - or at least, hope for - capital appreciation. Yet the ultra-low returns on everything in the U.S. - necessitating a significant amount of appreciation just to generate a reasonable total return - is not the norm for U.S. investing historically, nor even currently around the world outside of the U.S., as I was reminded during my recent trip to Australia. In fact, I was somewhat shocked while I was there to wonder: how would investing in the U.S. be different if we, too, could get local short-term bank CDs that paid nearly 6%!?Read More...
If Clients Are Naturally Loss Averse, Why Don’t We Invest For Them That Way?
Psychologists Daniel Kahneman and Amos Tversky won the Nobel prize in economics for developing a theoretical framework to show how we make often irrational decisions when faced with real life economic trade-offs. As a part of their prospect theory research, they showed that we are naturally loss averse; this means we experience more negative feelings associated with a loss, than we do positive feelings for a comparable gain. For instance, we feel worse about losing $100, than we feel happy for winning $100. Yet despite the recognition that this research has received, are we ignoring it in the financial planning world? Simply put: If our clients feel worse about a loss than they feel good about a comparable gain, shouldn't we be more proactive about protecting them from losses, even at the risk of giving up more gains?Read More...
People Who Can Afford My Services Is NOT A Target Market!
The common refrain from practice management consultants for years is that to survive and succeed, planning firms need to clearly define their target market. After all, if you don't know who you're trying to serve, you can't create unique value for them, and you can't focus your limited resources. The good news is that after years of this messages, a recent trend suggests that financial planners are finally getting it... sort of. Planners are saying that they've defined a target market in increasing numbers; the problem is, their target market is often defined as no more than "people who can afford my services" - and that is NOT a target market!Read More...
Is The Financial Planning Process Actually An Enjoyable Experience?
A recent common refrain at conferences is that when done best, financial planning is a process, not an event - meaning that financial planning is not about delivering "THE plan" at the end, but about the ongoing process of continually aligning money with goals as life and circumstances continually change. In turn, this implies that the value of financial planning will be rooted in the ongoing experience that the client has while engaging in the planning process. But how good is that experience, recently? Perhaps not so great... as one researcher's recent focus group described financial planning as feeling "like a mix between a dental visit, math class, and marriage therapy." Ouch.Read More...
The New Ronco Fiduciary Standard – And More!
Coming soon to a branch office in your neighborhood: the latest – and greatest – fiduciary standard ever! No scaling. No cutting or gutting! Blended just the way Wall Street likes it.
Forget that the fiduciary duty is an overlay of principles designed to fill in the gaps of law and regulation to assure that the adviser acts in the best interest of the client. A traditional fiduciary duty, relying on legal precedent, would create an overarching, nearly bullet-proof standard unassailable by Wall Street lawyers eager to poke Swiss cheese holes in it.
Why "Fiduciary" Might Actually Be A Terrible Marketing Strategy!
One of the strategies that many financial planners use to differentiate themselves is to communicate that they are fiduciaries: legally bound to put their clients' interests before their own. In fact, as the debate about the fiduciary vs suitability standards has increased in recent years, more and more advisors who are subject to fiduciary regulation are promoting it as a differentiator in the marketplace. Yet in reality, most people generally assume that anyone they're doing business with will treat them fairly - at least until proven otherwise. Which means that claiming you're a fiduciary isn't necessarily a differentiator - unless you actually go so far as to bash your competition and accuse them, implicitly or explicitly, of being liars and cheaters. Could this be part of why the fiduciary message doesn't really connect in the marketplace? Because it's turning into a giant negative advertising campaign where you bash the competition instead focusing on the value you actually deliver?
Could Stock Options Be A Practice Management Tool?
Learning about stock options is a staple of investment education; whether it's the investment section of the CFP certification curriculum or the Series 7, virtually all planners learn about the basics of stock options. However, in practice, options are very rarely used for hedging the typical client portfolio, due to a number of reasons. Nonetheless, there is perhaps an even better use of options for hedging - not to protect a client portfolio from the next bear market, but to protect the profit margins of the financial planning practice!Read More...
Common – And Wrong – Assumptions about the Safe Withdrawal Rate Research
As safe withdrawal rate research gains in popularity, it is both increasing used - and misused - by financial planners and the press. Although the research does have its limitations - which I discuss frequently in my presentations at various financial planning conferences throughout the year - and is built on many assumptions that deserve to be challenged, a rising number of safe withdrawal rate critics appear to criticize the approach based on inaccurate statements. So let's clear up a few points of confusion about safe withdrawal rate assumptions. Read More...
