The Reward For Good Behavior

Many investors have been educated on the broad investment themes to improve their investment experience and outcomes. Some of the most basic include asset allocation (this determines the vast majority of both the risk and return of your portfolio), broad asset class diversification to reduce the overall portfolio volatility, and more recently lower cost mutual funds to improve the probability of better investment results compared to higher cost funds.

One of the most common concerns that clouds an investor’s vision of a comfortable retirement with large account balances or plenty of asset class diversification with sufficient retirement income is the inevitable equity market downturn. It has been eight years since the U.S. equity markets have had a significant correction and investors should be reminded and prepared for the eventual decline that comes with equity investing.  In fact, since 1929, there have been 25 bear markets (defined by a 20% loss or more).  On average, that means a bear market occurs approximately once every 3.5 years.  If history is any guide, most of us are going to experience several bear markets over our lifetime.

The future is uncertain and investing is often influenced by unexpected events, some good and others bad. Predicting when or how bad the next correction will be is futile but you can be prepared for it. Behavioral coaching is most effective when clients are prepared for the eventual ups and downs of the markets and prepared in advance of such unexpected events.

This is exactly when advisor behavioral coaching with clients is most important. Human emotion and fear can allow clients left to their own choices to abandon their financial plan and run for cover. Advisors use their past experiences to bring logic, patience and discipline back into focus for client conversations. Clients must realize and accept these downturns as part of the investment journey.  The reward for accepting this truth is gigantic.  Over the 87 years (from 1929 to 2016) that I quoted above, an investor who kept their money in the S&P 500 would have seen $1,000 grow to over $2.7 million.  It is important to note, that to generate this return they would have experienced 25 bear markets, everyone different in their own right!

Saying you need to be prepared and actually experiencing the next downturn can be challenging. What can you do to prepare? Here are several ideas. First, recognize that market declines will happen.  The sooner that you accept that you can’t control that piece of investing, the better you will be able to handle the short-term volatility when it occurs.  Second, review your asset allocation model and be prepared to rebalance if certain asset classes are either overweight or underweight versus their target allocations. Third, think about how much money do you have saved in your “rainy day bucket”? Clients could consider these cash reserves as their “first source of funds” when markets correct so they can avoid selling assets as they are declining in value. Finally, maintain balance in your portfolios and life. Broad asset class diversification can help reduce volatility in your portfolios. As it relates to your day-to-day life, turn off the news, stop looking at the declining asset values on-line or statements and go on with your life and trust that markets will once again have better days.

If You Called South Africa Home

If you called South Africa home, life would be very different….


There is at least one thing though that would be pretty similar- the approach you and your financial advisor take to develop your financial plan.

Greenspring recently had the privilege of  hosting Bruce Fleming from the Financial Planning Institute of South Africa (FPI). Bruce won the FPI Financial Planner of the Year competition for 2016-17. This is a very prestigious award given to the most deserving recipient after three rounds of judging; the winner then serves as FPI's lead volunteer brand ambassador for one year. Bruce was attending conferences in Baltimore in September and he had time to sit down with us.

What was so striking when we met with Bruce was that despite all the differences in our countries-regulations, politics, language, currency, even the seasons- the fundamentals of financial planning are universal.  First an advisor will help you examine and really think about your financial goals. Does your spouse or significant other share these goals or are there other things to consider? Next, we assess where you are today financially and where you want to go.  After a thorough analysis, we develop a plan to get you where you want to go that incorporates risk management (what could derail my plan?), tax implications and strategies, and estate planning. The best laid plan is useless unless it is efficiently  implemented (hint: let your advisor do the heavy lifting here!).  After all the implementation items are checked off, you may think you can put the plan up on the shelf and go on about your way and all of your financial goals will come to fruition right on schedule. Not likely. Life happens, things change and so will your plan. You and your advisor need to meet as life changes, or at least annually, to monitor the plan and course correct when necessary.

As financial advisors we are dedicated to an ongoing relationship where we can help you achieve your financial goals. Whether you are meeting with Bruce in Cape Town or sitting down with us in Towson, we would all would be doing pretty much the same thing and following a similar process. Yes, Bruce has a much cooler accent, but at the end of the day your experience would be remarkably similar. As with many things in life, putting a clear plan and process in place is an integral component of achieving ultimate success, in whatever country  you might call home.


Research On Getting Rich

For those intent on building their wealth, the focus is often on saving and investing.  There are countless articles on how to save money by cutting out that daily Starbucks latte, and then how much that will compound if invested wisely.  While there is no problem in focusing on frugality and investing, a new study finds that we may be focusing on the wrong factors.  The author of the study researched 233 self-made millionaires and found they fall into one of two categories:

  1. They were fanatical savers or
  2. They sold something

The article went deeper on this topic:

The average net worth of these 135 millionaires was $5.7 million. Seventy-one percent accumulated their wealth before the age of 56, or on average, in less than 22 years.

The millionaires who were fanatical savers had an average net worth of just over $3.2 million, accumulated over an average of thirty-six years.

In other words, those millionaires in my study who sold something had a net worth that was $2.5 million higher than the savers in my study and it took the sellers 14 fewer years to accumulate that wealth. Clearly, if you want to accumulate a lot of wealth in the shortest period of time, you need to sell something.

Those that sold something had higher net worths and incomes compared to millionaires that were more focused on saving.  Now, I am not saying you should forget about saving and investing to build your wealth.  What I am saying is that most of us miss one of the most important aspects of wealth building:  their income.  Those that sell something presumably have the ability to save more because they make more.  If you want to build wealth, keep this in mind.  Selling is not easy (which is why successful sales professionals get paid more), but for those who are looking to grow their net worth, this may be a great place to start.  The author ended the article with a list of well known wealthy individuals who focus on selling (or at least that consists of a part of their job):

  •     Warren Buffet sells his financial expertise.
  •     Elon Musk sells his Tesla cars or the use of his Space X rockets.
  •     Mark Zuckerberg sells Facebook advertising and marketing services.
  •     Dr. Ben Carson sold his expertise as a neurosurgeon.
  •     LeBron James sells his basketball skills.
  •     Tony Robbins sells his motivational and training seminars.
  •     J.K. Rowling sells her Harry Potter books.
  •     Taylor Swift sells her love songs.



How Many Clients Does Your Advisor Work With?

Last month Barron's published their annual Top 1,200 advisors in the country.  This list recognizes the largest "producers" from the large Wall Street firms.  Even the terminology at those firms is interesting.  Producer implies that you are creating something…in this case it's revenue from selling products and services to your clients.  One specific paragraph really resonated with me and reminded me why it was so important to leave that environment.

ON AVERAGE, our Top 1,200 and their teams manage $2.27 billion in client assets. That’s down from $2.42 billion for last year’s group and is, in part, a testament to how challenging the markets have become. At the same time, the advisors are serving more clients: This year’s Top 1,200 serve 521 households on average, compared with 496 for 2015’s crop.

521 households!  That's the average.  Think about that for a moment.  How can an advisor effectively serve 521 families?  There are approximately 250 business days in a year.  If you wanted to meet with each of your clients just once a year, you'd have to have more than 2 meetings a day and not take any vacations.  That leaves no time for managing portfolios, doing financial planning, or just time to think strategically on behalf of your clients.  The truth is, serving that many clients works with a certain type of model- product sales.  It is easy to call 30 clients a day and talk to them about selling or buying a particular investment.  Or put them in an advisory account where someone else will manage it on the client's behalf.  Or unfortunately, just overall neglect of a client's portfolio.  Where it doesn't work is a true comprehensive planning relationship.  There is just not enough time in the day to understand and advise on a client's cash flow, insurance coverage, estate plans, retirement objectives, tax projections and investment management needs.  We have clients from these firms coming to our firm every month looking for a better solution.  At Greenspring, we work in teams of two advisors per client (along with a client service specialist).  Currently our average ratio is approximately 50 clients per team.  We believe this allows us the time to manage the intricacies that are common to a true planning relationship.

For the client's sake, we hope to see the number of clients per advisor move down over the years.  Instead of judging advisors based on how much they produce or manage, it would be a breath of fresh air if these types of awards focused on the impact they are having in their client's lives.


More Evidence That You Are Wasting Your Money On Traditional Financial Advice

Have you ever had an advisor or consultant recommend a fund or investment to you because he thought the manager of that investment had a "good story" for future outperformance?  It could be that the manager has a certain investment philosophy, risk management strategy or track record that warrants investing money with them.  If part of your advisor's value is helping you select these investments, I am here to tell you they probably can't do it, and therefore, you shouldn't be paying for it.  Professors from the University of Oxford and the University of Connecticut have released a research study that covers approximately 90% of the market share of investment consultants worldwide during the period 1999 to 2011.  Here is an excerpt from the study:

Starting with returns relative to benchmark, on a value-weighted basis we find no evidence that recommended products significantly outperform other products. However, on an equally-weighted basis, we find that average returns of recommended products are actually around 1% lower than those of other products. This result is confirmed using one-, three- and four-factor pricing models, and the differences using returns against benchmark and factor models are in every case statistically significant. We also measure the performance of products in the one- and two-year period after they have experienced a net increase or decrease in the number of recommendations they receive; we do so in order to test for the possibility that consultants’ recommendations add value in the short term, but then become stale and fail to make a contribution. However, there is no evidence that the net increase or decrease in the number of recommendations predicts superior or inferior performance respectively. 

Let me put this in more plain English:  The smartest, highest paid professionals, working at firms with vast resources, were not able to add any value (and on average detracted from value) when making recommendations on which funds the largest pensions and endowments should select for their portfolios.  These were recommendations were made to clients with hundreds of millions of dollars.  If you believe that your advisor has some uncanny ability to select winning funds or investments you are probably wrong.  

So if advisors can't consistently beat the market by picking winning investments, what should you be paying them for?  Good question.  We think there are several services advisors can provide which are hugely valuable to clients:

  1. Diversification and Portfolio Structure- given your goals, time horizon and risk, how much of your portfolio should be in small US companies, real estate, bonds, etc?  How you structure your portfolio is a major determinant of your risk and return
  2. Discipline- investors are their own worst enemy.  A good advisor will help a client from inflicting harm upon themselves
  3. Cost containment- advisors who have a laser focus on wringing every unnecessary cost out of the portfolio can help investors keep more of what they earn
  4. Tax minimization- designing a portfolio that minimizes income taxes can add tremendous value over time by increasing the investor's after-tax return
  5. Financial planning- how much should you be saving each year, which goals should take priorities, how can you budget more effectively, how should your estate be set up to accomplish your wealth transfer goals?  These are just a few of the questions a good advisor can answer.

As investors and academics start to understand the value an advisor brings, the entire industry will begin to change.  Those advisors who are doing business in the future the same way they have always done will be dinosaurs in the not too distant future.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.