Statement 1: “Hey, check out Tech Stock A. Got this great tip on it and so far so good after last week’s performance. Could be huge, a great trade. The sector is going to go bananas. Buy it. You don’t want to miss out.”
Statement 2: “Hey, so my Financial Advisor and I just reviewed my allocation and current cash flow considerations, and we decided to lean in further into private equity. It should work out well as we think about my family’s investment policy and legacy goals.”
Statement 1 is sexy. Classic cocktail party chatter. A small group, everyone with their Aperol Spritzes in dressy-casual attire2 bantering about the latest and greatest on a sunny, sizzling summer afternoon. Statement 2 is not leading the conversation. Investment policies and multi-generational planning aren’t the topics du jour, despite their importance, as the ocean breeze arrives. It’s definitely Statement 1 that is going to roll off the tongue. Maybe not definitely. It could also be the always popular …
Statement 3: [After someone finds the guy or gal in the financial industry]: “So, which way is the market going to go next week?”
It’s time to reframe the wealth and investment management conversation and re-focus in on what matters (Statement 2). For some, it’s a blank slate and a new thought process, while for others it’s a transition over time from an old archeotype to new principles.
OLD: Lead with investing.
NEW: Lead with appropriate wealth and estate planning needs before investing funds.
OLD: Present a recommended portfolio at the first meeting.
NEW: Frankly, have any other conversation at the first meeting.
OLD: The advisor has all of the answers.
NEW: The advisor-client relationship is a collaborative one, with the advisor providing necessary perspective.
OLD: The advisor is a sole practitioner and spends most of his/her time on security selection.
NEW: The advisor operates as part of a team, allowing for significant time to discuss with clients what matters most in their lives.
OLD: The client and his/her family members approach multi-generational planning via Trust documents that bind them together.
NEW: The client and his/her family members are bound together by a written shared mission, purpose, and set of values, with Trusts acting as an important instrument for multi-generational planning.
OLD: The client’s only goal is to maximize wealth.
NEW: The client’s goals include maximizing one’s satisfaction and purpose, with wealth as a tool to do so.
OLD: Ask the client to identify his/her risk tolerance.
NEW: Assess the client’s risk tolerance, composure, financial expertise, market involvement, desire for delegation, and belief in skill.
OLD: What is behavioral finance?
NEW: The importance of behavioral finance.3
OLD: Look at each investment in isolation.
NEW: Take a total portfolio construction approach to bring disparate investments together.
OLD: The right portfolio is the one that provides the best chance for success.
NEW: The right portfolio is the one the client can stick with over the investment journey that provides the best chance for success.
OLD: Diversification means limiting returns.
NEW: “Diversification is the only rational deployment of our ignorance.”4
OLD: Single-scenario investment planning.
NEW: Probabilistic thinking by pursuing a broad opportunity set and preparing for a wide range of outcomes.
OLD: Potential alpha: Tactical asset allocation and security selection.
NEW: Potential alpha: Governance, asset allocation, asset location, implementation, and managing taxes.5
OLD: Manage the portfolio to outperform an arbitrary index benchmark.
NEW: Consider a personal benchmark, and use an index benchmark(s) to be mindful of how markets have performed.
OLD: The advisor attributes good outcomes to skill and bad outcomes to luck.
NEW: The advisor appreciates the roles of skill and luck in investment results.
One more …
OLD: (2008): The bear market will last forever … It didn’t.
NEW: (2019): The bull market will last forever … It won’t.
Jason Mingelgreen, CFA
1 The term “green shoots” in the investment vernacular still refers to the development of improving or positive economic data in an otherwise challenging period. As used above, the term is a play on words and is not meant to indicate investment results or the state of the market.
2 We’ve all received an invitation noting a dress code as dressy casual, and we’ve all “Googled It.”
3 Behavioral finance in its simplest form is the influence of psychology on the behavior of investors.
4 Peter Bernstein. Said another way, diversification is a “free lunch.”
5 Stifel does not provide tax advice.
Past performance is no guarantee of future results.
Asset allocation and diversification do not ensure a profit and may not protect against loss.