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| Opportunities & Exposures: Finance |
Valueless Values
Donald Moine
06/01/2005
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In the face of mounting investor losses, private wealth managers and
financial advisors have quietly shifted away from selling investment advice.
Instead, many ask questions such as: “What is the most important thing about
money to you?” or “What do you want your money to do for you?” They sound more
like therapists than financially savvy investment advisors.
I have watched
this trend develop since the early 1980s. At the time, I served as a consultant
to Wall Street firms, training their sales staffs in how to build trust and
address investors’ values and goals. My clients wanted to establish a
values-based relationship with investors, rather than one based on performance.
Their hope was that this strategy would expand their appeal to investors and
stave off client flight in the face of inevitably poor investment
returns.
Many financial advisors and consultants in this life-planning,
values-based movement focus on philosophical and psychological issues related to
money. For some investors, these services are truly valuable, and there are many
well-intentioned life planners. They can prevent their clients from trying to
time the market or from overreacting to losses by exiting the market altogether.
But on its way to becoming mainstream, this movement was hijacked by brokers who
simply wanted to avoid the responsibility for growing their clients’
portfolios.
Part of this problem rests with the limited arsenal that most
financial advisors have. The prevailing wisdom recommends a highly diversified
portfolio that rarely, if ever, changes. Financial advisors assemble a model
portfolio that they adjust to the needs of individual clients. Unfortunately,
this tailoring and customization are often fairly cosmetic.
A typical
diversified portfolio—60 percent stocks, 30 percent bonds, 10 percent cash—may
provide a gross return of 7 percent a year. After taxes, inflation and
fees—which are much higher than the official expense ratio cited by fund
managers and brokers—the real rate of return can average out to less than 1
percent a year.
Most planners lack the training in sophisticated investing
techniques that have developed since the advent of diversification. Hedge fund
managers have clearly demonstrated that there are ways to profit from
uncertainty, market declines and volatility. Many private wealth advisors,
however, are unaware of or untrained in using these techniques.
Moreover,
even if they were inclined to move beyond diversification, many financial
advisors have their hands tied by aggressive compliance officers. In other
cases, they are constrained to selling in-house products. Independent advisors
suffer a similar fate. Many began their careers with large investment houses
where they are brainwashed into an unfaltering belief in diversification.
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