The definition of insanity

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Feb 5, 2010 10:21 am

One of the perks of this business is the ability to live in a nice neighborhood. One of the downsides of living in a nice house surrounded by other nice houses is that the solicitations from financial advisors and consultants never ends. Many on this board who live in these types of places can relate.


This week i received not one but two solicitations from MSSB. One from their local in town office and another from an office located in Capital City about 10 miles away.
 
First, the good news- Hats off to these advisors for their prospecting effort. At least that I respect.
 
Next, the messege to us advisors - If you aren't contacting your clients rest assured someone else is.
 
Finally, the bad news -
 
Mailing number one comes from a three advisor group. The group consists of the typical two senior veeps and a junior FA. They have invited me and my guest to a dinner at one of the area's top restaurants. We will be entertained by Blackrock Investments. Opening for Blackrock that evening, Roosevelt Investments will do its act.  The entertainment should be interesting.
 
The invitation is entitled: A Consultative Approach to Investing
 
It says and I quote: In today's complex world, investors need to develope a sound investment process that addresses asset allocation, developing an investment strategy, evaluating investment managers, and measuring performance.
 
OK folks, what's wrong with that statement?
 
If you answered, nothing listed in the invitation stopped investors from losing money throughout the past decade give yourself a gold star. Nothing in the invitation talks about protecting assets from decline. There's a reason for that.
 
It doesn't work, it's failed strategy within a broken process.
 
Yet "they" continue to push it.
 
If it doesn't benefit the investor, who does it benefit?
 
 
On to mailing number two:
 
This one comes from an advisor without the Veep title, so I'm guessing rookie. The letter is four paragraphs long and totally fails by any standard to grab my attention.
 
The letter focuses on retirement asks: How much should you save for retirement? What level of risk can you live with? How much do you need to live on?
 
These are all good questions that we as profesionals ask as a standard course of business.
 
The letter goes on:
 
I believe that MSSB's comprehensive approach to retirement planning sets a new standard in the industry. We begin with your vision for retirement and try to estimate what that may  cost to fund. (and here's the part i really love) We'll also look at risk factors-longevity,health care costs and others-that could threaten the lifestyle you envision. Then we'll develope a long-range investment plan that details where your income will come from in retirement.
 
OK, I'll give trying to estimate retirement funding a pass. You either can estimate it or you can't.
 
My question is this: When looking at the risk factors that could threaten my retirement lifestyle who proctects me from this Advisor and MSSB? 
 
Ya gotta love rookies. This kid obviously drank the Kool Aid because he believes that MSSB sets a new standard in retirement planning. Did i miss something here? Did MSSB  protect it's clients in 2008? Did thier clients have a positive return in 2008? Are they back to even this year? How have MSSB clients done over the past decade? Were they immune to the tech bubble popping and decade opening 45% sell off?
 
We all know the answers to those questions.
 
The point: On main street people have gotten screwed by this process. Retirees and pre-retirees have little to show for the past decade of investing. Many have had their retirement plans scuttled. This firm, my firm , all our firms, did nothing to protect these people. Yet the beat goes on. The fees are racked up and the cash register rings. Whether you call it a Consultative Approach to Investing or Comprehensive Retirement Planning any program that puts investors money at risk without the safeguards in place to protect those assets is a failed process. A well stuffed mattress has outperformed most if not all of the cookie cutter fee based programs on Wall Street over the past decade.
 
What do you call that when you continue to do the same thing and expect a different result?
 
In this case, it should be called criminal.
 
 
Feb 5, 2010 10:28 am

You have been on this for a week now... What is with the anger?

Feb 5, 2010 10:28 am


Feb 5, 2010 10:37 am

Squash, rant of the week huh? Actually, I've been at this for a decade. Not anger, frustration.

 
Rather than focusing on me, the messenger, think about the messege.
 
You need to be able to answer this question at your next client/prospect meeting:
 
The market's been down over 40% twice in the last ten years, what will you do to protect me the next time?
 
In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks.
 
You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it!
 
 
Feb 5, 2010 10:37 am

Spot on Bond Guy

Feb 5, 2010 10:39 am

BG,

 
I agree with you on this.  My firm peddles the same lame asset allocation / buy and hold through anything philosophy like every other firm.  They have absolutely NO response to what to do if the market tanks.  Actually, their response is, "you can't time the market".  They constantly come up with new and exciting twists on the "missing the 10 best days in the market" B.S., the "you can't predict" B.S., etc. 
All of it rests on the fact that all the firms want to hang their hats on the same CYA strategy backed up the FPA, et al.  That way, nobody stand out from the crowd and they can't be "wrong".  Personally, I don't think large brokerage firms do anything from a strategic standpoint to help FA's.  I think it is up to us to use our heads and focus more on risk management and less on the "optimal" portfolio.  It drives me crazy to see firms like Goldman, Merrill, etc. (the "stars" of Wall Street) making changes like "moving from 12% in Consumer Durables to 14%, and lowering our "guidance" on Health Care stocks to 10% from 12%".....as if that will make ANY difference AT ALL.
Sometimes I feel like my firm is completely ignorant to what goes on around them.  And yes, many portfolios have made back much of their losses.  But what about the ones that haven't?  And what if the market DIDN'T recover???  Then what?  Just keep sitting tight??
 
Feb 5, 2010 10:50 am

B24, BondGuy in mock horror!

Sacrilege!  The people at the heads of these firms are soooooo much smarter than you.

And do you mean to tell me you don't KNOW that asset allocation is 93 (or 4 or 5 or 6 or 7) percent of returns?

Look, just because the market has treated people horribly for ten years, does NOT mean it's ok for YOU guys, retail advisors to question the big dogs (in all fairness, BG is a big dog).


Seriously folks, if you haven't been listening to BondGuy, now is the time to do it.  That is some good advice.

Feb 5, 2010 11:06 am
BondGuy:

Squash, rant of the week huh? Actually, I've been at this for a decade. Not anger, frustration.

 
Rather than focusing on me, the messenger, think about the messege.
 
You need to be able to answer this question at your next client/prospect meeting:
 
The market's been down over 40% twice in the last ten years, what will you do to protect me the next time?
 
In your practice you need to develope a way, a process, that pulls your clients who have entrusted their life's saving to you off the tracks.
 
You, me, us, need to think long and hard about what we are doing. Looking at a screen, collecting a fee, and hoping for the best doesn't cut it!
 
 
I didn't mean of the "week".... Normally you post on a topic and move on... I completely agree with what you are saying(i learned the hard way at EDJ buy and hold) so I decided by reading a lot of books by a lot of people and experimenting in the past... That "smart" clients don't mind only gaining 50% of what the market does, if they don't lose money in the bad years..
 
I do pull money out of the market and for first time clients they have a hard time grasping the idea, but after the last 2-3 years, they understand now...
 
Feb 5, 2010 11:18 am

I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?

Feb 5, 2010 11:26 am

Where's BioFreeze??

Feb 5, 2010 11:32 am

Yes, finally a relevant topic.

Feb 5, 2010 11:40 am
Ron 14:

I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?

 
Insurance products should be part of everyone's plan.
Feb 5, 2010 11:59 am
Ron 14:

I understand what you guys are saying and I agree most investors just roll their eyes at all of this crap. My question is, what is the alternative ? If you pushed bonds the last 10 years you look like a hero and your clients love you, referrals are probably flooding in, but what happens if the next 10 years the market does 10% annually or better ? Those same people will be pissed and rush to someone else. What exactly should someone fairly new to the business and still just trying to gather assets be selling as their value ?

 
It starts with segmentation of money.  Short term/mid term/long term.  Risk.  Don't risk short term money (0-10 years).  Don't risk a lot of mid-term money (10-15 years) - balance is key here.  LONG term money (15-20 years+)  can eb invested aggressively in assets with a high likelihood of long-term appreciation (i.e. emerging markets, etc.).  BUt since it is for a spending goal 15-20 years+ away, you don't need to allocate a lot to it, so you are minimizing your downside risk.
 
Most average FA"s just take the whole thing and say "10% cash, 30% income, 30% growth and income, 20% growth, 10% aggressive" without any plan for the future.  And if things go bad, just "hold on".
 
This is a start, and there are other ways to do it.  I also believe that a portion of your money could and/or should be gauranteed, especially the short-term bucket.  Whether through annuities, CD's, short-term fixed income, whatever.
 
I also feel like we have to look at the bigger picture.  Should it have made sense to get highly allocated to equities in 1998/1999/2000?  Did all the brokerage firms REALLY think the sky was the limit?  How often does the market trade at 30-35 P/E and then grow from there?  Oh, I forgot, it was the "new paradigm".  Thank God that term was lost.
 
Who knows what's next.  But there is this strange deisre to shoot for the moon in investing, when most clients would be perfectly content with 5-8% per year without big losses.  At least my clients would.
Feb 5, 2010 12:09 pm

The alternative is to be the alternative. To have an answer.


To have an answer we need to turn back the clock. For those of you who don't know it here's a news flash: I'm a dinosaur. I'm a dying breed. I come from an era of individualistic brokers who not only raised the money but managed it to. Day by day, we are being replaced by a kool aid army of raise the money fee it up advisors. Most of these advisors are clueless on the investment side. They've never bought a stock or a bond. They've never written an option ticket. Most can't read an options screen. And to most Bloomberg is a guy running a big city and nothing else. All this group knows is fee it up and you get to drive a BMW.
 
Ethically, we need to go back to raising the money and managing it. Or, we need to at least exercise the oversight we claim, to justify the fees we collect.
 
My personal answer is to have my own seminar.  It will be entitled:
 
The Bear Ate My Pie Chart
 
Content will be centered on ways to protect assets. From bonds with maturity dates, to annuities with living benefits to options/hedging strategies to momentum analysis of the major market sectors.
 
The messege: The process is broken. I am the alternative.
Feb 5, 2010 12:22 pm

MPT is a joke... In never takes into account the down years... ever... and assumes 35 year times horizons...

 
MPT applies risk in the wrong way. The founder Markowtiz even said the problems are the lack of ability to figure out semivariance...
 
Investors don't care about upside risk, they care about downside risk.. A prime example of this is the idea of a sharpe ratio... It penalizes return above and below a set amount(such as your 12% equity returns) when in actuallity all investors should care about are those below such stated number.
Feb 5, 2010 12:50 pm
PS - "Growth & Income" isn't an asset class.  --, Jones told me it was !!!!
Feb 5, 2010 1:28 pm
iceco1d:

MPT isn't a joke.  It requires some adjustment to account for the "real world" but the concept isn't a joke.





 
As B24 said, most clients would be more than happy to earn 5,6, 7 or 8% a year, consistently.  Without costs, you could have an expected return of 7% with a 20/80 portfolio.  If you could keep your TRUE costs at 1.5%, you could have an expected return of 7% with a 40/60 portfolio.
 
Now, tell me that your average 50-something wouldn't be OK with a 7% return?  And tell me they wouldn't be OK with 40/60 volatility?
 
Throw in some puts, or some living benefits on the risky assets, and you could increase to a (gasp) 60/40 allocation.
 
PS - "Growth & Income" isn't an asset class.
 
I know that.  That was a sideways shot at Jones.  I never understood their asset allocation theories.  Small cap growth is aggressive.  Small cap value is growth.  WTF?  Basically, it's a misnomer for value and growth...sort of.  I still don't get it. 
Feb 5, 2010 1:29 pm
Ron 14:
PS - "Growth & Income" isn't an asset class.  --, Jones told me it was !!!!

According to my buddy at LPL it is too...
Feb 5, 2010 3:25 pm

The problem with MPT isn't MPT.  It is that it was never meant to be an all-encompassing theory. 

You can use MPT and even EMH as a starting point.  But advisors don't add value by blindly following theory.  It's application of theory and the exceptions to theory is where advisors become worth their salt.


Feb 5, 2010 4:31 pm

Thank you once again, BondGuy. Most will make this thread about the merits of MPT or asset allocation or investment strategy.


However, it's a classic BondGuy prospecting thread for me. You sir, with the definition of insanity just gave me my "opening line" to prospects on how I am different. I told a prospect that has his money at MSSB in an asset allocation fee based account that I didn't believe in the old-school method of asset allocation, and he looked at me like I was insane. His broker tells him to "stay the course." Then, I told him what I had been doing for my clients over the last couple of years, step by step. I will still be transferring his assets in, but I felt like I sounded a bit too much like "my rate is better than his rate."
 
You just helped me how I can tie it all in...