Asset Allocation

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May 23, 2009 12:40 pm

Everyone has seen the studies that asset allocation makes up over 90% of a portfolio's return versus security selection and timing. We have some excellent systems at my firm that break this down in depth and compare holdings to where a clients tolerance for risk is. My problem currently is "selling" this. How do you sell asset allocation as something a client needs and why they need me to do it for them ? Thanks in advance for any thoughts.

May 23, 2009 12:55 pm

I think the study and the 90% only works when dealing with indexes... If you took some historically bad funds... and ranked them against historically good funds... i think there would be a much bigger difference.. Hence the reasons no one uses Putnam..



As to how you sell it that part is easy.. EMOTIONS.. clients tend to do the wrong things at the wrong time based on fear. Show them a chart of inflows and outflows of equity mutual funds for the past 10 years.. that is why they need you..

May 23, 2009 1:08 pm

I've found it's relatively easy to sell, simply because it's such common knowledge. The whole ideas of 'diversification', 'asset allocation', 'don't put all your eggs in one basket' are something that most people have heard a thousand times.
Usually I mention it and the prospect starts nodding, so we move on to other things.

On the other hand, two things:
More and more prospects and clients don't believe it anymore. (I'm not even sure I do. I think you could get the same level volatility and return just limiting yourself to buying good Dow stocks and core bond fund as you could buying everything from blue chips to Chinese real estate. Also,  if you want to outperform the indices, you need to be opportunistic. But that's another topic.)
So instead of talking about asset allocation, I think it's more important to talk about quality and safety -- Mr. Prospect, what I do is recommend the best and the safest investment in these asset classes. We want to own blue chip companies. We want to own A rated bonds, etc., etc., we want our annuities to be backed by the best insurance companies.
Second, asset allocation gets people to thinking about stocks and I think you want to get the focus off stocks in your presentations. You don't want people seeing you as a stock broker when we're entering a time when people might not want to own stocks, ever.
just my two cents. Good topic.


May 23, 2009 1:34 pm

My problem with using "best" and "safest" is that I don't necessarily know what those are. AIG had great VA options 2 years ago and great managers and now you can't even mention their name. I also used quite a bit of Income Foundation from American Funds. It had never lost more than 1% in any given year and I put people in it and told them it could go down 10-15% on any given year, but it still makes sense for you, then the following year, down 25%. 

May 23, 2009 5:07 pm
Ron 14:

My problem with using "best" and "safest" is that I don't necessarily know what those are. AIG had great VA options 2 years ago and great managers and now you can't even mention their name. I also used quite a bit of Income Foundation from American Funds. It had never lost more than 1% in any given year and I put people in it and told them it could go down 10-15% on any given year, but it still makes sense for you, then the following year, down 25%. 



The Income Foundation thing happened to me, too.
What should we learn from that? One thing I've learned is to look inside these funds more and figure out what's in them. Are the bonds long, short, intermediate? What's the credit quality? Are the corps, mortgages, etc?
And what should we learn from last year's collapse (which could very well continue, imo)?

I know that just as a sales technique, presenting a strrategy of asset allocation, rebalancing and buy and hold has gotten me yawns from anybody who has passed Investing 101. The guy who lost 30 percent at RayJay with that strategy isn't going to switch to me with the same strategy.

What is safe and quality, you say? Good question.  Take treasuries -- safest possible investment right? Well, maybe not. Not if you think there is going to be hyper inflation, rising rates and possible default.







May 23, 2009 6:18 pm

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.

May 23, 2009 7:26 pm
Ron 14:

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.



Unfortunately, I would blurt out: Great, do you plan to get back in at Dow 12k!?
On reflection, what I would say is:
'Great call. That means for the portion of this that should be in stocks you can get back in now and own high-quality stocks and have saved yourself 30 percent. Great call, how did you see this coming?!
And then listen, and listen, and listen and try to look interested and wait for her to say, 'Ron14: What do you think we should do?'
Sounds like she came to see you because she doesn't trust what he's doing. Sounds like he's there because he wants to vent and wants to be stroked. I would also guess that she is the decision maker; most of the time when both parties come in the wife makes the final yes/no.


May 23, 2009 8:19 pm

That is good stuff. Mr. Guru did say that he missed the bottom and I tried to use that against him, but he is some hot shot computer exec and isn't a big listener.He would ask me a question and cut me off as I answered. I earned a small part of their business, but I just didn't feel in control at all.

May 25, 2009 8:07 am
Ron 14:

Everyone has seen the studies that asset allocation makes up over 90% of a portfolio's return versus security selection and timing. We have some excellent systems at my firm that break this down in depth and compare holdings to where a clients tolerance for risk is. My problem currently is "selling" this. How do you sell asset allocation as something a client needs and why they need me to do it for them ? Thanks in advance for any thoughts.



Hack.

May 25, 2009 8:08 am
Ron 14:

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.



Hack.

May 25, 2009 8:09 am
Ron 14:

That is good stuff. Mr. Guru did say that he missed the bottom and I tried to use that against him, but he is some hot shot computer exec and isn't a big listener.He would ask me a question and cut me off as I answered. I earned a small part of their business, but I just didn't feel in control at all.




Owned.

May 26, 2009 10:58 am
Ron 14:

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.

 
It sounds like you could have done a much better job of learning what their goals really are. Are they saving for retirement? What is their time horizon? How much will they need to maintain their lifestyle... blah, blah, blah.
When someone drops their statements off I am going to schedule some time to get to know more about them. If they don't want to do that, I don't want them as a client.
May 26, 2009 11:10 am

I don't care who you are, if you get blindsided by "I got everything out right before the crash, please give me a pat on the back guy" during the initial meeting then there's no recovery.  The only thing you can really do is play to the other spouse (which it looks like Ron did) and hope to minimize the carnage.  I impressed you were actually able to get a sliver of the biz, usually those guys want an hour-long c0ck rub before they hightail it out of the office.

May 26, 2009 11:23 am
Ron 14:

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.

 
Before you open your mouth, you need to be sure that what you say will improve upon the silence.
 
You tried to sell before you established what their "want" is.
May 26, 2009 11:36 am

Newguy - As the appointment progressed I was able to uncover their goals and purpose and horizon. They were willing to answer every question I had from that standpoint. The problem was this guy just thought his market timing and investment picks were superior and he based that fact on his recent history. It was almost like he was just using me for the financial planning software to get some projections on when he could retire.

 

3rdyrp2 - The wife (who was real hot btw) was annoyed by his arrogance and actually told him to "hold on let him finish" when he interrupted me a few times. It is quite possible that Mrs. doesn't trust Mr. and was seeking out a professional and had to actually talk him into doing it. Not the basis for a great relationship moving forward so I guess I shouldn't really concern myself with the results.
May 26, 2009 11:38 am
Ominous:
Ron 14:

The yawns is exactly what I am trying to avoid ! The reason I brought it up is I met a woman who "wanted a second opinion" on her investments. She dropped off all statements and later in the week I met her and her husband. I really had no clue exactly what they were looking for. A majority of their stuff is at current jobs and I tried leading with Asset Allocation and the importance of a long term plan. Immediately the dude points to the market timing bullet point and says he got everything out at Dow 11k. Every single time I tried to explain something he butted in with a question. It was a very annoying meeting and I feel like I got pin balled and didnt control the appointment.

 
Before you open your mouth, you need to be sure that what you say will improve upon the silence.
 
You tried to sell before you established what their "want" is.
 
When she dropped off the statements I wasn't even at the office. That is what I meant by having no clue what they were looking for. As the meeting progressed and the husband was rambling on about his market timing I tried to bring it back to reality and started with Asset Allocation.
May 26, 2009 12:37 pm

Why would you lead with a solution when you didn't establish a problem? Before you can sell anyone on going with you, you must establish their pain. What hurts, and how can you fix it? You are justifying in your post that he made great market timing decisions and superior investment picks. Then why didn't the wife trust him? I made this same mistake once, by telling a prospect and her husband that they had done a great job so far in their retirment planning. Not only did I not establish their pain, I put it at ease.


 
You put the cart before the horse. When I sit down with people the first time I am gathering information. I am getting their investment goals, their career goals, learning about their family, and finding the reason they are in my office. That meeting is 30 minutes to an hour. I make no recommendations whatsoever. How can I? I don't know the answer to their problem.
 
Oh, and nearly every prospect who told me they got out before the crash is LYING.
 
It may not be worth much, but those are my thoughts.
May 26, 2009 1:22 pm

I did establish a problem. The guy thinks he can consistently jump in and out of the market at the right times. I was explaining to him why my firm and I believe in allocating assets across different investments classes and holding on to them for the long term. The entire first 30 minutes he was patting himself on the back about his market timing, I then counter with a philosophy that will serve him better over time. I see where you guys are coming from because the way I explained the situation made it seem like I didn't do any profiling. That wasn't the case.

May 26, 2009 1:29 pm
Ron 14:

I did establish a problem. The guy thinks he can consistently jump in and out of the market at the right times. I was explaining to him why my firm and I believe in allocating assets across different investments classes and holding on to them for the long term. The entire first 30 minutes he was patting himself on the back about his market timing, I then counter with a philosophy that will serve him better over time. I see where you guys are coming from because the way I explained the situation made it seem like I didn't do any profiling. That wasn't the case.

 
People don't buy on logic, they buy on emotion.  What he has done has solidified his beliefs in himself, not you, because HE was correct THIS TIME.  Eventually he will lose his ass, but until then, he will not trust you with a bigger piece of his pie.  Not everyone is meant to be a client of yours.  Just wait until your real opportunity with the guy...you haven't had it yet. 
 
 
May 26, 2009 2:44 pm

Good point.