Where do most financial planners or financial advisors come from? Although a lot of colleges and universities have set up financial planning programs, these are fairly new and not many advisors come straight out of college. If they did, would you want them to start practicing on you?
Doctors say they are practicing medicine. Why don’t financial planners and advisors say they are practicing financial planning and investing? After all, financial planning is not an exact science!
The majority of financial planners in the past have been people who were looking for a second career.
So how do they learn to be financial planners?
The best method is to go to the College of Financial Planning and take their Certified Financial Planning™ (CFP®) course work. However, the vast majority are taught by the firms that hire them. Remember, these firms are in business to make money. They are not non-profit corporations. They tell their advisors to be good team players; that if they follow their firm’s methods, that they can get rich. They teach advisors:
- Buying and holding investments is best for clients. They teach that pulling money in and out of investments will cause clients to miss the biggest days in the stock markets.
- If you had invested $10,000 on such and such a date and kept it invested, you could now retire early and send your kids and grandkids to Harvard. But if you missed the 10 best months and/or best month and/or 5 best days each month; your investment would now be practically worthless.
- That their job is to build a book of business (clients) and do financial planning for their clients and, by using asset allocation, they won’t have to pay a lot of attention to their clients’ investments, other than rebalancing the portfolio from time to time. Advisors are taught the most important thing they do is build a book of business and give financial advice to their clients as their clients grow. Advisors are taught managing a client’s assets is not needed if the asset allocation is working properly. Just put the money in the right categories, rebalance from time to time and leave it alone.
Here is what two advisors said about their clients’ investments during the early part of the 2008 and 2009 meltdown when asked what to do.
Advisor #1: “Don’t change things very much, but DO rely on proven techniques that work in all seasons.”
Advisor #2: “I think the traditional approach is best. Should advisors be making massive tactical moves based on markets? Making these changes is inherently far riskier to a client’s long-term health than the short or intermediate term pain of a tough market, because following a sensible long-term allocation assures a long-term return similar to the market averages. The prudent advisor must always realistically assess what he can and cannot control.”
Would you believe that not long after this, this same group of advisors were wondering if they should change the way they collect fees from clients from a percentage of the assets they manage to a flat fee, because their clients had lost so much money the advisors were going to have to cut back and/or lay off staff under the percent of assets under management system.
Now these advisors were fee only advisors, but can you imagine what commission advisors might be thinking about? Were they going to have to talk clients into selling some investments and buying others to generate needed commissions to keep their business running, even if it was not in the best interest of their clients?
Advisors have been brainwashed by brokers and investment companies (hedge funds and mutual funds) into strictly using the asset allocation and buy and hold method, because it benefits these companies. These investment companies look for and promote any reports that show asset allocation and buy and hold systems are the best way to invest. Think what would have happened if financial advisors had sold off all of their clients’ investments in October of 2007 and kept that money in cash. Their clients would have lost a lot less, but the investment companies would not have collected any fees, and some may have gone out of business.
It does not take that much thought to realize that asset allocation and buy and hold actually helps to stabilize the stock markets. If everyone wanted to sell all of their investments at once, those investments would be worthless because no one would want to buy them.
For over 50 years financial advisors have used Markowitz’s Modern Portfolio Theory (MPT) to build their clients’ investment portfolios using a combination of assets thought to always have a different risk attribute. They combined this with each client’s risk tolerance level to come up with the optimal portfolio for each client. Each asset type — stocks, bonds, commodities and real estate — was thought to have different fundamental characteristics. These differences were thought to help determine the amount of risk in each client’s portfolio. There were four types of risk that affected each of these investments: Business, financial, interest-rate (or credit), and market risk.
Yet, the massive amount of debt and reduction of credit, during 2008, has changed the economic world as we thought we had known it prior to that time. While each asset class within an asset allocation model retained its unique risk profile, the difference in 2008 was that investors were unwilling to take any risk at all. Market diversification during 2008 and early 2009 gave investors very little benefit, as all asset classes moved in tandem. Financial planners have always thought this could not happen. Despite risk/reward differences, an asset is worth only as much as somebody is willing to pay and, during 2008, nobody was willing to pay much.
However; if your advisor had sold off all of your investments before the 2008 meltdown would you have been better off today? The second line of the chart below shows you just how low the stock markets fell from October 11, 2007 until March 9, 2009, the very bottom of the meltdown. The third line shows you just how much these markets need to earn to get back to where they were on October 11, 2007.
If your advisor kept you invested and had you ride these markets all the way to the bottom, how did you feel at the bottom? Like a deer frozen in headlights of an on-coming car! Were you afraid to do anything for fear that anything you did would be wrong?
Fear is such a very strange bedfellow. During good times it is easy to be a financial advisor or a client of a financial advisor. Everyone is happy and everyone loves one another. When times get tough and investments start to fall apart, like they did in 2008, you learn a lot about yourself and your financial advisor.
You become emotional!
You are afraid! What are you going to do?
You get mad at the world! How did this happen to you?
You become frozen, like a deer in the headlights of a car, afraid to do anything!
You see your world and life styles falling apart and you want to blame someone!
Most clients don’t worry about their financial or investment advisor during good times, but during bad times they think he should be some kind of financial God that can guide them through anything. Clients don’t feel they should ever lose anything at all.
On the other side of the coin, advisors don’t understand why what they have been taught is not working. They begin to worry about their own businesses, their investments, their retirements and their life styles falling apart.
Fear paralyzes both clients and planners and keeps them from being able to be objective, analyze the situation and discuss what they need to do next.
Does that mean that the Modern Portfolio Theory Buy and Hold Asset Allocation Model does not work and will never work again?
No! It simply means that the Modern Portfolio Theory Asset Allocation and Buy and Hold Model does not work during market conditions like those of 2008 and early 2009. It means we may want to tweak the current system to help avoid periods of time like 2008.
We should remember that this system was originally conceived with a piece of paper, a pencil, an adding machine and a slide rule. There have been vast improvements in our abilities to reason, calculate, formulate and provide information to both advisors and investors. If we are not using these methods, someone else is and you can trust that they will be using those methods to benefit themselves and/or their clients.
Shouldn’t you be one of the people to benefit from these new technologies?