Randall Davey
I am an investment advisor representative and a fiduciary. On a near daily basis, I talk to people about money. I am always fascinated to learn why clients do what they do, save what they save, invest where they invest and think what they think about money. I have been fascinated to discover that high net worth clients and those far more financially modest, frequently do decision making similarly. The purpose of this essay is to argue for a far more rigorous, robust, comprehensive, and empirical approach to decision making than that which I normally encounter.
I Did Some Research. This is a very typical response when a client explains a particular bias in favor of or in opposition to a particular strategy. Research is good. Google search may not rise to the level of research and here is why. It is often difficult to know and assess the professional behind the blog, article, or book. More often than not, the article may constitute little more than an ungrounded opinion replete with an unarticulated agenda. I am somewhere between amused and irritated with those who post strong, fear-based opinions with little to no support or without offering an alternative. (I am thinking of one author who railed on the stock market in favor of precious metals. At the close of his book, he acknowledged that he just happened to specialize in precious metals and would be happy to help converts move forward). To be fair, there is solid research and sound scholarship available, but I rarely find clients who have taken the time to access legitimate materials before deciding.
I Talked to Some Friends. It is always good to talk to friends about all manner of things but when it comes to financial decision making, one needs to move forward cautiously in polling that which “everyone else” is doing. Suppose one interviews ten people as to the kind of life insurance they own, and they discover all ten have the same, identical policies. How does that help with respect to that which is right for any one client? I would argue, it has precious little value. One could conclude that one’s friends own a lot of the same financial stuff without knowing if it is appropriate for them or anyone else. Admittedly, we confess a propensity for “herd mentality.” Hence, a word of caution by way of example. Many baby boomers utilize the 401 (k) as a keyway of preparing for retirement as that is the way “everyone does it!” According to Insured Retirement Institute, not “everyone” is. Only 6 out of 10 boomers say they have anything in savings, 401 (k) or otherwise. Suffice
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it to say, finding out what the herd is doing may be interesting and slightly helpful but may not be the criteria necessary for sound financial decisions.
Warren Buffet. I nearly titled this category as the “my rich friends” defense. The theory goes something like this. I know x number of rich guys/gals and they do not do what you recommend so I am hesitant to do anything different. Let us unpack that. A bunch of my clients are my age which means “older,” within ten years – give or take nine – of retirement. We share ailments like arthritis, weight (too much), hair (gray and too little), replacement eligible joints and more. When we talk, we complain about aging, (nothing golden about the golden years) but honestly, we’re happy to be alive. Now imagine this. One of our number (true story) just told the group that he is having surgery in a few days to remove a malignant tumor on his kidney. On the conference call when he breaks the news, imagine if any one of would say, “wow, I haven’t had the surgery and none of us on the call are having it – except you. You may want to re-think your decision.” One’s personal financials are as unique as one’s health. That which everyone else in the room is doing – strategies they are pursuing, products they own, investments they make, trusts in which they hold what they hold – are unique to them. Whether Warren is having cancer surgery, or a routine blood draw has no bearing on anyone else’s health. The same is true when it comes to financial stratagem.
Some Guy or My Guy Said… (not intending to be sexist here – substitute gal for guy and the point remains). A far too common response as to why a client changes philosophies mid-stream, buys or sells a particular product or straddles a tax-strategy fence (owning traditional I.R.A.s and Roth’s) roots to “some guy I heard at a seminar” or “my guy” said this or that. Note to self. Not everyone who plays in the financial services space plays fairly and occasionally, one can blind-side compliance and say things that simply are not defensible. Should the time come that a product fail, a plan implodes or an investment fail, pleading to the judge based on what “some guy said,” is of little value. Read the fine print. “Past performance is not indicative of future results,” but that doesn’t stop prognosticators baiting unwary clients with “potential” rates of return. (A well-known author and radio personality often tells his audience to go out and buy mutual funds yielding 10% – 12% as though one can choose mutual funds like a variety of candy).
The Smartest Person in the Room. The Smartest Person in the room is often the last person to whom a client has spoken. The scenario looks something like this. In hopes of finding the golden chalice, a client goes to a “free seminar” at a local upscale restaurant. Just for grins, the client takes his “documents” along. Smartest Person generally is great at creating doubt and is more than willing to “help” by rolling an account, or by canceling or implementing a policy, mortgage, or investment. Here is a suggestion. Listen to Smartest Person, take copious notes, and go home. Consider talking to the advisor with whom you’ve been working and simply say: “Here is an alternative that looks pretty good to me. Give me a fact-based analysis as to how this new thing compares to my old
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thing.” Do not pass Go. Do not collect $200. Insist on “point – counter point” before deciding.
The Elite Advisor Position. Here are a few iterations of the Elite Advisor response: My advisor is with an elite; topflight firm and she typically works only with people who make a gazillion dollars a year. Luckily, she was willing to see me even though I only make $59,500, $159,500, $259,500…fill in the blanks. Comparably, “my advisor” has a Ph.D., graduated Harvard or better yet, “is a really stand-up person with whom I go to church and with whom my family vacations.”
Someway, somehow, we desperately need to believe that there is someone out there who knows far more about the future than almost anyone else. And if that person is laced with integrity and is a friend to boot, how can it get any better? By the way, it is at this point I generally withdraw on an offer to serve. Friendships are worth more than money, so I am not going to interfere. I do want to make a salient point.
If we could line up scholars with Ph.Ds. and circle the world, collectively, with the best research tools available, they cannot tell anyone what the future holds. And no matter how smart, how connected, and how much research they do, at the end of the day, no one has an inside track on what the market is going to do, what real estate is going to do, or surely on what world governments are going to do. No one can identify the “best stock,” “the sure-fire mutual fund,” or the greatest hedge fund. Think about it. If it really boiled down the best, brightest, and smartest, wouldn’t they put everyone else out of business? At best, there would be a few stocks, a few mutual funds, a few insurance contracts, a few non-market securities, and the big wire houses would be flat out of business.
One word about dear, trusted friends as advisors. That is the card I played for twenty years when I was in the non-profit space. My advisor went to church with me, hosted me to breakfast frequently, was a pillar in church, a great family man and I thought he had special insight. Then the call came. “Randall, I hate to report this to you, but I just lost a ton of money in your portfolio.” He was and is a friend (though no longer an advisor), he was and is a good, principled man, a great husband, good father – to ten kids – and fun with whom to talk. Our friendship and my trust did not mean diddly when the market did what the market did after years of not doing what it did. Capish?
Fact-based, Comprehensive Analysis. If the latest greatest is truly the latest and greatest, there should be some evidence to support the sales and marketing team’s narratives. What is the best, possible reason one would not test a competing sales rep’s recommendations? I suspect it is linked to our need to believe there is something better, quicker, faster to speed us on our way toward mega wealth. It is not a guessing game. Get evidence that demands a verdict. (Be warned: when we do hear there is something
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so much better, we want to believe and do not want to risk hearing anything differently – that’s often-called confirmation bias).
Example: Advisor A recommends a way unique to a particular client to achieve financial balance. Advisor B “pooh-poohs” the recommendations and offers an alternative plan. It is unlikely they are both right and it’s very likely the analysis is more complex than one would imagine. Hypothetically, (urgh!) a client of Advisor A owned an investment contract. Said client took the contract to Advisor B who explained how these things “really work.” Though advisor B didn’t offer this particular contract, he talked about it ad infinitum, and created enough doubt for the client to take a penalty hit, blow up the contract only to find later, he had been misled. Instead of “reacting,” take the critique Advisor B offered and go back to Advisor A and say, “help me understand the legitimacy of that which I’ve just heard. Prove your point based on contract and law. Show me the assumptions inherent in the product and as a fiduciary, explain why it is or isn’t in my best interest.” Then and only then decide.
To be clear and more importantly fair, Advisor A may well be wrong but if he/she is, the analysis does not need to hang on an opinion.
Just the Facts, Ma’am. Sixty-eight years ago, “Sargent Joe Friday” appeared on TV’s Dragnet. Friday was a no-nonsense, L.A. detective and this quote was attributed to him though he never actually said it in any of the aired episodes. Still, when analyzing financial strategies, it’s a good thing to demand. Just the facts.
Your I.R.A.’s internal rate-of-return, the fees exacted, the various asset classes involved, and the associated standard deviation is knowable. The answers are facts, not opinions. When an advisor says, “You should expect 10% to 12% rates of return,” it is not a fact. It is just an appealing idea designed to induce one to fish in another financial pond.
The true cost of insurance, coupled with lost opportunity costs, is a fact. The ways in which annuities are (or are not) suitable should be based on facts, not an article in a trade magazine. The propriety of Long-Term Care Insurance should be evaluated in light of an entire estate plan, not on the efficacy of a singular product offer. Look at the facts. The extent to which assets are subject to litigation is a matter of the law and that differs state by state. That is a fact.
Before you hire or fire an advisor, engage, or disengage from a financial representative, an insurance agent, a loan officer, or banker, ask about the extent to which they coach and educate clients in the context of facts, law, and contracts. The cost for anything less is something few of us can afford.
This very morning, I met with a medical specialist here in the East Valley of Phoenix for the second time. On the first visit, he said he needed me to go for “testing,” and the results would give him what he needed to coach me back to health. Frankly, I feel good,
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and I mean really good. I feel far better than I have for years, have more energy and less discomfort. I was tempted to walk into the office and say, “Doc, let me save you some time. I am good. I really think I am. Let us just cancel the visit.” (He may insist on a mental welfare check). Even if I said, “I’m good,” it would be an ungrounded assessment, an opinion. For the love of yourself, your family and those you care about, do not self-assess, and don’t relegate your wealth to a professional who doesn’t offer evidence as to your financial health and wealth accumulation strategy. If you are indeed “all good,” if your advisor is the best of the best, your plan will bear the scrutiny and you will know beyond a shadow of a doubt that you are indeed financially fit. Getting clear on where you are and where you are going may be the best investment you will ever make.
1 I am not down on 401 (k)s. I am down on the over-reliance on them as a singular retirement platform. These statistics were taken from an on-line article, published April 12, 2015, on CNBC.Com, written by Kelley Holland. The article was entitled, Retiring Well: Not Most Baby Boomers.
Guide Advisors, Inc. 19125 North Creek Parkway, Suite 120, Bothell, WA 98011 206.486.2477