A Simple Method to Improve Your Clients’ Investment Performance

Thursday, March 22nd, 2012

There is a great arti­cle by Louis S. Har­vey of Dal­bar enti­tled Purpose-Based Asset Man­age­ment.

When I read this arti­cle, my ini­tial reac­tion was that this sim­pli­fied method would result in peo­ple walk­ing out of an advisor’s office, climb­ing into the car and say­ing to his or her spouse:

“Dear.  For the first time in my entire life, I think I finally under­stand how to invest our money.”

You should spend a cou­ple of min­utes read­ing the arti­cle before read­ing the rest of this arti­cle.  It is only six pages and has graphs.

OK.  Back with me now?  Here is how I would describe this process to a client:

“When I started in the indus­try, I used to sit through pre­sen­ta­tions by our Chief Econ­o­mist and walk out won­der­ing what lan­guage he was speak­ing.  Invest­ing and wealth man­age­ment can be very con­fus­ing and over­whelm­ing.  It is our job to take com­plex finan­cial prod­ucts and ser­vices, fil­ter them and trans­late them into a lan­guage that most peo­ple can understand.

To be hon­est, most peo­ple don’t under­stand how to invest their money.  Most advi­sors take them through a fact-finding process to help iden­tify finan­cial prob­lems and then rec­om­mend a port­fo­lio of stocks, bonds and mutual funds.  The port­fo­lio is devel­oped to gen­er­ate returns to help grow invest­ments over time.

Port­fo­lios are gen­er­ally devel­oped based on the level of risk you are able to with­stand.  Most advi­sors gen­er­ate a sin­gle risk tol­er­ance and develop a port­fo­lio based on that.

We do things quite dif­fer­ently.  One of the first things that we try to iden­tify is the pur­poses for your money.   Let me give you a cou­ple of examples.

Most peo­ple have mul­ti­ple ways in which they plan to use money.  Most peo­ple like to have an emer­gency fund or need to save money for retire­ment.  Oth­ers have chil­dren who plan to attend col­leges or uni­ver­si­ties, and some plan to pur­chase a recre­ational prop­erty or help their chil­dren to pur­chase homes.

I have placed sev­eral buck­ets on my desk to help you under­stand this process.  Some buck­ets are large, some are medium sized and some are small.  Each bucket rep­re­sents a pur­pose for your money.

Your retire­ment bucket may be one of the large ones.  A large bucket requires more money to fill.  One bucket may be edu­cat­ing your chil­dren.  This may be a medium bucket.  Another may be for the pur­chase of a new car.  That bucket is rel­a­tively small.

Some buck­ets need to be filled within a short time span.  In the exam­ples above, your new car bucket may need to be filled within the next two years.  Your retire­ment bucket, on the other hand, may not need to be filled for twenty years or more.

When you invest money, one of the major fac­tors for iden­ti­fy­ing risk is the length of time before the money is required.  If you have a short time­frame, you can­not assume much risk because there are a lot of things that can and will go wrong in a short period of time.  If some­thing goes wrong, you don’t have time to recover and there­fore, you need to be very con­ser­v­a­tive in the way you invest that money.

If you will not be using money in one of the buck­ets for over twenty years, you can take more risk.  If you lose 20% of your cap­i­tal in one year, you have lots of time to recover.  This becomes really impor­tant when you review invest­ment per­for­mance of the major stock indexes.  Approx­i­mately 50% of the time over the past 111 years, the stock mar­ket has gained more than 16% or lost more than 16% in a sin­gle year.

Let’s use 2008 as an exam­ple.  If you invested a one-year bucket in stocks at the begin­ning of the year, you lost 34% of your money that year.  Let’s say, your new car bucket had $40,000 in it at the begin­ning of 2008 and you planned to buy a new car at the end of the year.  You invested in the Dow Jones Indus­trial Aver­age at the begin­ning of the year and at the end of the year, your invest­ment was only worth $26,400 and you are nowhere close to buy­ing your new car.

If you invested a 25 year bucket in the Dow Jones Indus­trial Aver­age, you have time to recover from your loss and although it was uncom­fort­able, your bucket has more money in it today, espe­cially con­sid­er­ing that you have added per­sonal funds to this bucket as per your plan, than you did at the begin­ning of 2008.

So the task ahead of us today is to put some labels on each of these buck­ets, deter­mine how much you need to fill each bucket and put a time­frame on when they need to be filled.  Some buck­ets, like your retire­ment bucket, will be more dif­fi­cult to esti­mate how much money will be required to fill it but we have lots of time to make these calculations.

Then we need to put labels on each bucket sym­bol­iz­ing the tar­get date for fill­ing the buckets.

Are you ready to get started?”

The Bucket Strat­egy will help your clients to bet­ter under­stand the risks and will help them stay com­posed dur­ing dif­fi­cult mar­ket con­di­tions.  This will improve invest­ment per­for­mance and will reduce strains to your client rela­tion­ships caused by high lev­els of stress caused by uncertainty.

Bob Simp­son is Pres­i­dent of Syn­chronic­ity Per­for­mance Con­sul­tants.  Bob can be reached on his direct line at 905−502−0100, toll free at 866−646−6002 or by e-mail at bob.simpson@synchronicity.ca.

About Bob Simpson

Syn­chronic­ity Per­for­mance Con­sult­ing has been coach­ing finan­cial advi­sors since 1998.

Bob Simp­son, pres­i­dent and founder of Syn­chronic­ity has been involved, directly or indi­rectly in the finan­cial ser­vices indus­try since 1981. He has been a very suc­cess­ful finan­cial advi­sor with Nes­bitt Thom­son Inc., a major Cana­dian finan­cial insti­tu­tion. Between 1981 and 1989, he built a busi­ness with more than $120 mil­lion in assets under man­age­ment, was branch man­ager and SVP National Sales for Mid­land Wal­wyn and has been coach­ing finan­cial advi­sors since 1998.

You can fol­low Bob Simp­son via:

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Tags: Asset Management, Chief Economist, Colleges, Couple Of Minutes, Dalbar, Emergency Fund, Graphs, Initial Reaction, Invest Money, Investment Performance, Investments, Mutual Funds, Need Money, People, Portfolios, Retirement, Risk Tolerance, Stocks Bonds, Universities, Wealth Management
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Harvard’s Robert Pozen: Perspective on the Fund Industry

Wednesday, September 28th, 2011

Harvard’s Robert Pozen dis­cusses the mutual fund indus­try in perspective.

Robert Pozen is Chair­man, MFS Invest­ment Man­age­ment, the $184-billion global asset man­age­ment subis­di­ary of Sun Life Finan­cial, and was a for­mer exec­u­tive of Fidelity Invest­ments in the company’s for­ma­tive years.

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Tags: Asset Management, Fidelity Investments, Formative Years, Global Asset Management, Harvard, Mfs Investment Management, Mutual Fund Industry, Perspective, Robert Pozen, Sun Life Financial
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Defining Your Business Opportunity

Wednesday, August 10th, 2011

Your Busi­ness Plan starts with Defin­ing Your Busi­ness. The four com­po­nents of Defin­ing Your Busi­ness are: Vision, Mis­sion, Val­ues and Busi­ness Oppor­tu­nity. Your Busi­ness Plan is the artic­u­la­tion of your Strat­egy for grow­ing your busi­ness. Strat­egy is the sys­tem­atic out­put of what you want to achieve, the resources and capa­bil­i­ties avail­able to you and the oppor­tu­ni­ties and chal­lenges the envi­ron­ment pro­vides. Your Vision State­ment describes the sys­tem­atic out­put of what you want to achieve. It is in the Busi­ness Oppor­tu­nity sec­tion of your Busi­ness Plan that you describe how you will take advan­tage of the oppor­tu­ni­ties and chal­lenges the envi­ron­ment pro­vides. You iden­tify your Busi­ness Oppor­tu­nity by answer­ing four questions:

1. Where do you make your money?
2. How do you spend your time?
3. Who do you sell?
4. What do you sell them?

In answer­ing the first ques­tion, it is impor­tant to think about the tasks you per­form that drive rev­enue. A finan­cial advi­sor makes money by pro­vid­ing finan­cial solu­tions for clients. The advi­sor can make money from the com­mis­sions earned through the sale of prod­ucts or through charg­ing fees for ser­vices such as finan­cial plan­ning and asset man­age­ment. The more time an advi­sor spends with prospects and clients, the more suc­cess­ful they will be. When you describe who you sell, you begin with your Ideal Client Profile(s), the demo­graphic and psy­cho­graphic descrip­tion of the types of peo­ple you want to serve. You also describe the mar­kets within which you work. What you sell explains the prod­ucts and ser­vices you provide.

Your Busi­ness Oppor­tu­nity also high­lights the areas of great­est poten­tial in grow­ing your busi­ness. These oppor­tu­ni­ties could include open­ing up a new mar­ket, new prod­uct ini­tia­tives or a new approach to an exist­ing market.

You describe in two or three para­graphs why your busi­ness has a unique oppor­tu­nity in your cho­sen market(s). Whether the oppor­tu­nity is local, national or inter­na­tional depends upon the geo­graph­i­cal scope of your business.

Norm Trainor is the founder of The Covenant Group, a com­pany spe­cial­iz­ing in prac­tice devel­op­ment for advi­sors. For fur­ther infor­ma­tion, visit his Web site at www​.covenant​group​.com.

Fol­low The Covenant Group at:

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Tags: Articulation, Asset Management, Business Opportunity, Business Plan, Business Strategy, Capabilities, Challenges, Client Profile, Commissions, Financial Planning, Financial Solutions, Geogr, Mission Values, New Approach, Norm Trainor, Opportunity Section, Paragraphs, Product Initiatives, Prospects, Scop, Time 3, Vision Mission, Vision Statement
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