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The Great Leap Forward
By Bob Veres
July 28, 2011
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Lately, I've seen more and better thinking about asset management than you could find in the previous 20 years in the profession and I think it may be time to give modern portfolio theory a makeover. In fact, I think this fits a long-standing historical pattern.
How so? If you can remember all the way back to the 1970s, professionals were the only ones who had access to the mutual fund data. There was a huge knowledge gap between the professional broker and the average consumer, who had nothing comparable to the old Weisenberger tables. Eventually, mutual fund data was more widely available and the gap between professional and consumer closed.
Advisors leaped ahead again in the late 1980s when they embraced modern portfolio theory and for about 10 years (during the rise of the AUM business model) professionals had a significant advantage over retail investors. The gap closed again and, since the turn of the century, it has become accepted wisdom that astute individual investors can probably do about as well managing their portfolios as the best advisors.
I think we are in the early stages of creating another gap between advisors and laypersons; that is, another time period when professional RIAs will have more tools, information and sophistication at their disposal than their clients.
In fact, I've created a new conference this fall (October 13-15 in Chicago; http://www.signupforconference.com/) to explore in detail the emergent investment sophistications in the advisory world. Among the speakers: Harold Evensky, Bill Bengen, Michael Kitces, Don Phillips, Tom Giachetti, Mark Tibergien and Stephanie Bogan.
One of the most interesting topics, which I cover in detail in the August issue of my newsletter and that will also be explored at our conference, is Enterprise Risk Management.
An advisor with 25 years as a consultant to Fortune 500 companies talks about ERM as an offshoot of MPT. But unlike MPT, ERM has progressed dramatically. MPT uses one number for an investment's volatility. ERM looks at how an investment's volatility correlates with market and economic conditions, and instead of using one number, it uses a spectrum. It does similar things with correlation coefficients and expected returns.
The tools to do these things in the corporate world are complex: copula systems, GARCH models, structural uncertainty measurements, but most of that can be put into future software programs, and the data is already out there. They suggest that advisors do what corporate managers and consultants do as a matter of managerial routine: constantly assess the economic and market conditions, constantly assess the portfolio's responses to changes in these conditions, and look at making changes based on how investments have behaved under similar circumstances in the past.
Conceptually, this is not rocket science, but some of the mathematics might challenge the rocket scientist's facility with numbers -- and it is certainly beyond even the astute layperson's grasp.
I think we'll know more after the meeting in October than we do today; in fact, that event may usher in the next round of advisor dominance in the world of investing.
The last time this happened, the profession gave birth to a new business model and took off from a revenue standpoint. Are we on the verge of something similar today?
What do you think?
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For more on planning, client service, practice management and marketing, or to join the Inside Information community, contact Bob Veres at Bob@BobVeres.com or go to www.bobveres.com.
Is modern portfolio theory in desperate need of a makeover?
While the recent FPA Convention provided some new and very interesting presentations and introduced some pretty high-brow concepts, Financial Planning columnist Bob Veres felt far too many of the presentations were bogged down by speakers who decided -- or were compelled -- to “dumb down” the material to appeal to the lowest common denominator. What did you think?
Ahead of next month’s Business & Wealth Management Forum in Chicago, it’s time to start asking some big-picture questions. For example, how could our profession have a bigger political impact than we do today and if there are better ways to add value than simply tending client portfolios?
I think we all know that the financial planning profession is drowning in paperwork and the problem is only going to get worse. This vexing -- and increasing -- compliance hassle is generating a certain amount of frustration in the profession, and most of the people I talk with don't know where to turn. So who speaks for the planner?
Make no mistake. We are going to sail through a lot of these volatile periods over the next five to 10 years and the profession needs to brainstorm better ways to deal with them that won't harm clients and their investment goals. We need to better understand what's going on. And consumers deserve to be told more than just which way the wind is blowing today.
How do you talk to your clients about the debt ceiling and budget battles when so many people are strongly -- perhaps not always rationally -- on one side or the other of the political divide? Suddenly, loss of confidence in our country's legislative and executive leadership is driving loss of confidence in the markets and it seems the two are now linked in ways that we may never have seen before.
I think we as advisors are going about our lobbying effort all wrong. More to the point: does it make sense for us to keep lobbying on behalf of the consumer or should we act like everybody else in the universe and lobby for things that would better serve our own interests?
I may be opening up an old wound here, and if I am, I hope you'll forgive me. But I find myself wondering about all the ways that the interests of a broker-dealer differ from the interests of its affiliated advisors. I've never seen this explored anywhere.
I have a lot of pet peeves but one of my biggest is how we, as a profession, tend to define other professionals by one number: their assets under management.
To me, the most interesting event of the year, so far in the financial planning space, is the Schwab organization's new Independent Branch Services initiative. The gist of it is that Schwab's retail division is looking for experienced advisors to come in and transform their practices into Schwab branch offices on a franchise basis.
I've put on my annual to-do list that sometime this year I'll create a Facebook page, and Lord help me, I may even start twittering before long. This means I'm about to stick my toe into the dreaded Social Media world.
The time and energy that the advisor focuses on the client produces far more terminal wealth for that client than anything you can get from the traditional investment management services.
The royal wedding, eliminating the notorious mastermind of the Sept. 11 attacks--this is going to be a week to remember forever. But I also wonder whether it might represent another milestone.
I have a very simple question to ask all of you. Suppose, by some miracle, that you were given an extra two hours a week to spend in your office. How would you spend that time?
Some advisors are averse to even DISCUSSING the value of portfolio management, possibly believing that we all spend too much time talking as if financial planning and portfolio management are the same service--which they clearly are not.
What portfolio management activities provide the MOST value for your time/money/energy/attention, and which activities provide the LEAST value for your time etc.?
One of the most interesting things to come out of this conversational thread about the regulators is the amount of fear advisors are expressing about speaking openly.
The current SEC inspection and audit process is kind of silly, at best, and a waste of resources, at worst. FINRA's process, from what I've been told, makes even less sense. But what can we do to improve things?
I see a lot of advisors who get very little interaction with the sponsors, and there is little in the design of today's exhibit halls that encourages that interaction--and THAT was my point.
One of the biggest wastes of time and talent that I see in the financial services industry is something you probably take for granted: the conference exhibit hall.
The more you hear about the SEC examination process, the more you realize that the examiners can't quickly recognize the honest advisors from the crooks, and are generally more interested in finding fault with the honest advisors than identifying the crooks.
It seems we have reached the absolute bottom of the barrel in terms of regulatory efficiency. If the SEC is spending weeks on trivial issues and completely missing Bernie Madoff then it is clear that something is seriously broken.
Having attended hundreds of practice management and motivational sessions at various conferences over the years, it has become clear to me that most of our roadblocks to business and personal success are (get ready to wince) self-created.
There seems to be a lot of "energy" (and sometimes anger) around the idea that some people provide full-service financial planning and some people call themselves planners while actually selling products or managing assets for a living.
We call this the "financial planning profession," right? So here's a topic for discussion: how is it that many people calling themselves a financial planner don't actually do financial planning work for their clients?
The community really needs to know if you are (or are not) satisfied with the service you're receiving, and how it has (or has not) helped you focus on your direct client services.
One of the postings after a recent chat has started us all on a discussion of another possible way to handle this macroeconomic chore: Actually do your own evaluation of the markets and decide whether to be in or out.
Ever since September 2008, clients are asking for more than you can possibly deliver: to keep track of the macro-economic big picture and help them get out of the market as soon as we start moving into another meltdown period. So the question is: How can we possibly respond to these lofty expectations?
The financial planning community has a lot of knowledge and wisdom – way more than any individual writer or commentator. But how do we tap the deep wisdom of the crowd to help us resolve important, complicated issues? Bob Veres, a columnist for Financial Planning magazine, is here to trigger conversations on important topics for advisors on issues and subjects facing the industry. First up: The regualtory standard.
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