I often tell new clients that I am in the business of helping them with the complexities of reaching simplicity.
With every client, my eventual goal is to have a few very broad and ultra-low-cost index funds. But rarely do I have a client build that simple portfolio because they aren’t starting with a pure cash position.
Clients typically come to me with dozens or even hundreds of positions. They often have annuities, hedge funds and various “permanent” life insurance products.
Many carry huge tax consequences for getting out such as the alternative minimum, capital gains and Medicare tax. Because clients aren’t paying me for a theoretical portfolio, we can’t ignore taxes and sometimes must make the fewest bad decisions on products that have charges to get out.
Ultimately, I move every client toward simplicity. I explain that they can own virtually every publicly held company on the planet with just a couple of index funds such as any low-cost brand of a total U.S. stock index fund and international stock index fund.
I tell them that this simple equity portfolio provides the best diversification, lowest costs and most tax efficiency.
Clients come to understand that it is virtually impossible to go anywhere on the planet and see a publicly held company of which they don’t own a piece. The biggest impact comes from realizing the mathematical certainty that they will do better than the average investor in U.S. stocks and international stocks, respectively.
Because the return received by the average investor is the return of the market minus the costs paid, paying a small fraction of what everyone else pays in fees provides that guarantee.
Some clients want factor tilting, such as “smart beta,” and though I accommodate their wishes, I also try to talk them out of it.
I say that a higher expected return is no free lunch but compensation for taking on more risk. I also explain that fees are higher and tax efficiency is lower.
As for bonds, I make clear the poor track record of economists in forecasting rates and typically recommend one or two ultra-low-cost and high-quality intermediate-term bond funds.
So why might a little simplicity be good for the practice? I have found that, often for the first time, the client understands the investment strategy, and that is empowering.
In my experience, they want family and friends to be empowered and enlightened as well and spread the word. That yields more engagements helping clients through the complexities of reaching simplicity.
This story is part of a 30-30 series on strategies to boost your practice.
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