Broker Check


Alert: Advisors Force Diversification on Client Portfolios!

| April 13, 2015
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Have you ever read the satirical newspaper The Onion?  If you haven’t, you should check it out.  It’s a great read, but as a bit of a health warning, it spares no one with its humor and jabs.  For those easily-offended readers of this blog, you might steer clear.  In any case, I felt like a writer at The Onion as I wrote this post’s title because it sounds cheeky in isolation.  After all, professional money managers shouldn’t have to ‘force’ diversification on anyone.  Isn’t diversification one of the major pillars to investment success?  Welcome to a strange land where things don’t always make sense. Where “up” can mean “down,” and people often think and say the opposite of what you’d expect.  ‘Wow’, you say, ‘sounds like Alice in Wonderland.  Great, I love that movie!’  No, we’re not in Disneyland, you’ve entered a world that I like to call:  my office.

Here is the Webster’s Dictionary definition of Cherry-Pick:  to select as being the best or most desirable.

How is the concept of cherry-picking pertinent to this post?  I’ll give you one, of MANY recent examples of client conversations about their portfolio performance.  It is worth noting that this issue and these conversations are not unique to TrestleBridge Capital clients, these conversations are happening with virtually all advisors and their clients.  Here is a re-cap of a recent client meeting/conversation.  I was told prior to this meeting that the client was not happy with their portfolio’s performance.  It’s worth noting that the client’s portfolio was up almost 10% year-over-year at the time of this meeting.  At the beginning of the meeting the client immediately ended any efforts at small-talk/catching-up – never a good sign - and pulled out several sheets of paper.  Here is my best recollection of the transcript:

Client:  So, as you know, I’m now retired and have a lot more time on my hands.  I’ve been doing some extensive research on my account (points to the papers in his hand) and by my calculations, my account has only earned 5% over the past year.

Me:  So sorry, I don’t mean to interrupt, but you’ve actually earned just under 10% over the past year (pointing to my papers).  We’ll e-mail you a PDF of your performance report after today’s meeting.

Client: No problem, thank you for that information.  That aside, I’ve been doing my research (holding up his papers again) and I see here that the S&P 500 Index has done just about 15% over the past year……………and…………

Me:  Aaaaannnnd?

Client: And I am wondering why I’m not keeping up with the S&P.

Me:  Could you remind me of how old you are?

Client: 64 years young.

Me:  You realize that you have, and always have had, a moderate-aggressive risk tolerance for your accounts with us, yes?  And as such, your portfolio is not 100% in stocks, right?  And that the S&P is in fact, 100% stocks by definition? 

Client:  Yes, of course.

Me:  So why would a retired, 64 year old client’s moderate-aggressive portfolio that is well-balanced between stocks, bonds, and alternative investment asset classes ever be expected to keep up with the S&P 500 index, particularly when the S&P has done nothing but scream upwards over the past few years?

Client:  I guess you wouldn’t expect that portfolio to keep up (putting his papers down and folding his hands).

Sounds fun, huh? This conversation is playing out thousands of times each day across America between advisors and their clients.  Why?  Chalk it up to human nature, behavioral finance, greed, too much CNBC watching/newspaper reading, whatever.  Now, as armchair quarterbacks reading this post we can all sit here and say ‘well, this client is being unreasonable, he’s taking on less risk than the S&P, so why would he expect to keep up with it in an upward market?’ But it’s not that simple.  This client was pulling a vintage move, the old ‘retro cherry-pick’.  It’s a simple, yet powerful move that can throw off even an experienced advisor in a meeting.  The move goes something like this:

Step 1: Open your quarterly statement.

Step 2: Scan your statement to see each holding’s performance.

Step 3: Take out your highlighter and mark the best performing holding.

Step 4: Pick up the phone, call your advisor and ask why you didn’t have 100% of your money in the highlighted holding.  If you receive any pushback from said advisor, ask him/her:  ‘well what am I paying you for anyway??’

It’s all too tempting (trust me, I’ve done it) for an advisor to respond to a retro cherry-pick with equally convenient and cherry-picked set of statistics, studies, charts, etc. and jump down a rabbit hole (note the Alice in Wonderland tie-back) with a client.  In this particular client interaction I chose to take a step back and identify the root question.  I often times find that the question that a client (or my wife for that matter) asks isn’t really the actual question.  In asking why he wasn’t keeping up with the S&P what he was actually asking was ‘why am I diversified?’  Seems like a silly question when you look at it that way now doesn’t it?  We all know that diversification is a useful risk-mitigating tool and arguments against it don’t hold much water.  I posed what I felt the real question was (why am I diversified?) and then asked how the client would have felt had they been 100% in, and ‘keeping up with’ the S&P 500 index during the 08-09 financial crisis.  Game, Set, Match.

Although frustrating and challenging at times, these types of conversations are a cost of doing business for advisors like me and represent an opportunity to provide both perspective and nuggets of wisdom to a client.  In addition, if these conversations didn’t occur, I’d likely be out of a job so I’m happy to partake!  The point is, reacting to an initial ‘question’ or statement without determining its real meaning can be perilous for a client advisor relationship.  I’ve learned this lesson both in the office and through 11 years of wedded bliss!

By: Andrew Gonski

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. Investments mentioned may not be suitable for all investors. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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