I’ve had the privilege to work at a very large three billion dollar Registered Investment Advisor (RIA), a three hundred million dollar RIA and consulted other RIA’s.  One of the themes that cause so many problems with financial advisor-client relationships is “mutual respect.” 

One example, a few years ago, I met with an advisor (let's call him Bill).  Bill experienced a nightmare that many financial advisors fear similar to the fear of getting some incurable disease.  Yes, this was a serious situation that cost him his job, damaged his reputation and some other pain points.  A few years before this nightmare Bill had landed a challenging financial client and over the years continued to spend an abnormal amount of energy to maintain the relationship. 

Then one day Bill received an email reply from this client (let's call him Joe) giving him an update on his business trip to London and instructions that he would need some funds wired to him.  This trip had not been as smooth as the last several to London, and this time he had his personal belongings, his passport and cell phone stolen from his hotel.  Joe also indicated that he needed a new suit and personal items before the next morning business meeting.  Joe also mentioned in his email that he was closing on an apartment while in London and needed $277,000 wired to the title company for the closing later the next day.  Fortunately, Joe provided all the necessary wire instructions for the local title company and hotel.  According to the pictures, it was a pretty nice apartment with some great views. 
​
Of course, Bill was a bit surprised and disappointed that Joe had not mentioned the coming purchase but went ahead and sold off some investments to raise the necessary capital.  Bill would also be able to submit the wire request form and wire out the funds to meet Joe’s deadline.  Bill recalled at this point that he paused and decided to reply to Joe’s email.  Being the advisor, he decided that he probably should question his client's decision to purchase the new apartment because it would materially affect the financial planning goals that Joe established two years ago.  Bill also remembers being very apprehensive to reply to Joe but decided that it was his role as an advisor to bring the purchase into question.  The advisor's request was simple,

“Hey Joe – would you care to discuss this new apartment in relationship to your established financial goals.  Can we talk on the phone about this?” 

​At this point, Bill’s world crashed into the Sun and started to burn.  Later discovered, a hacker had hacked Joe’s email, read through all the previous emails and responded to the last email from Bill.  Reading through all the previous emails gave all the ammo the hacker needed to pull off the scam.  Even though the custodian reimbursed Joe, Bill’s RIA had to cover the total amount stolen.  A simple conversation with Joe on the phone would have prevented this damaging career event. 

But why did Bill not hold out for a phone call conversation?  The simple answer, “No mutual respect.”  Had Bill and Joe established mutual respect at the start of the relationship the situation most likely would have ended better and strengthened the relationship further.  For example, if Bill knew that Joe always respected Bill’s advice, whether he executed on it or not, then tactics the hacker used in the email to intimidate Bill would most likely not have worked.  Bill most likely would have realized that something was off and looked for a phone confirmation from Joe. 

In conclusion, my advice is never to continue a financial advisory relationship that is not mutually respected.  Bad things often happen when relationships are not mutually respected.  And advisors that do not respect their clients are just as guilty as clients that disrespect their advisors.  How do you identify this kind of relationship?  Simple, it starts when either the client or advisor starts to talk down to the other person.  If you are feeling intimidated by the person sitting across from you then most likely are being disrespected and should get up and leave. ​

​
​What I have found in my life journeys is that bad people often trespass on good principles and give very compelling reasons to break good principles for some exceptional gain.  Life can be challenging and when offers to avoid those challenges and obstacles, it is often easy to consider the easy way out.  Bad people understand this probably better than most individuals and prey on those who would rather avoid.  But it is by comparing life’s offers to great principles that can often reveal hurtful relationships.  I find the most challenging part of life is searching, learning and applying great principles to life situations.  And when I trespass on my principles, I often discover a healthy reminder. 

I always look forward to your comments, stories, etc.  Please post or send me a response.

While I do not have a connection or currently recommend the producers or company that sponsored this animated educational video it does a great job at explaining a reason economic pains often exist.      

As always I would enjoy hearing feedback.

One of the difficulties of being a Financial Wealth Manager is the expectation from most of the investors is the expectation that the accuracy of future market predictions has to be as close to 100% as possible to be able to make a successful return.  For traditional passive portfolios, this is never a discussion because it is often not part of the strategy.  But for those of us that go beyond traditional strategies to reduce the risk for our clients (see Nov. blog on why), it is often preparing for possible negative impacts to a portfolio that may not appear for a time or not at all.  This often means that predictions are a lot less accurate than 100%. 

It took me quite a number of years to come to terms with this scenario as it did not satisfy my ego.  But what I discovered over the years from my mentors and the top hedgefund/traders was that strategies that reduce downside portfolio value risk often meet investors financial goals better than looking for strategies with 100% accuracy.  And what investors are usually looking for often leads them to mediocre returns and sometimes charlatans.   

With that being said, to look back at the past is to pay attention to the possible risks of the future and how it affects our financial portfolios.  Below is an excerpt from a newsletter that comes from one of the fund companies we currently use, LongBoard Asset Management, that I think you will find timely.  You will notice the first date in parenthesis is comparing to the second date.  Why I think this is important (even if point #6 never materializes) is because human nature always looks for an easy way out of painful situations and thus often leads to repeating the same mistakes.  Looking for similar situations will greatly increase your awareness of potential negative surprises and allow the consideration within your investment strategy. 

After nearly 20 years of investing experience I cannot think of anything more important to consider for your investment strategy.   I have a large library of books I have read and re-read, but one central theme appears again and again  since the beginning of time, "Downside Investment Risk".  As it appears that we are once again on the edge of another Bear Market it moves me to write about the simplicity of avoiding the "Impact of Losses" on investment portfolio values.  Below is a graph produced/shown many times and in many different ways over the years, but the numbers are still the numbers that tell a story.  

How to read this chart above is rather simple.   If you lose 20% of your portfolio value it will take 25% future investment growth to get your investment portfolio back to even.   What becomes alarming is to notice the larger increase requirements for growth percentage amounts for every additional 10% decline.  A quite common possible scenario now days is a portfolio losing 60% of its value during a bear market.  So if you have $1,000,000 starting value you would only have $400,000 after a 60% decline.    That means that you will have to get a total return of 150% over the next few years to get from $400,000 back to $1,000,000.    

So how long will that take to recover a 60% portfolio value reduction?   Well, that depends on what you invest in, but let's say for the purposes of most individuals we just stay invested in the overall market.    The average return many analysts and academicians often state can very from 5% to 11%.   I think that number is probably a lot closer to the 5%, but for this purpose lets just say its 8%.     So if we compound the $400,000 by 8% per year it would take us nearly twelve years to recover a 60% loss.   That is also assuming that there are no years in between less than 8%.  

Now lets take another angle at this theme of market losses.   When I started my investment career in 1999 during the time of Y2k ​panic and technology market euphoria I was shown a chart of why clients should always be in the market.   It said that if you missed the top 10 best days of the market your returns would largely under-perform the market.   It was meant to encourage investors to stop trying to time the market.  But after a number of years of trading I learned that the biggest obstacle to good investment returns is protecting against the downside returns.    If anyone has ever attempted to learn trading they will almost certainly stumble into the teaching of keeping your losses short for the very reason shown above.    But what made the following graph below so fascinating to me a number of years ago was looking at avoiding the top 25 worst days of the market.

Clearly, as shown in the graph above, the strategy of investment returns is to develop better defenses and focus less on the best 25 days.   You can see that missing the top 25 best days does impact the investment returns but not nearly the impact that losses take on a portfolio.   

​Again as I think of the coming Bear Market I would encourage you to make sure you are comfortable with the strategy you have either accepted or developed.   Based on just the concept above the strategy should have a part of defensiveness.   If not, well then time is of essence and now is the time to make sure you have a great strategy.    Both the February and Octobers sharp market losses should be a wake up call that the investment environment is changing.  

Your comments and thoughts are welcome… 

History has a way of not exactly repeating but rather rhyming.   That also generally plays out in the stock, futures, bond and other investment markets.   Look at the chart below.   Investors and traders have been trying to predict tops and bottoms of a general investment market for more than several hundred years.   I wish I could tell you that I was especially gifted at predicting the future on an exact date or point in the market, but that is not the case.    If anyone could predict the market shifts with pinpoint accuracy it would still be easier, cheaper and more profitable if someone could predict the winning lotto numbers.   

However, there is a difference between predicting lotto numbers and how the market performs.   Humans are responsible for the overall market direction and generally, humans have not changed much in thousands of years.   Sure we've got new toys and have landed on the moon, but we are still a population of people that respond to fear, greed and love.    What that simply means is that the markets are generally a lot more predictable than inanimate objects flying around in a big bubble looking for a way out.  

As humans, we tend to get fearful of both extremes in the market.  When the market is dumping daily into the black abyss, close to previous market lows, we tend to let our imaginations run with panic that this could be the time when it truly collapses.   And when the market is soaring to the sky and approaching the heavens close to previous historical market bull runs we tend to get nervous that the end is near.    But to our often surprise when we get so confident and certain that nothing can stop the downward or upward momentum it often turns against our expectations and proceeds to fool the majority. 

Even the best investors of all time have been fooled many times and hammered with losses.    But one thing I have learned from those great traders and investors, before and now, is that as humans we tend to push the envelope on everything we do.    I almost buy into the fact that as humans we just can't stop our selves from jumping off cliffs just find out what it is like.  

So what does all this mean, you may ask?  For one, when the candy stops being handed out you can be certain there will be riots and stress in the market.   Investors are going to push the market envelope till it pops just to make sure it cannot go much higher.  And that usually means the once calm and lack of significant volatility (i.e. how much the market moves around daily) will certainly change.  Which I believe started last February.  Secondly, when the general market volatility increases it often plays significantly on the fears and safety concerns of individual investors.   It is often that this volatility exposes bad investor behaviors and as a result starts to shake out these bad investments.    If only a few are caught in this shake out then the market will only temporarily make adjustments and then continue its trend.   However, if the majority have made bad investments then the market will start a market plunge until the bad behaviors are expunged.    And sometimes this process of expunging bad behaviors irreparably damages good investors as well. 

So where are we now...?  I guess that depends on your view of how much more candy can be handed out till its all gone.   You can see from the chart above we are stretching into historical market highs, but the 1990's also show that the previous norms can be violated significantly.    My view is that the market is hoping to see the 1929’s and 1990's all over again even if that means living in market non-reality and that type of hope is often not rewarded.  

I expect now is the time to start putting your house in order and paying down any debt you have, because the tidal wave that is approaching will not be navigated with a boat full of lead weights (debt).  The probabilities and pressures are mounting that you should know in the next year or certainly within the next couple of years whether your financial planner, wealth manager, investment manager or your disclosures with them was worth the weight in gold or not.  I would be asking your investment professional what their plan is to navigate the next bear market and if they don't have a plan then ask them to develop one.  Good relationships are hard to find so first do everything possible to keep the relationship strong.  Only rethink the relationship if they refuse to develop one that you are comfortable with. 
 
Your comments and thoughts are welcome…

Continued from the Last blog …..

But regardless of our profile, thoughts usually creep in with a focus on how we can possibly live off the savings we’ve put away.  And the scary question to ask is “What if I discover later that my savings fail to support my retirement, what do I do then?”  As we answer that question, we acknowledge that fewer employers want to hire individuals our age and we are less likely to earn the income we now depend on if we go back to work.  This simply makes us ask the next question “what happens next if I quit my current occupation?” 

If we happen to be closer to the “Extreme Spender”  leading up to retirement, then the common decision is to likely stay put in a job we no longer feel challenged or wish continue.  The other not so popular choice is deciding to downsize expenses such as vacations, house size or entertainment until forced to do so.  In this case, it's very apparent why we would not want to spend our savings, but what is not apparent is why we would resist spending clearly when we have more than enough savings for retirement.  

But let's assume that we have saved enough to fund our income needs after retirement.  This would possibly mean we have been a better saver vs. spender.  Let's also assume that either we worked through our financial plan with an advisor or alone and determined that we financially can continue or even improve our pre-retirement lifestyle. 

So why do I see retiree’s in this situation continue to experience a fear of spending during retirement?  I’ve come to believe it has to do with how they viewed their savings during their career.  Savings for many investors represented a safety net in addition to their current income generator.  So during their career, if anything happened to their income they knew they could dip into their savings until they found the next income generator.  Therefore, when retirees leave their income generator and replace it with their savings they emotionally no longer feel they have a safety net.  This leaves the constant concern and fear of spending that often disrupts the enjoyment of spending. 

Often one solution to solve this dilemma is to build a safety net into our investment/savings that again allows us to sleep at night.  One suggestion for a safety net could very well be paying off our mortgage.  To find our safety nets I would recommend thinking about the “what if’s” and have plans for those situations.  Will the future go according to how our “what if” plans indicate?  Often the answer is No.  However, I can tell from experience that it's easier to modify previous “what if” plans than it is to create a solution on the fly from scratch while under pressure.

And to my business owner readers, I would tell you that planning your retirement is often more difficult because it’s likely 85% of your income will be based on the value you receive from selling your company.  And determining the sale value is not an exact method.  You may find yourself also carrying part of the sale value in a note to the buyer.  This also adds another dimension of risk to your retirement income vs. employees retirement income. 

Your comments and thoughts are welcome…

Years ago I received a call from a client, worth 36+ million dollars with a $300,000 a year pension distribution and only used half the pension annual payout, asking if it was going to be ok to spend $250,000 on a recreational vehicle. 

One large difficulty with retirement is the challenge and fear of leaving the income generator, whether it be our business ownership or job, and relying on the fruits of our savings.  As we get older the fears of change continue to grow relative to our vulnerabilities of income security. 

The journey following the start of our young career often leads us to get married, have kids, buy a house, buy more expensive vehicles and essentially depend more on the increase in income we receive from promotions or business growth.  Early in our career, we tend to ignore that the future could be any less ideal than our incredibly optimistic vision of the future.  When we are young we can allow ourselves to leave a job and pursue another job in hopes of bettering our lives.  If the job or career fails to turn out, like we hoped, then we have the ability to continue looking for better possibilities. 

Some individuals, “Extreme Spenders”, spend every dollar earned to experience life and believe that better jobs tomorrow will eventually make up for the lack of planning today for retirement.  The difficulty with betting on higher incomes in the future is the lack of better-paying jobs the higher we progress up the income ladder. 

On the other end, some, “Extreme Savers”, believe that life is unpredictable and save every dollar they earn and don’t spend but on absolute necessities.  The difficulty with saving every last dollar is that we don’t really get to experience things like travel, entertainment, and vacations. 

Somewhere the rest of us fall in between both extremes.  And the closer we are to one extreme viewpoint vs. the other is often dependent on the sensitivity to the fear that the future may not look like our beginning optimistic vision.  Also the closer we are to the “Extreme Saver” profile during our career the more likely we will have the necessary funds to continue the lifestyle we have come to enjoy.  However, the closer we were to the “Extreme Spender” profile during our career the more likely we will be required to work longer or decrease our current lifestyle during retirement. 

This is important to understand, as somewhere along the way, as we get closer to retirement the realization starts to sink in about the cost of all the things we have come to depend on.  Things like a big house, expensive nice cars, travel, entertainment, hobbies, and vacations.  As the income generator starts to stall or go away the fear of transitioning to living off of retirement income exclusively starts to elevate. 

Until next…(Part 2)

Below was my reply to another question I answered today on Investopedia.  It's a great resource for answers.  I hope this helps in your pursuit of investment knowledge. 

"Your question holds a couple of interesting concepts.   Should you do-it-yourself?  How should you invest if you do?  The first question is often asked to save on the cost of an advisor. 

But what if an advisor was free, would it not pose another question?  Do you love to invest and spend your time doing that?  If you answer yes, then I would suggest you pursue the do-it-yourself approach. But if you do, then you should really spend the time to self-educate yourself and have patience developing a strategy that fits you. 

Using an investment advisor or any professional should be a decision on added value.  I use advisors for more experience or just because I don’t want to spend the time and effort myself.  How much is your time worth?  It’s just a simple cost-benefit analysis on whether to use an advisor.  It’s really no different to why a business owner hires employees. 

On the second question on how to invest: Over the years I’ve seen thousands of different strategies and a lot of them are useless but then I’ve seen a large amount that gets the investor to their goals.  The ones that are successful are usually built around similar principals.  I’ve found after 20 years investing for clients and myself that the only strategy that matters is the one that you like that gets you to your goal. 

Everyone has a strategy they think best about how to fill a dishwasher, but I only care about the dishes getting clean.  If the dishes don’t come out clean then you need to change strategy.  Sure, someone can always find another way to include a couple more dishes, but do you care?"

Your questions, comments and feedback are always welcome!

All the best,
John

I was responding to a short article request from a large newspaper, but when I emailed my reply back to the individual requesting it, I discovered the individual had left the company.  So, I have decided to post the question and my short answer here on my blog. 

Parents should ask themselves a couple of questions first, “Will this assistance put us in financial difficulty?” If no, then ask the next question, “Is my kid responsible with money?”  It may be a good idea if the first question is a “No” and the second question is a “Yes”.  If the answers are reversed then it will be a complete disaster for the parent’s retirement and often ends worse for the child as well. 
 
Years ago, I oversaw a couple of parents that paid the mortgage down payment for an irresponsible child (parents definition not mine) and the child kept taking out equity to spend until they eventually lost the house.  I’ve also seen where parents that gave a down payment as a wedding gift to a responsible child, years later, unexpectedly received it all back plus more in a thank you card. 
 
Had the first parents left the irresponsible child to renting then it might have saved the child from a mortgage default on their credit report.  “As I say often to parents,  What are the intents and likely results?” 

Until next...