Updated Friday, December 19, 2014 as of 10:44 PM ET

Better Way to Talk About Risk?

Like most retail financial advisors, I have thought a lot about how to reduce both actual risk and the perception of risk in my client’s portfolios. Since 2008 we have all thought, rethought, written and rewritten about risk.

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Comments (6)
This is Mike Chindamo, Co-founder of Fautores Family Offices. I started in the business in 1978. I have had the good fortune to earn the respect and client relationships with some very wealthy clients as well as those that are not very wealthy.
Here is the point - NONE acquired their wealth by investing in the stock market. I will refer to the article and the steps and study, Monte Carlo reviews etc. All are an excercize in futility. Wealth is accumulated by owning businesses, vs. ETF's, real estate directly vs. stock market reits, collectibles vs hedge funds. Need I go on. The average investor would benefit more by owning the house next door, cashed out and renting it.
Stock market investing can help preserve purchasing power. If an investor owned stock options, insider stock etc, that may be an initial wealth attainment strategy. Frankly, the rest is diluted and manufactured Wall Street products that are fee-loaded without much value other than a luck factor.
Financial advisors are compensated by assets under management in Wall Street created products! How does financial advisory correlate building wealth by investing in such a limited venue?
Two things need to happen (in my opinion):
1) Mass market investors would need to lower their expectations of "stock market results and the impact on their retirement.
2) They have to understand that hiring experts that can really advise them well costs money. The mass market reluctance to pay fees exposes them to dubious financial strategies and products masked as ETF's, Indexes, alternatives etc that are incented by internal low fees and other Madison Ave. marketing strategies. This equates to going to McDonalds for a fine dining experience.
The typical financial advisor brings very little value to a client relationship. The business is very commoditized as a result. This is why the creation of the Silicon Valley internet based investment platforms are gaining market share.
Advisors should ask themselves this "If you were very wealthy, would you hire yourself as an advisor?" Probably not. More likely, you would look to the experts that have extensive legal, estate, asset protection, Property and casualty contract language experience, business entities, business behavioral issues and more. Those are just some of the skill sets that are required to preserve wealth and protect purchasing power.
Stock market investing would be a small part of the plan.
Please note! Does Warren Buffet buy ETF's? OR does he invest in real value-based businesses?
Your average investors look for stories that are cheap and sound good. You get what you pay for.
For those advisors that are frustrated, I would like to encourage you to take a step back, study where you want to be in 5 years, Raise the bar on your abilities and plan on being significant. Marketing mass market product lines will always be there , but in the long run, you are easily replaced by a less expensive way.
Posted by Michael C | Wednesday, June 18 2014 at 8:50AM ET
Franklin understands that clients do not give good answers to questionnaires. Psychological experiments and studies have shown that people can be preconditioned to give a desired response. Advertisers do that all the time.
A professional evaluates the client situation, and does what is right for the client. Why ask? Does the dentist ask how much novocain you want?

Mike does not appear to understand investing. He states that you should not be in the stock market, and the best investment is owning a business. Buying shares of stock is becoming an owner in a business. If you approach the stock market as becoming a business owner rather than a casino where you are speculating on short term fluctuations in stock prices, rewards can be huge. Many public companies have unique market positions and opportunities far beyond what a person can do on their own.
In addition, there are many who do not have the aptitude, time or inclination to run their own business. Should a doctor give up his practice to run a Dairy Queen? He can grow his wealth by finding a great money manager. Our record speaks for itself.
Herb Schechter Minneapolis Portfolio Management Group www.MPMGLLC.com
Posted by Herbert S | Wednesday, June 18 2014 at 10:13AM ET
Herbert,
Your interpretation is lacking. Try reading what I wrote again. We are advocates of value investing in individual stocks. Secondly we are not advocating that every one should own a business. The mass market investors would be better off investing in "the house next door" vs. manufactured Wall Street products.
Many entrepreneurs do invest in many businesses. Your thought that I or my group does not understand investing is a lack on your part. Our position is simple. There are many ways to invest that exclude investments in the stock market. We are advocates of diversifying outside of the stock market. Like I said, the wealthiest out there my a long haul have not made their wealth investing in the stock market. Many have attained wealth by owning stock options, and insider stock. Those same clients also will have positions in real estate, fine art, and many other areas.
Those that are in the mass market that do not have the "aptitude" as you stated are easy prey for disfunctional packaged products.
Funny you should mention a doctor giving up their practice to run a Dairy Queen. There happens to be much of that going on. The doc's are suffering from forced mergers into hospital systems. Many Doc's are investing in Franchises. I do not neccessarily support anyone owning a business until they have vetted out the opportunities carefully. One most important factor are the psychological assessments that can help determine whether someone has the mental make up to handle the responsibilities to manage a business.
Be happy to compare notes anytime.
Posted by Michael C | Wednesday, June 18 2014 at 11:33AM ET
Your point about setting aside the financial plan and turning to the risk tolerance questionnaire is right on point. The financial planning process is the only planning process I can think of that looks outside the plan to determine benchmarks and strategy. The plan ought to be at the center of the investment planning process, in fact, it should flow from the planning process. The investments should support the goals stated in the plan. There are always trade offs, but the conversation has to be in the context of the plan.

My biggest challenge to the robo advisors is that they develop an asset allocation without a plan. As George Harrison said,"If you don't know where you are going, any road will take you there." Client's investments don't exist in a vacuum. They saved their money to fund something in the future (retirement, etc). The investments need to support those goals and the risks in the portfolio need to align with the timing of the goals so that they can be more effectively managed. But in order to do that, as Franklin states, the conversation about risk (and what the real risks are) needs to be reframed. Quarter over quarter standard deviation doesn't capture it. It was the best thing they had in 1952 when there were 4 computers and slide rules were the primary means of making calculations. Even in his '52 paper, Markowitz noted that eventually better risk measures that focus on the downside would become available. Unfortunately, our industry has not kept up with the computational capabilities that allow us to frame risk in a better way.
Posted by BRENT B | Wednesday, June 18 2014 at 1:32PM ET
Michael,

I read your post with great interest. It is refreshing to see the exchange of ideas and I truly appreciate your perspective and experience. I would love the opportunity to have further dialogue with you. I work with HNW and financial advisers, specifically for investment opportunities associated with a real estate fund. I'm going to send you a package via 'snail' mail and hope to have a few minutes to connect after you receive that. Thanks again for sharing your insight. Suzanne R, LYNK Capital
Posted by Suzanne R | Wednesday, June 18 2014 at 3:19PM ET
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