In an earlier post, I stressed how good marketing delivers the right message to the right audience using the right form of media.
Without question, the message that presently draws the most attention today is need to plan for the taxation on qualified accounts.
A close second is the fallacy of active portfolio management.
It still amazes me how many advisors are duped into believing that somehow information travels slowly enough for someone to skillfully get a jump on the rest of the market. Or perhaps they simply believe news is predictable. Of course, your clients know the news is not predictable.
In workshops, I expose this myth through a formula taken from high school math called the law of transitive inequality.
If A is greater than B, and B is greater than C, then A is greater than C.
If we can agree that news is unpredictable and markets react to news, then markets are unpredictable.
Throw in the costs of active management and style drift, and you’ll quickly demonstrate to your clients how flawed their portfolio really is.
An effective way to lead your clients toward seeing this flaw and adopting a better approach (offered by you) is by making them a part of plan design process.
For Advisor Architect members, this revelation occurs in the second meeting with the client. By then the client will have already read The Investment Answer, easily the best (and shortest) book written on this topic. From there, it’s a matter of demonstrating how their current portfolio can’t achieve their goals given the fact active management does not maintain a structured asset allocation policy.
The use of a good Monte Carlo simulator like Money Tree will help you do the necessary analysis.
Aside from the fact passive management offers the greatest chance for long term success, it saves the advisor endless hours of research and evaluation. If your goal is to achieve market rates of return, you need not waste time trying to beat them. Buy, hold, and re-balance 12 to 14 asset classes. A simple message, but one that rises above all the noise.
In addition to his great writing, Dan is a hero of mine for the epic slap down he gave the very worse of the worse, Jim Cramer. Sadly, that video has been scrubbed from the internet, but click here for a good recount.