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• Is Traditional Financial Planning Advice Insane?
  …insanity is doing the same thing over again expecting different results
• Kids Don’t Try This At Home
  …a little knowledge is a dangerous thing
• Personal Notes
• Market and Account Updates
  …the uptrend that began in July may just contine
• College Classes
  

It is no secret that I believe that active management is superior to passive buy-and-hold investing.

One of my initiatives as President of the National Association of Active Investment Managers (NAAIM) this past year has been to raise the issue of a trillion dollar flaw in traditional financial advice – that it completely ignores active management, and increases risk in doing so. Trying to create change in a huge industry is no small feat.

My goal is to have diversification by strategy accepted as a risk reducing mechanism just as diversification among different asset classes, such as stocks and bonds, is recognized as a way to lower risk.

I believe that every investor should have at least a portion of their portfolios allocated to active management, just like they should have some stocks, some bonds, some hard assets, some international investments, etc.

I actually began this mission in 2002 when I wrote to the Certified Financial Planner Board of Standards suggesting additions to the
traditional advice promulgated in their curriculum.  My changes could have significantly reduced the huge losses investors incurred in the 2000-02 bear market and again in the 2007-09 decline.

The CFP Board, currently home to over 59,000 CFPs, in 2002 had an authorized curriculum with over 1800 topics, only three of which were remotely related to active management.  I had hoped my nudge would encourage them to include a few more active management subjects in their curriculum.

I was told, politely, that the Board thought 3 out of 1800 was plenty.

Disillusioned, I dropped my CFP designation a few years ago after a 12 year membership.  While the CFP Board may not exactly be
dinosaurs, they certainly can act like ostriches when it comes to viable new ideas.

Why does my industry resist active management despite its success?  Because active is much more difficult to execute than a passive buy-and-hold strategy.  The back office functions are different and complex. There is an added layer of skill required of the practitioners when compared to ordinary mutual fund and annuity sales people.

Also, it takes a lot of time to monitor your investments every day.  Many investors falsely assume their traditional brokers or planners are watching their investments for them.  But how many of them moved those investor’s money to safety before the market went in the tank last year?  Not very many.

The bottom line is that the businesses of most brokerage and planning firms were designed in the 1980s and 90s around buy and hold.  They are not equipped to handle actively managed accounts and they don’t want to take the time, hire the extra help or spend the big money to change their systems.

The absurdity of traditional advice was made clear in the July 20, 2009 issue of BusinessWeek.  In an article called Retirement: The Big Rethink, two industry pros were highlighted in ways that exposed the fatal flaw of traditional financial planning advice.

Rockford, IL Financial Planner Theresa Harezlak tells BusinessWeek that her traditional advice to remain 100% invested in stocks, destroyed her children’s college funding, but her buy-and-hold discipline has her staying the course.

I am reminded of the tongue-in-cheek definition of insanity:   Doing the same thing over and over and expecting different results.

Christine Benz, The Director of Personal Finance for investment analyst Morningstar, confessed that she “had been trying not to look at her retirement accounts” during the last year’s downturn, and I think I know why.

The article mentioned that Ms. Benz kept 60% of her portfolio in stocks and went so far as to name her 10 holdings.  As expected of a top person in the firm all were mutual funds with high Morningstar ratings, plus some Morningstar stock.  Hers was a textbook case of investing in the way Wall Street suggests.

Assuming an equal amount of each holding, data provider FastTrack shows the equities in Benz’s account would have lost a stunning 52.83% of their value between Oct 9, 2007 and March 9, 2009.

Benz acknowledged that helping friends and family not make bad decisions, “like moving to cash”, was stressful.  I can understand her stress when friends were looking to her for advice and the best she could offer was a seat belt for their deck chair on the Titanic.

Is this the best that the “traditional” side of the industry can offer?  From a top dog, even?  God help us all!

I would think that the non-traditional, active management might be looking a little better to them after their experiences of the past year or two.

Only time will tell if I will be able to get the industry to shift its direction a bit.  But I love a challenge and I certainly think this is a worthwhile one.

In the mean time, don’t take any wooden nickels and question all “traditional” financial advice.

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In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC, adapt to changes in the markets by changing the investments they hold. Therefore, comparisons to broad stock market indexes such as the unmanaged indexes listed above may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares are not insured by the FDIC or any other agency, are not guaranteed by any financial institution, are not obligations of any financial institution, and involve investment risk, including possible loss of principal.  Advisory services offered through Hepburn Capital Management, LLC, a Registered Investment Advisor.  HCM will not transact business unless properly registered and licensed in the potential client’s state of residence.
Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.

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