CEO Insights

The Depth of True Investment Diversification

In the financial services world, diversification is generally defined as an investment strategy used to reduce risk and maximize return by allocating money among different financial categories, instruments, and industry sectors.

It is the buzzword within the industry – everybody talks about it; seems most advisors advise clients to seek it – yet, its true meaning isn’t always found in many of today’s portfolios.

There is diversification, and then there is diversification to the third power such as what Jay Branson, Principal of Branson, Fowlkes & Company, Inc., based in Houston, Texas, uses to support his goal of growing and protecting the wealth accumulation of his more than 150 clients.

“We are very proud of the philosophy we have used for many years which is based on the investment approach that institutional investors use,” Branson explained. “We had our description of the process trademarked: It is D3 The Power of Diversification™. It is not commonly used in the industry for individual investors.”

In a recent interview with Advisors Magazine, Branson outlined the three-step diversification process.

The first level of diversification is by asset class. At the second level of diversification, Branson and his team identify investment styles within the asset class. The third level of diversification occurs by selecting fund managers within the investment style that match performance parameters Branson seeks.

That third layer – performance by the fund manager – matters a great deal to Branson as he makes selections.

He hears all the industry discussion regarding fees and the need for transparency – something he wholeheartedly supports – yet, what he’d like to see change within the financial services industry today is what he considers a lack of focus on performance.

“I think overall there is too much emphasis on fees and not enough emphasis placed on net returns. I don’t think the fees determine exactly what the results are going to be within an account, and right now I don’t see the industry providing investors with enough information regarding the performance they should expect or can achieve for the fees,” Branson said.

Another industry trend with which Branson takes issue is the Department of Labor’s (DOL) recent move to create a fiduciary standard for all advisors which requires them to act in a client’s best interest for certain retirement accounts. While he recognizes the new DOL regulations are intended to protect investors, he doesn’t see its current implementation of the standard as achieving that goal.

“It is very difficult for consumers of financial services to differentiate between one advisor and another,” Branson said. “On the one hand, you can have an advisor who is a CFP and trained to advise in a variety of areas, and you can have somebody else that just has a securities license or an insurance license. You put both of them in a three-piece suit and give them the same haircut and they look trustworthy. To hear them talk, they sound the same. It is very hard for the customer to differentiate because everybody sounds good.”

For Branson, Fowlkes & Company, the new fiduciary ruling represents perhaps only some additional paperwork. Since its 1987 founding, the firm has operated independently embracing the fiduciary role as a federal SEC registered investment advisor.

Branson’s approach acting as a fiduciary is to define his role and the client’s role at the start of the advisor-client relationship.

“The financial services industry is very intimidating with all of its jargon and acronyms,” Branson said. “I work to set the client’s mind at ease right away by making a distinction as to what they are responsible for knowing, and what I am responsible for knowing.”

The client’s job is to tell Branson what their goals and objectives are. His job is to identify the best structure in which those goals and objectives can be achieved.
That often includes a bit of behavior management.

“Behavioral economics is an amazing science as it relates to investing,” Branson said, citing many studies documenting the mistakes investors make when emotions control decision-making.
People buy in at the peak of markets because they fall into a wave of euphoria, and then when the markets go down, they let fear drive their choices, Branson said.

“Guiding people through the difficult times in the market is really where we make them money,” he said.

It is something a robo-advisor cannot do, referring to online investment trends.

In fact, Branson said, chances are high that a robo-advisor won’t even be available for online consultation when markets are volatile.

He cites the erratic market movement just this past February and several subsequent reports that the websites of online robo-advisors crashed leaving clients with nowhere to turn for advice, or even access to their accounts to make changes.

“It is just one reason I don’t see a robo-advisor as working in the best interest of the investor,” Branson said.

Instead, it is building relationships over time – just as he has done for the past 30 years – where Branson sees the greatest potential for client success.

“We still have nearly all of the clients we started with. Being able to retain them, to serve them and a do a good job for them and that they have continued to show their faith in us by staying with us is something we are very proud of,” he said.

For more information on Branson, Fowlkes & Company, Inc., online at bransonfowlkes.com

Disclosure: Jay Branson is a CERTIFIED FINANCIAL PLANNERTM Chartered Financial Consultant® and Registered Securities Principal through the Financial Industry Regulatory Authority (FINRA) and has completed the College for Financial Planning Advanced Studies in Securities Due Diligence. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Securities offered through Triad Advisors LLC a registered broker/dealer and Member FINRA and SIPC. Advisory services offered through Branson, Fowlkes & Company, Inc. which is not affiliated with Triad Advisors LLC

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