What’s Missing in the Modern Dialogue between Advisor and Investor?

Fundamental Changes in the Investment Conversation and Approach

The percentage of Americans who own stocks has yet to rebound from its post-Great Recession fall. More than a decade later, and with the stock market reaching record highs, Gallup finds that only 55 percent of Americans own stock as of April 2019, compared with 62 percent ownership between 2001 and 2008.[1]

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The majority of the 45 percent without stock are low income Americans.[2] Not surprisingly, they are also the ones with the least access to education and the professionals who could showcase the absolute necessity of prioritizing a securities portfolio.

With half of Americans now earning their keep from independent contract work[3] (read: no corporate 401(k)), we can likely expect a rise in self-directed IRAs and investment app participation. This new investment middle class is all about educating themselves, and they are fundamentally changing the conversation between themselves and the advisors who must now offer more than ever to earn their business.

“Products should never pay the advice givers,” Casey T. Smith, president of Wiser Wealth Management in Marietta, GA, tells us. “The United States is one of the few developed nations that still allows this to happen. Unfortunately, the lobbying power of the insurance industry is greater than the financial literacy of our elected officials.”

inflation400x400Lower income Americans are just now recovering the wealth they lost during the Great Recession. Adjusted for inflation, they have 32 percent less wealth than they did in 2003.[4] Because they were the ones who lost the most during the downturn, they likely have the largest emotional hurdle to overcome when seeking out professional advice. Allowing non-fiduciary advisors the ability to recommend products based on commission certainly does little to solve the problem.

“The industry is dynamic and broad, so not all flavors are equal for all investors. Listening to and understanding the needs and goals of each person is the key for long term success. Clients also need to be educated enough to ask the right questions,” says Eduardo J. Ramos, CIMA®, CPA, MBA and Managing Director of Freedom Advisory, LLC. “Normally, long term plans are achieved by making a series of short-term decisions that lead to a great long-term success. Clients disconnect easily when bad news starts to surface for the wrong reasons.”

Many prospective investors do not fully understand the toolsets they have available to them. Professional investment strategies consist of a lot more than blind speculation about a stock’s price movement up or down. Engaging an investment professional should be a much more sophisticated relationship than “up = happy, down = mad.”

“I think that the financial industry needs to take a harder look at liability-driven investing for the individual client. In contrast to the total return approach that most clients are familiar with, this approach prioritizes cashflow planning. Academics call this dedicated portfolio theory. Retirees’ expected withdrawals are seen as liabilities that need a dedicated source of income to cover them. The stock/bond allocation is determined by the amount of income needed and the length of time the retiree wants to protect that stream from short term market fluctuations,” explains Kelly Jennings, CFP® an advisor with Branning Wealth Management, LLC.

relationships 604x400“For example, a ladder of individual bonds held to maturity generate cash flows from coupon interest and redemptions to provide a secure income stream for anywhere from 5 to 10 years. Each year will require about 5 percent of the total portfolio, so a protected stream for 8 years would typically require about 40 percent of the overall portfolio. This 40 percent is called the ‘Income Portfolio.’”

This is just one of the more sophisticated investing strategies that might apply to prospective investors of all walks of life. However, it is not something that is readily taught. Investors may also have trouble applying the proper strategy to their own lives. One of the best reasons to hire a financial advisor is to have a set of dispassionate, objective eyes looking at an investor’s goals, timeline and resources to create an optimal solution. It is essential, however, to learn about the different kinds of advisors as well as the different kinds of investment strategies.

“If an advisor cannot articulate their investment philosophy, a client is liable to end up with a hodgepodge of securities in a portfolio that do not necessarily work together in accomplishing a particular goal,” says Scott Kays, CFA, CFP®, president of Kays Financial Advisory Corporation in Atlanta, Georgia. “The advisor is likely to call this diversification, but a well-diversified portfolio will be held together by a defined investment philosophy.”

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