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Is Your Portfolio Really Invested For You—Or Your Advisor?

In Christianity alone, it is estimated that there are thousands—yes, thousands—of different denominations around the world. Each denomination has its own interpretation of Scripture and its optimal application.

If you’ve ever been part of this world, you likely know many denominational devotees would, indeed, “die on that hill” for various individual tenets of the faith. I’ve often wondered how these stark stances draw more people to the singular Figure discussed in every song and sermon—or whether the division is a repellant, more about the denominators than the Divine.

I’ve observed (and at times exhibited, TBH) a similar level of religious passion that many financial firms, advisors, and gurus have about their respective investment philosophies. Active vs. passive, efficient vs. inefficient, aggressive vs. conservative, ETF vs. fund, traditional vs. alternative, private equity vs. hedge fund, fee-only vs. fee-based vs. commission, and don’t get an advisor started on whether annuities are virtue or vice!

Interestingly, the missing ingredient in all this debate is the client’s needs and wants. While every advisory firm on the planet will tout its “client-centric” credentials, I’d wager that most of those firms are in the business of imposing their investment doctrine on their parishioners, rather than helping each individual investor craft a genuinely personalized portfolio.

That advisors would apply a systematic approach to investment research and implementation is not a bad thing. But might it not be a better thing if as much care was taken in learning about the investor than the investments? And is it possible that what is optimal for one investor may be vastly different from another?

I think most advisors who’ve been in this business for any length of time would acknowledge openly that the lives, personalities, careers, families, needs, and wants of their clients vary greatly. But they may have to go off the record to admit that so, too, should their portfolios.

The problem is it’s really hard to scale a blank canvas approach to investing, while templates and models make it much easier. I submit that the secret to finding such a solution is to shift our framing from investment characteristics to human characteristics.

For example, I’ve never met a client who was born with an innate need to overweight small-value companies in pursuit of besting the S&P 500 by basis points. But I’m sure you remember Maslow’s “hierarchy of needs” from high school. Well, a collection of psychologists and behavioral financiers (Lola Lopes in 1987 and Hersh Shefrin and Meir Statman in 2000) have documented a theory known as SP/A that seeks to translate our human needs to economic needs for Security, Potential, and Aspiration.

“Security, much like the bottom-most rungs of Maslow’s hierarchy, represents the most primal financial needs as is rooted in the emotion of fear,” write Dr. Daniel Crosby and Chuck Widger in their book, Personal Benchmark. “If we are able to provide and account for the Security bucket, we will be less fear-based and better able to make rational financial decisions.”

In the SP/A model, Potential references our general hope for financial flourishing while Aspiration addresses our drive for achieving specific financial goals. “As opposed to the fear-based emotions underlying Security,” Crosby and Widger suggest, “Potential and Aspiration are driven by a hopeful outlook.”

While hope is where we’re heading in investing, students of behavioral finance will recall that fear is a more powerful motivator by a factor of roughly two-to-one. This may be where the financial industry has especially failed—in making such a strong case for investors to earn more (if you invest with Advisor X or Firm Y), rather than first addressing the fear of loss. It’s as though most investment pros are fixated on the “P” of SP/A with little attention paid to “A” and even less to “S.”

So, what would the equation—or portfolio construction—look like if it were truly client-centric and human-first?

In “Investing in the Language of Life,” I offered a framework for investing that deconstructs portfolio construction to ensure four “buckets” are at least addressed, if not filled. While their order of prioritization could be different for each investor, here is a list that is designed to apply the SP/A wisdom:

· Protect – Protect your family, lifestyle, and property.

· Live – Provide a predictable source of income to ensure provision in the present.

· Grow – Grow your assets to ensure provision for the future.

· Give – Give to the people and causes that are important to you.

The Protect and Live buckets are designed to address investors’ security needs in the immediate- and near-terms. With the fear factor addressed, investors are then freed to pursue their potential more effectively with the Grow bucket and target specific aspirational goals—like paying for kids’ education and generating a legacy—with the Give bucket.

The real key to maximizing this framework is to ensure deliberate—and I would argue, distinct—satisfaction of each of the needs. In other words, you don’t just have the bucket conversation and then throw everything in a 60/40 portfolio. In order to realize the benefits of the Protect and Live buckets, in particular, it is best to have specific investment mechanisms for each that connect the dots for our clients.

For example, I’m a huge fan of equities, but they are a crappy asset to throw in your Protect bucket, excepting the rarest of exceptions. And this is where we, as advisors, are forced to consider assets and asset classes that may not be our personal favorites, but are entirely appropriate for helping build a solid foundation to a client’s investment plan.

Yes, as true fiduciaries, we must represent our clients—not a product set or even a particular investment philosophy—because the optimal optimized portfolio isn’t the one engineered through any degree of back testing to perform a particular way in any number of hypothetical scenarios to beat an arbitrary market benchmark. Nope, the best portfolio is the one our clients can stick with, in service of their personal benchmark.

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