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Customization is key to success

I have witnessed a lot of amazing things during my career in the financial services industry. Many of which create meaningful themes. Those on the positive side are that hard work, discipline and balance in our lives typically lead to a positive outcome (though not promised).

On the flip side, trying to get around any of these practices seems to be a path which quite often yields the opposite result. At times the outcome can be catastrophic. For instance, I remember an individual who showed a multi-million dollar net worth statement prior to the Global Financial Crisis. This person ended up having to draw on his children’s college funds in 2008 – 2010 to pay for necessities because he did not fully understand the power and pitfalls of leverage. This is an extreme example for sure. However, these experiences have made me even more passionate about sticking to the aforementioned positive traits, which when adhered to, generally increase a person’s probability of success rather than deplete it.

One of the areas I see this play out most today is when people choose an investment solely on advertised performance. This can be through TV, print, email distribution and/or from sources such as advisors, mutual fund companies and sometimes more dubious placed (see the Ponzi Schemes of the past… anyone remember Madoff?).

Fortunately most people I speak with are not already locked into an investment and are simply trying to find the best path for their family, business, etc. To these people I explain there are generally one of three paths they will choose from when evaluating their options in the marketplace today (this list is not exhaustive but is reflective of what I currently see the most often). Those being:

  • Do it yourself: you are responsible for everything (coordination, planning, etc.) but you have the lowest immediate out of pocket costs.
    • Pros: you have full control and keep your costs as low as possible.
    • Cons: you can miss out on opportunities available due to not having proper support if this is not your field of expertise. To use a medical analogy, it may be fine to treat a cold with over the counter medicine. However, if you have a bigger issue and do not have the proper care, a more serious problem could be brewing.
  • Model asset allocation: This is provided by most custodians today and can be considered a good path by those who are more hesitant about paying advisor fees.
    • Pros: portfolios based on academic research are available for a lower cost than most brokers. This allows the investor in camp one above to move into path two with “lower costs.”
    • Cons: lack of customizable strategies. This is due to the portfolio construction being tied to risk tolerance which, in my opinion, is often subjective and can change daily. This can lead to investors changing strategies at the wrong time.
  • Customization: here you have strategies built for your specific needs. This is the space we sit in at Creative Planning, thus it should be emphasized that I believe in this being the best approach as people’s financial needs become more sophisticated. (Note: I cannot emphasize enough that in all cases working with a fiduciary, one who is required to work in your best interest, should not only be a top priority, it should be mandatory.)
    • Pros: customization of investment, tax and legal planning by a family wealth office utilizing specialists in each discipline.
    • Cons: typically, a higher cost structure than options 1 or 2 above (though not always the case). The expectation however is that the added services of tailored tax, investment and legal planning will offset the additional fee.

Sticking to the theme of this article, the rationale for utilizing a fiduciary who customizes your investment approach means there will be purpose when selecting strategies. The selection criteria then becomes tangible rather than subjective like a basic risk tolerance questionnaire. For example, adding short term bonds, CDs or holding cash may be beneficial for protecting immediate needs. Having a well-diversified stock portfolio however may be appropriate for the person who is looking to grow their money over longer periods of time and is willing to accept much wilder fluctuations along the way.

When the investor’s specific situation is the catalyst for the decision making process, it is much easier to look at the their lives and create a financial strategy based on where they are personally rather than what the markets are doing at that time. For instance, if someone has set aside 3 years’ worth of their income reserves in conservative assets they may be more comfortable when