What You Wish Your Advisor Had Told You

by Benjamin Beck, CFP® Benjamin Beck, CFP® | October 11, 2022

You would think that the period from the end of 2007 and effectively all the way through to 2009, would be a terrible way for a new financial advisor to start their career. And yet that’s how I started my career, back in 2004, not knowing of course that we were about to head into the biggest financial collapse in history (2009) since The Great Depression. 

When I started out in 2004 the S & P 500 was at 1,174. Those years, especially the 2007-2009 timeframe, were filled with incredibly valuable lessons mostly about human behavior. When people look back and say it was a terrible thing to go through, while the real hardships that were endured cannot be disregarded, I would say as a financial advisor that time offered tremendous lessons on the psychology of money. 

What I learned about people’s behavior around money helps me navigate conversations to this day. When people come to me, they often want to apprehend the enormity of what's going on in the world. They want to know how this will affect their financial situation. Most of all they are seeking a financial advisor, a guide in whom they can believe. Oftentimes, not everyone but so many, are looking for assurances. Even though they rarely use these words, their search is for another advisor who can help them find a way to “never go through a market like this, again.” 

The sad thing is that this reassurance clients seek, is the thing that will get in the way of their long-term success. One of the failures of our industry is that even though we speak about staving off inflation, the 30+ years of rising living costs in retirement, the importance of diversification, we dance around the issue of equity volatility. Equity volatility is where you feel pain, and it’s what keeps you from staying in the markets. 

Whether you admit it or not, if you’re looking for a new advisor, somewhere deep down you have a false hope that this new person will tell you something that I know can never be true. You want your financial advisor to say that there’s some way out there for you to capture the enduring premium provided by the long-term equity markets, without having to experience the volatility. In other words, you want all the gain and none of the pain. Surely, there’s got to be a financial advisor out there, some product, some system, something that can offer you that. You just haven’t spoken to the right one! Maybe you meet someone that you think could offer you this, and you decide to work with them. But then, the next bear market comes around and you realize this advisor wasn’t the one for you, either. You start your search for the next advisor, hoping this one can promise you what you so badly want: certainty. 

The vicious cycle I just described to you, I am sorry to report, is a symptom of our profession. I see it practiced repeatedly. How else would our industry get people to accept the equity exposure that they so desperately need without masking the true magnitude of the equity volatility they'll ultimately have to endure? Then when the normal bear markets come along – occurring at the historical average of once in every five years – that’s when people flee in a panic and the same terrible detrimental cycle begins again. 

Our industry chooses to profit from this phenomenon, rather than address it head-on. By constructing various fool’s gold like structured products with downside protection, indexed annuities, absolute return funds, which effectively don't manage volatility at all, advisors and their firms successfully pander to your susceptibility to panic. As an industry, we are doing you a great disservice.

The 60/40 portfolio, for example, is celebrated as the vehicle that achieves the greatest return relative to risk. From a mathematical perspective, for every unit of risk taken, it is said to show the greatest amount of return. But I have questions about the application of this logic to real life. Because a portfolio with nearly half of its allocation in fixed-income securities, over three decades of rising living costs, does not create a lifestyle that sustains income for a client who may well live to be 90 years old or more. I ask myself, is the 60/40 portfolio just a placebo that puts your mind at peace today? Any advisor that is putting you in a 60/40 position is soothing you today, while maximizing the risk that you'll run out of money later. And speaking of 60/40, how does this allocation serve you in a year like 2022 when stocks and bonds fall in unison? 

As a financial advisor, how can I advocate that clients surrender the 40% of their portfolio that's in fixed income to the permanent long-term return of equities? All in the name of buying protection from the temporary volatility of those equities? Volatility is, in fact, the most valuable ingredient of all the things you need to achieve the results necessary to fund your lifestyle into your later years. 

The most important role a financial advisor needs to play is to prevent you from panicking. Getting you to invest in the stock market is the easy part. Figuring out how to keep to there is the hard work. 

But if you are to enjoy the permanent return of equities, not to mention the compounding effect on the growth effect of rising dividends over long periods of time, keeping you in equities is our most important priority. The only cure I have found for panic in volatile markets is to have overwhelming faith in the future.

Over the last year or so, the small handful of clients that have succumbed to panic in our practice didn’t necessarily do so because their investments moved down. Their investments had moved lower many times in the past. It seems to me that they made their decision to quit because of an overwhelming feeling of surprise. In other words, they were surprised that the reality they were experiencing was somehow different from what we had told them would happen. (Even though I will say that we make a practice of spelling out what will happen in the future, but most people, being human, tend to forget.)

Whether you are working with a financial advisor, or looking for a new one, if they are skirting the issue of equity volatility, particularly at the front end of the relationship – move on! I find that the advisors who tend to avoid talking about the inevitability of bear markets are the ones whose clients capitulate soonest. How many investors – perhaps even you – ended your investment journey during times like 2022, or during the 2008-2009 period? 

A good advisor will speak to you about equity volatility early on. A good advisor will not try to “protect” you from bear markets because the bear markets are what you MUST endure in order to get to your long-term goals. When I start talking to folks, I show them a chart of all the bear markets we have seen since World War II. By my count, we have had around 16 or so bear markets. Even though the technical definition for a bear market is a 20% or more decline, I am counting two dips that were around 19%. My chart shows declines in the S&P 500 that range from 19% and 57%. On average that’s a 30% or so decline, and if you do the math it comes to one bear market every five or so years. When I entered the investment business back in December 2004, the S&P 500 was trading at about 1,174. As I write today it’s at 3,693. Despite being at a 20% or so decline from the beginning of the year, your return in the diversified equity markets has been over 300%.  

If you’re the kind of person who decides to focus on that average one ‘bad’ year in every five, and choose to ignore the increase that is happening the other, say 80% of the time, maybe the stock market just isn’t the place for you. Because the temporary declines are unavoidable. Panic, though, in response to them is perfectly avoidable. Particularly when what's at stake is the independence you have earned by working so many years to build your nest egg. As you look to the future and admit that over the next 30 years the cost of living will double or triple (not knowing what inflation will be but going at the average historical rate of inflation it’s a pretty good guess), you have to also admit that equity volatility needs to be a part of your investment experience. 

Your financial advisor owes it to you to talk early and often about the intense bouts of volatility that you should expect to see over the 30 years of your retirement. In that same sentence, your advisor also needs to show you the utter insignificance of those volatile periods when it comes to the permanent return of those equities and the compounding effect of those dividends. 

You deserve to truly know what you’re giving up by getting out. 

Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.

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