Millions of people swear by Waze as their go to driving navigation app, I am not one of those people. My wife and friends are constantly trying to convert me to Waze by telling me about their satisfaction: it has the best UX, best real time updates, the algorithm optimize drive time, notifications for potential speed traps, etc. While I do not doubt the capability of the technology, I simply prefer Google maps. Even if I occasionally add 2-3 minutes to my trip, I know my preferred app is not going to take me down side streets or shortcuts with which I am not comfortable or familiar.Â
During a recent road trip, I was thinking about the parallels between navigation and portfolio construction. Over the past 22 years, I have been privileged to engage with some of the most brilliant asset management minds in the world. Their understanding of asset allocation, manager and security selection, risk tolerance, and tax efficiency is unprecedented. Regardless of their mathematical precision and vast portfolio construction experience, sometimes clients and prospects are still displeased with and decline to implement their recommendations. I contribute this disconnect between investment management prowess and client satisfaction to 3 key factors:
Failure to factor in that which we cannot quantify: building a portfolio is much like engineering or architecture in the sense the equations need to balance. However, when it comes time to present our recommendations, a client’s comfort level is really the only determining factor which leads to implementation. You cannot quantify investment preferences that are guided by: personal values and beliefs, family history and dynamics, non-negotiables which clients are not willing to sacrifice for any amount of money. Such factors are often overlooked in pursuit of balancing the equations. These factors becoming even more important when you understand clients rarely say exactly what they think and feel or do what they say they are going to do.Â
The curse of knowledge: as the expert, financial professionals often get mired in technical speak and jargon when explaining investment recommendations. We must constantly remind ourselves that what is simple and obvious to us, is not so to our clients and prospects. I would wager not a single retail wealth management client has ever agreed to move forward with a recommendation based on its information ratio or Sharpe ratio. Making the complex simple begets clarity which begets comfort which begets trust and confidence.
Sacrificing the present for the future: For true portfolio optimization to occur, the spending-saving continuum skews almost fully in the direction of saving. A common illustration of this point is the example of making your coffee at home in the morning instead of buying that $5 cup of Starbucks. The hypothetical shows that if you did this for 40 years and invested that money at a 9% return, you would generate almost $1 million in additional retirement savings. Most people are willing to delay gratification to an extent in the pursuit of their future goals. However, most people I know are not willing to give up their daily coffee, occasional dinner out, or family vacations in pursuit of potential future portfolio gains. Oftentimes financial professionals do not take the present into account as much as their clients would prefer.
Like all people, I want to arrive at my destination safely and efficiently. What I am not willing to do is careen through parking lots and neighborhoods to shave a few minutes off my drive time. Financial professionals would benefit from a better understanding of what their clients are both willing and not willing to do in pursuit of optimizing their wealth. Sometimes the road less traveled is less traveled for a reason. Take the time to find out why.  Â