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Five Fingers Apart Are Not As Strong as When They Come Together

posted on

December 05, 2013

In the old definition of investment advice, a financial advisor would try to forecast investments. In the new definition of investment advice, a financial advisor helps clients capture capital market rates of return by determining a client’s risk tolerance. Based on this information, a financial advisor can help structure the client’s portfolio in a way that effectively achieves the appropriate risk exposures.

There are 5 key parts or “fingers” to this process of the new definition of “investment advice” (Source – Dimensional Fund Advisors :

  1. Diversification
  2. Education
  3. Discipline
  4. Cost Efficient
  5. Holistic Approach

This old adage “Don’t put all your eggs in one basket” has been around for many years. Clients should invest across a wide range of asset classes that make the most sense for their individual goals, time horizon, and risk tolerance. 

Never stop learning – education is a requirement. This goes for both advisors and clients. Clients should have a clear understanding of how markets work and how to capture market returns. The role of a financial advisor is to help clients understand that forecasts and predictions do not work and are typically costly. The role of a financial advisor is to help clients act on intellect instead of emotion – facts instead of emotions. Most of Wall Street and the majority of media promote a short term perspective. Magazine articles, headlines, TV programs are all about hype and often distract investors from long term goals thus destroying discipline. 

Maintaining discipline is crucial if an investor is to effectively capture market returns. Too often investors abandon their long-term strategy in response to events, media, or predictions about the future. By going back to the science of investing and looking at facts, advisors can help clients/investors stay focused and disciplined. It has been said that in order to focus, one must eliminate distractions. What is the long term vision, what are the things that can be controlled, what are the facts? When advisors and clients focus on these things, they don’t get sidetracked from the distractions, the fear, the hype, the hiccups, the noise, and the fireworks (whether good or bad).

Keeping costs down and reducing taxes whenever possible can help clients retain a greater share of their investment return. When it comes to investing, costs matter and so do taxes. 

Taking a holistic approach means an advisor is not just interested in investment portfolios of our clients, but also with knowing them as people, what their dreams are, and what their fears are. People don’t care how much you know until they know how much you care. Investment performance is very important, but it is not enough. An advisor has to build relationships with clients based on trust. 

What happens when five fingers are apart? They can be effective but not very strong. These five fingers are not as strong as when they come together in a “fist.” When the five keys mentioned above come together, you have an investment model that works very well, has strength, and stays the course.