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The Best Interest of the Client

Many unsophisticated Investors buying complex financial products commonly misunderstand their suitability in an investment portfolio.

There is a misperception that investment products promising high returns and the maximum amount of safety do not come with risk. Lifestyle risk is the chance that some investments may not reflect our needs nor synchronize with our future lifestyle. The reason is the current assumptions for our investments are too vague since we cannot possibly foresee future events that may significantly affect our lives. We must prepare to live with uncertainty. Do not be simple in your financial decisions. Not all poems rhyme and not all stories have happy endings. These include the loss of a job or a loved one or both. Investments should be pliable to adjust to the needs at different stages of life as well as meet any unforeseen events that may unfold that affect our health, career or family. Therefore, investors need to be aware that one particular investment (putting all your eggs in one basket) may not be the solution that procures a safe secure financial future.

“I took a test in Existentialism. I left all the answers blank and got 100.”

Woody Allen

Investment companies and advisors who work at these financial institutions have a responsibility to consider not only the suitability of each investor but to carefully consider the appropriate diversification of his other investments as well. Decisions an investor makes today can significantly affect his financial stability. If circumstances change, the original reasons why he purchased the product may also change. If you went to the doctor today the doctor might prescribe something for your current ailment. But the prescription will only address the needs you have now because neither you or doctor know what your needs will be twenty or thirty years from now.

Since the great credit crisis of 2008, there has been a growing aversion to risk that has seen the creation of investment products that purportedly mitigate the risk of owning equities. Some of these products may come in the form of variable annuities sold by insurance companies. They were created to ameliorate the normal fluctuations associated with owning equities for a risk-averse investor. Because investors ( in their effort to avoid any loss) sometimes illogically assume that a severe market downturn would render them poverty-stricken and penniless. The thought of suddenly having daily meals at a soup kitchen would make anyone skittish.

There are far-reaching reasons for this, too. One is Hegel's axiom that “the owl of Minerva spreads its wings only with the falling of the dusk.” Since the financial crisis in 2008, fears have been stoked by the hot irons of mistrust created by the misdeeds of some stalwart Wall Street bankers.

What are the most important things we need to understand when we make an investment? It certainly should not be for the return they will provide you. The investments we make should reflect the lifestyle we wish to fulfill. As events in our lives unfold and our lifestyles change, the needs of our investment should reflect this. How is it possible to make an investment decision today based on your needs over the next thirty years? It’s like driving a two-seater convertible with your in-laws and children to travel on a family vacation. It’s a great automobile but it does not suit your lifestyle. We face lifestyle risk when changing careers or raising children who eventually (hopefully) leave the nest. Will the investments you make today offer any flexibility in case you lose your job or the availability of another person’s income? There are so many variables in life that we couldn't possibly foresee what may occur over the coming decades!

If we wish to avoid fear and uncertainty, our previous biases and behaviors need to be explored to better understand which investment process needs to be undertaken. Is the monthly check you receive from your investment company the only validation you need for a successful investment experience? It shouldn’t be. It should be a combination of many things including the flexibility that enables you to make changes in unforeseen circumstances.

What worked yesterday doesn't always work today.”

Elizabeth Gilbert, author, Eat, Pray, Love

Our primary residence is a good example of an investment that is multifunctional. It is a living, breathing organism of the labors, talents, and expertise we put together to purchase it. Like good little squirrels we saved to buy it! You can borrow against it, make improvements to increase its value or you can choose to sell it to move up to a larger or down to a smaller one. In other words, we can control what shelters us to meet our needs as we journey through life. The investments we make outside our homes should also reflect our current needs and objectives. The investments we utilize should have the same characteristics as we journey along the path we call life.

It is fair to say that salespeople at insurance companies and other financial institutions serve an important role. They facilitate the availability of investment information as well as products that may be suitable for various investors. However, great care should be taken when we invest. Attention should be given to the amount of upfront and deferred commissions, performance, and annual fees charged.*  Also, these investments should provide liquidity to meet unforeseen circumstances.

In contrast to the rather loose requirement that insurance companies make things suitable for the client, The Rules of Conduct establish the high standards expected of certificants and describe the level of professionalism required of certificants.

1.4    A certificant shall at all times place the interest of the client ahead of his or her own. When the certificant provides financial planning or material elements of financial planning, the certificant owes to the client the duty of care of a fiduciary as defined by CFP Board.

Due diligence must be the ultimate factor in the financial wellbeing of a client. The problems investors will face in the future can and most likely will be different from what they face today.

Joan was a retired teacher. She attended a retirement seminar to help her decide how to invest her 403B plan at work. The discussion addressed annuities which promised guaranteed rates of return. The salesperson at the seminar discussed rolling over her entire pension into an annuity. Joan discussed this with her accountant and the accountant suggested she seek a second opinion. she came to me for that second opinion. When I met Joan her she appeared to be very concerned about how she supplements her income in retirement. Joan was also very concerned about running out of money after she stopped working. Her health was uncertain and she was distressed by the loss of her husband a few years ago. When I first met her, I noticed the expression on her face was one of great concern. Like many widows, she was alone and frightened about her financial future. She told me about going to the dinner seminar and putting all her money in one investment. Many investors are not aware of the full consequences of an investment and are whistling past the graveyard. I reassured her she made the right choice to get a second opinion. The dignity and rights of women who have experienced the effects of poor health, the loss of a spouse through death or divorce need to be respected.  

I reassured her it was important to attend the seminar dinner to get educated. Investors have a responsibility as well. Many people buy a financial product and it doesn’t work out the way they wanted it to and they are unhappy. I am reminded of the silent movie star Buster Keaton. In his short comedy skits, he would walk into a room, draw a picture of a hat-rack on the wall and hang his hat on it! Yeah, it may work in the movies but not in real life. An Investment may appear to look like the perfect thing that works, but you can’t hang your hat on it!.

Many people complain it is impossible to be educated about investments when they have little time to learn about investing. I say to them the word impossible is found in the dictionary of fools! Everyone has the responsibility to research their future financial goals and to carefully consider the lifestyle they would like to have. I think most investors spend more time researching the purchase of a refrigerator than learning about investments. By looking at ordinary things we do today and educating ourselves we can change the way we look at things and create extraordinary opportunities in the future. Investors need to be treated with compassion. Their investments may not meet their needs during times of unforeseen events. We work hard for our money; there is a price to pay for everything.


 *Wall Street Journal, Getting Smart About Annuities, April 18, 2009

Tags: financial planning, retirement planning, financial security, annuities

Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
Information provided in this blog is for educational purposes only and is not intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with own financial advisors, accountants, or attorneys regarding your individual circumstances as needed. No advice may be rendered by Arcadia unless a client service agreement is in place. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

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