Advisor Blog

Big insurance companies have extensive investment portfolios that are critical to maintaining their financial strength and that are used to support their in-force insurance policies.  Of course, they depend heavily on the investment management expertise of their portfolio managers and they hire some of the best and brightest.  While reviewing one of their reports this week, it was interesting to note how the long-term disciplined investment strategy of one large insurer was described:

• Different asset classes will perform well during different periods and the performance of any asset class during a single period cannot be predicted with reliability.
• A broadly diversified portfolio is essential to help manage portfolio risk.
• Holding high quality fixed income investments allows the portfolio to invest in higher risk assets, including equities.
• Owning Real Estate Investment Trust securities (REITs) adds both return and real diversification to the portfolio.
• Owning higher-risk assets, such as equities, in combination with fixed income, reduces overall portfolio volatility while increasing returns over time - as explained by Modern Portfolio Theory (MPT).

What struck me as particularly interesting about this description of the insurance company's portfolio managment strategy is the similarity to ours.  In fact, most of the above statements can be found in our investment philosophy.  As we often tell prospective clients, this is how large institutional investors structure portfolios.  However, it is very rarely how individual investors or retail "financial advisors" do it.  In fact, I've read a few articles over the past couple of years that claim that MPT is dead.  Hardly.  At least, not among some of the largest investors in the world.

Dave Smith recently read this book and thought that it was quite worthwhile.  The author, Charles Farrell, is an attorney and investment advisor who has written for CBS Moneywatch and Investment News. 

The book presents a series of simple formulas for managing most important aspects of your personal finances by calculating ratios related to savings, debt, investments, and insurance.  Following this methodology provides an objective view of the health of a financial plan.  The Wall Street Journal described these formulas as "some of the best tools we have seen for gauging where you stand."

The author also understands investing and wisely suggests ignoring Wall Street, the financial press and commissioned salesmen.  There is a well written chapter that discusses what to look for in a financial advisor, the "alphabet soup" of designations in the financial world, and the importance of working with a fiduciary.

The book is written in an approachable and easy to read style that is appropriate for most individuals. 

We all are guilty of saying that “it can wait until another day” about way too many things. I was so harshly reminded of that when a great man and friend that I know passed away from heart failure while skiing exactly one week ago today. David was 48 and lived a life that most of us would envy. He lead a life with few regrets, but his passing came way too soon and served as a vivid reminder to me to take an inventory of my life and make sure I can say the same thing if I had been the one in David’s position last week. Of course our firm is an Investment Advisory firm, but finances are really just one segment of the items on my checklist of things to review and should be for you as well.

David was in much better shape than most typical 48 year olds, but in all likelihood, I would not even be writing this today if David had made a yearly visit to the doctor this past year. I am so often guilty of saying, “I can wait to get my annual physical NEXT year which pretty much contradicts the meaning of an “annual” physical. This really hit close to home for me because my father, another great man who passed away too early, suffered a similar fate from being too busy and/or stubborn to see a doctor on an annual basis. Nobody is as guilty of this as me, so I am going to stop being a hypocrite and a finger-pointer, and will schedule my physical which has been not so annual, today.

We each have our items to inventory and some of us are better about doing this than others, but please reflect on your own checklist. David was a great family man. His life was lived with a real purpose and his funeral was a very inspiring testament to that. If we overlook one important item on our checklist, we may overlook something very important that could make a big difference to us and/or to our family. In addition to your health, your list might include your spiritual standing, your relationships with your spouse and/or children, among other things.

If you are a client or if you are someone who only reads our blogs, I hope I can get you to focus on at least one area (hopefully more) that you need to reevaluate or fine tune to help you and your family accomplish your goals. Obviously, our firm would love to help you with an inventory of your financial position and your goals and objectives in that area. It would be wise to do an inventory of the following items:

1. Do you have adequate life insurance in place if something unforeseen were to happen to you or to your spouse? 
2. Do you have your will in order to protect your family and your estate and does your will clearly state who will be responsible for taking care of your children if you were no longer able to instead of the courts deciding that for you?
3. Will you be able to retire at an age that you expect to and will you have the financial wherewithal to be able to sustain the kind of lifestyle that you anticipate or have the desire to when and if you finally decide to stop working?
4. Have you reviewed your investment portfolio recently to make sure that you are investing your hard-earned funds at a level of risk that you are comfortable with and that you are putting you and your family in the best position to be adequately rewarded for the level of risk you are taking? You want to make sure that you are taking what we call efficient risk (i.e., that you are being rewarded for each unit of risk that you are taking).
5. Do you need assistance with developing a financial plan? Do you make more than you spend or do you spend more than you make? Some of our clients need a roadmap to assist them in determining if they are on the path they think they should be on or if they are on one that will allow them to meet their goals and objectives.

The above list could easily be expanded by asking about whether you are maximizing your tax situation, are you giving to the charities that you want to in the most efficient manner, do you have adequate insurance in other areas like disability, property and casualty, etc. The list goes on. Just as I started out saying, David lived a very full life and was always thinking of others. I know his life is a big reminder to his friends that we need to do an internal checklist and I started mine this weekend. Please take the time to do the same and let us know if we can help you in any way.

Dave Ramsey isn't always right, but once in awhile he hits the proverbial nail directly on the head.  Yesterday's (March 4) edition of his radio show was a great example of this.  At about 43 minutes into the show, you can hear Dave discuss the virtues (or lack thereof) of whole life insurance, particularly expensive whole life policies from companies like Northwestern Mutual and New York Life.

He refers to whole life insurance as "the payday loan of the middle class."  If you don't get that reference, payday loans are a horrible product.  They charge ridiculous interest rates and take advantage of unfortunate people that need money to make it until they receive their next paycheck.  Many states are enacting legislation to help keep the companies that offer these products in check because they are so abusive.

Scott Maxwell and I listened to the segment again today and we ran the numbers to check Dave's math.  He's not dead on, but he's close enough to support the point that he's making.  Of course, a Northwestern Mutual salesman will disagree, and that's the problem.  The investment community points to terrible products like whole life and then uses a broad brush to paint all insurance products as expensive and awful - and all insurance agents as lying salesmen.  Conversely, the insurance industry tries to convince everyone that the capital markets are dangerous and evil and that the typical investor in them is doomed.  Of course, neither of these polarized positions is correct. 

So, the fundamental question is obvious.  Who do you trust?  It's time for some critical thinking.  Should you trust the insurance salesman that works for a particular company and only sells their products?  Is he going to tell you that another company's product is better than the one he sells?  He won't earn a commission that way, so it's unlikely.  Should you trust the advisor that only works with investment products?  Do you think that he will recommend an insurance product if it's right for you?  He can't get paid for it.  Will he place your best interest above his own self-interest?  What about a broker-dealer representative that also has his insurance license?  If he's paid on commission, will he recommend a product that pays him less if it's the right thing for you?  You'd hope so, but it certainly does not always happen.

The bottom line - work with an independent registered investment advisor that clearly discloses the way he is compensated and can offer both investment and insurance products.  In addition to the disclosure, registered investment advisors are required by law to put the client's best interest first.  This is the fiduciary standard that we've talked about before and it is a much higher standard than the suitability standard that applies to insurance salesmen and broker-dealer representatives.  Within our firm, Scott Maxwell, Greg Schmitz, and Bob Lamse are all licensed to work with insurance products under the fiduciary standard.