Compliance resolutions for 2010

I’ve had it. This year I’m going to do things differently. I’m going to learn from my mistakes. I’m going to chart a new course and follow it to become a better advisor; and a better me.

Forget the gym. I’ve wasted too much money not going there. Forget dieting. Doritos are delicious.

No, I’ve decided that this is the year I actually implement – and stick to – some very basic rules in my practice. If you feel so inclined, feel free to crib from my notes and do add these rules to your business. Like my trainer says, you should exercise with a group. Misery loves company.

Don’t Buy Junk

I’ve wasted too much time trying to find the best investment vehicle; whether it’s a stock, bond, fund, or whatever. As an industry, I think we spend way too much human, emotional and financial capital in the pursuit of trying to the find the best of anything. Frankly, it’s an easier task, and more effective, to simply identify and avoid the garbage. Junk is easy to spot. It’s expensive, has a dubious track record, a third-rate promoter, is usually tied to some hot idea or theme, and all of your clients want to buy it.

We all know that past performance is not indicative of future results: Except that’s not quite true. Some studies have shown that poor past performance is persistent. Junk stays junky. So keep the junk in the trunk.

This past year has put every investment product through an incredible stress test. The tide went out. We saw who was naked. And we don’t need to repeat those mistakes.

Quality investments are harder to define. And like trash, it can be a case of, “I’ll know it when I see it.” Quality is timeless. Quality is consistency. Quality is craftsmanship. When you review any investment vehicle, I think the two tests are: “Would I buy this for myself?” And then, a slightly harder question, “Would I buy this for myself, if I knew I would not be able to sell it for another 20 years?”

Many products may get through the first test. Far fewer get through the second. But it’s worth the effort to find the products that pass the test. In 2010 and beyond, we’re only buying quality.

Be More Boring

While my wife would say I’ve got this one covered already, in this case I’m referring to portfolio construction.

This year, the favourite flavour for our portfolios is plain vanilla. I like boring. Boring works. Boring is predictable. Boring doesn’t surprise, but it also doesn’t disappoint. Boring portfolios can outperform over time because they don’t get smoked in bear markets.

Experienced advisors know this. We all know that over a 10-year period, very few (if any) of our actively managed accounts have beaten even the most average balanced mutual fund. Despite all of our training, experience, education and constant attention, we suck when compared to the most boring balanced portfolio.

And that’s largely true because of the next truism: Clients won’t do boring. They fire you when you underperform. They’re not usually specific about what you’re underperforming, although I’ve found it’s usually something I call the “brother-in-law index,” as opposed to the TSX. When you underperform this imaginary index, clients think there’s always another fund, stock, policy, advisor, or horse that is a surer thing.

There isn’t.

If you doubt this advice, or think the hunt for the next hot stock, fund, or whatever is the solution for all of your client’s problems, then this summer I suggest you go and play golf with a senior. One round with an old guy and you will see a completely different game. I went through this exercise myself last July. I showed up with my Kaiser-sized woods, my offset, three-ball putter and my seriously expensive tournament golf balls. At the first tee, I adjusted the screws on my driver (I still don’t know what they do, but they look cool) and proceeded to drive a $5 golf ball deep into the forest.

My senior buddy took out a club made of wood and knocked the ball 100 yards down the middle of the fairway. He was on the green in four and one-putted for a bogey. Meanwhile, I’ve re-landscaped half the rough, delivered an outstanding (and very lucky) chip shot and finish in seven. This went on for 17 more holes and it taught me a lesson. My game was very exciting and fun to watch. His was dull and predictable. He beat me by 15 strokes.

This year, we’re investing like an old golfer. We’ll hit ’em where we can find ’em.

KYC – For Real

As advisors, we’re in the relationship business, not the investment business. We need to know our clients on a much deeper, more personal level. We all talk about understanding our clients, learning about their goals and challenges. Frankly, for most of our books, we know far more about what’s in the account than the person we’re investing it for.

This goes beyond the standard financial, occupation, risk tolerance and compliance questions. Who are our clients as people? How can we truly help them unless we fully understand them?

I recently had a review with a long-time client. We have a twelve-year relationship. During the conversation, I discovered that he likes square dancing. This had never come up before. Not once, in any conversation about his portfolio, investment strategy, review of tax issues or estate plans did we discuss a love of square dancing. And, it was our best conversation ever.

For clients, the market collapse of 2008 affected them emotionally as well as financially. Their retirement plans fell into shambles and their dreams started slipping away. Clients need us to build strategies specifically for them, for their unique goals, fears and circumstances. They need to trust that we know what’s best for them.

This year, my goal is to be the advisor my best clients expect and believe me to be. It’s going to be a wonderful year.