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Keeping Your Resolution to Build a Practice That is “Beyond Reproach”

By David Loeper

In last month’s column (December, 2009) I closed with a New Year’s Resolution for you that outlined the premises of true integrity. That resolution was:

I hereby resolve to build a practice that is beyond reproach and further resolve that in all communications with clients that I will not:

1. Omit any information that would be needed to make an informed objective decision
2. Overcome valid objections and I will, instead, acknowledge and reinforce their validity
3. Misrepresent biased information, research or analysis as being objective
4. Present the benefits of any approach without fully understanding and clearly disclosing the price, pitfalls, or uncertainties of the benefits hoped to be obtained

While it may be easy to say you are making this resolution, acting on it will require a lot of effort and objective self-examination that will, at times, be very uncomfortable for you. Think about these statements in collective context of one another. To fulfill all these together there are communications you will need to make that are rarely, if ever, discussed or highlighted to ensure clear objective understanding by the client.

Take, for example, something as simple as a decision to use active management or passive management. Regardless of whether you are an active advocate or a passive pundit, to honor your resolution you will need to highlight — and make sure it is understood — the potential pitfalls of your approach.

For example, if you are a passive pundit, you probably often cite the benefits of lower fees, the high percentage of active managers that underperform index benchmarks and, perhaps, also the lower costs of turnover and tax efficiency. You might even use examples of the active managers whose great track records ultimately turned sour. If you are going to honor your resolution though, you will need to also highlight the other side of the story. This would require you to disclose that you have no chance of outperforming appropriate benchmarks, there will be several active managers that will do so, that you are not going to attempt to identify those managers and the only reasonable expectation is for the portfolio to underperform appropriate benchmarks by the total expenses, lower as they may be.

Before you active activists get too excited about ethical passive pundits disclosing the downside to their strategy, you need to objectively shine a light on the potential pitfalls of your own approach. In your presentations to clients, you probably highlight superior performance records, your thorough due diligence and research, and your continuous monitoring. But, if you are going to honor your resolution from the same objective and honest context as the disclosures made by our passive pundit, you would need to make sure the client also clearly understood the flip side to your investment approach. This would require that you clearly communicate that the expenses are certain to be higher, that it is uncertain whether the performance will be higher, there is a risk of significantly underperforming that could be avoided, and even if better returns (or risk) are realized, this may not necessarily equate to any additional wealth (see my article “Winning By Not Losing”).

Regardless of which side of the fence you are on, omitting any of these disclosures (or relying on documents to do the disclosures for you) would mean you are violating your first resolution because one could not make an informed objective decision without knowing these facts.

As uncomfortable as highlighting these disclosures might be, our second resolution—acknowledging and reinforcing valid objections instead of overcoming them—helps to keep us honest even if we are not executing very well on our first resolution. But, this too is often difficult for us to do because our natural sales skills cause us to counter objections in an attempt to overcome them. Regardless of which side you are on, think about how you respond to valid objections and whether your tendency is to counter with a benefit in an attempt to outweigh the objection. Highlighting other benefits isn’t reinforcing the valid objection; instead it is an attempt to overcome it.

Think about the outcome and the choice you face in all of your communications and, at the root, what you might be afraid of that is causing you to not highlight the pitfalls of what you are presenting. Are you afraid that the client may not do business with you if you highlight the pitfalls? Instead of that being a reason not to emphasize it, in a practice that is beyond reproach it is the very reason you should.

David B. Loeper is the CEO of Financeware, Inc. which does business as Wealthcare Capital Management. An SEC Registered Investment Adviser with nearly 25 years experience, Loeper has appeared on CNBC and has been a featured contributor on Bloomberg TV and CNN.

Loeper joined Wheat First Securities as vice president of investment consulting in 1988, where he served for 10 years. He was promoted to managing director of investment consulting, and then eventually to managing director of strategic planning for the retail brokerage division. He left his position at Wheat First Securities in 1999 to found Financeware.

Active in industry associations throughout his career, Loeper has been a member of the Investment Management Consultants Association (IMCA) for over 20 years, serving on the advisory council for more than 5 years, most recently as chairman. Loeper was also appointed by the governor of Virginia to serve on the Investment Advisory Committee of the nearly $30 billion Virginia Retirement System. He received his CIMA® designation in 1990 by completing a program offered through Wharton Business School, in conjunction with IMCA.

Drawing on years of experience in financial services including serving as a fiduciary for all types of ERISA plans, Loeper has authored numerous whitepapers and books including the top selling book, Stop the 401k Rip-off! as well as The Four Pillars of Retirement Plans, Stop the Retirement Rip-off and Stop the Investing Rip-off