Registered investment advisors know that finding equilibrium isn't simply 'the middle' but a dynamic shifting process using mind and heart

January 9, 2017 — 10:14 PM UTC by Brooke Southall


Brooke's Note: We all seek pleasure and avoid pain.  Thinking is painful. Thinking about how to reconcile opposing forces is agonizing. Getting rewarded for thinking in unbalanced terms is ecstasy. In these hard times, we are seeking political, financial and emotional ecstasy. But we should be wary of it. RIAs should go one further and embrace the moderation and balance with a new zeal. Get there before humility is fashionable. Seek first-mover-to-moderation status.

Extremism is so easy. 

I know. I am an extremist.

The New England Patriots, the Boston Red Sox and the Boston Celtics can pretty much do no wrong in my estimation. And neither can their fans.

You can guess my position on Deflategate, whether David Ortiz belongs in the Hall of Fame and whether Isaiah Thomas should start on the NBA all-star team.

But while such narrow-minded thinking has its place, maybe, in sport, it gets ugly fast beyond the realm of play.  

But devil has found its playground. People are either giddy with excitement that President-elect Donald Trump is about to take over or they are seeking professional help to deal with the shock. See: How Donald Trump jolted Sallie Krawcheck out of sexism denial, maybe, and the startlingly retro remedies she prescribes for young women.

In the investments business, the two hot categories are passive investing and extremely active hedge fund investing. Each has a totally different investing philosophy and extremely different pricing structure. See: T. Rowe Price plucks an RIA 'pain' expert from Vanguard Group to rethink asset management delivery

Flirting with extremes

The RIA business is also an industry flirting with extremes. There is a growth at the top offering ever deeper family office services. There is a growth at the bottom where fully automated services actually market the fact that it's people-free.

Taking one extreme or the other is so tempting because you always have the answer at your fingertips. There is a playbook. A platform. A spiel. A grid.

Exercising moderation is a tragic challenge. In an intellectual sense you are like a ship that never comes to harbor.

As David Brooks writes in his book: "The Road to Character," moderation is misunderstood.

"Moderation is not just finding the mid-point between two opposing poles and opportunistically planting yourself there," he writes. "Neither is moderation bland equanimity. It's not just having a temperate disposition that doesn't contain rival passions or competing ideas."

Making 'moderation' exciting

For your middle-seeking troubles, you have to explain the nuances. It's sure not sexy. It's messy and exhausting. It hazards sounding incoherent.

Yet arguably, it is the only attitude that has staying power and worth as a long-term strategy -- in life or as a professional.

In a column I wrote last week, Why 2017 dawns brightly for RIAs, an oasis of unflinching ethics in an ethics-optional atmosphere, I described how I would state the mission of my fictional Southall Financial Advisors in a sweeping sense.

"I started this firm because I wanted a place where I would feel safe sending my mother or best friend to receive financial advice that would make them confident about their future."

But I think, too, I'd be feel compelled to further explain the thought process that engendered that confidence. I'd say: t Southall Financial Advisors we seek to rob the investing process of excitement. We only abide zealous moderation. But we also moderate our moderation. We see danger in euphoria and opportunity when depression envelops."

What RIAs knew

David Brooks: he best moderate is skeptical of zealotry because he is skeptical of himself.

Right now moderation is out. The market is at a high. The political fever is high.

Yet the time when this edgy, raw extreme emotion looks as appealing as a gin and tonic at breakfast table can't be far away.

Brooks writes: "Moderation is based on the awareness of the inevitability of conflict. If you think the world can fit neatly together then you don't need to be moderate."

RIAs are still reaping benefits from the 2008-'09 financial crisis. Back then, the idea that we could get to 5,000 on the Dow was pervasive. The theory as the Dow Jones Industrial Average edged to 8,000 and then 7,000 was that the market averages themselves could act on the economy and vice-versa. A death spiral. See: Hiring 'ringer', Big Four wirehouses launch joint RIA custody unit to stem breakaway broker tide as its leader delivers a reluctant 'sorry' for the 2008 financial debacle

I know of no self-respecting RIA who bought into that end-of-days thinking even though no RIA had ever seen a financial crisis of that magnitude. It was an incredibly proud time for you fee-based advisors who report directly to the SEC and submit themselves to its rules. 

The battlefield left wirehouses, broker-dealers, 401(k) plans and mutual funds with much less to be proud of and the incumbents have paid, and continue to pay, the price. See: Fed up wirehouse advisors more eager to leave than ever, study says

What did RIAs know? Surely different investment advisors used different thinking to ride out the storm. I'd say, however, they all had a good understanding of deceptive signals being sent to clients and to their own minds.

Advising clients under duress

San Jose State Professor Daniel Kahneman shows that people can make intelligent risk decisions right up until they experience the downside of risk. The choice between taking $500 and having a 50% of getting $1,000 in the future is met with the decision to take $500. See: How a Vermont janitor's $8-million bequest highlights lessons for advisors found in Tom Stanley's bestseller, 'The Millionaire Next Door'

But offered the choice between losing $500 and a 50% chance of losing $1,000 or losing nothing, the majority of people choose the latter choice -- the opposite mentality of what they went for on the way up.

An unethical advisor or money manager could choose to play on those fears. An RIA will step in and prevent clients from allowing themselves to be victimized by such thinking that runs counter to their interests.

It takes one to know one.

"The best moderate is blessed with a spirited soul and also the proper character to tame it.," Brooks concludes. "The best moderate is skeptical of zealotry because he is skeptical of himself."

Still, I am dead certain that Tom Brady and the New England Patriots will crush the Houston Texans like bugs this weekend.

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FAA said:

January 10, 2017 — 2:03 PM UTC

Ever watch a game where the big under dog is hangin tough in the early stages- it may be tied, close or the dog may even have taken a lead? The dog rises to the occasion based on energy, excitement, adrenalin, effort...which only lasts so long. Once in awhile they pull a huge upset but generally the team with the better plan, implementation and consistency wins. The old blocking and tackling The investment business in not that much different and the long term winners do take the emotion out of it. That is why there are investment policy statements (IPS)- that's the blueprint providing discipline and guidelines for how an asset pool is invested...and it is actionable. It is also the document which tempers the natural tendency to chase the hot dot, the latest fad etc. This is not exciting- just blocking and tackling. 08 was really hard- but for those sticking to their IPS (rebalancing) did fine- those who let their emotions dominate lost! Maybe an advisor can hit that turn around, 3 pointer off the glass once in a while...but that isn't how you win the game

Paul Kingsman said:

January 11, 2017 — 6:10 PM UTC

Well said, Brooke. It's the person who can see the challenge of committing to the mundane as exciting and joyful and take that step. Angela Duckworth's book, Grit, highlights that often success comes to those who commit to an ideal and don't waver.; they take pride in doing the basics over and over, believing, then knowing, they're on the right track to succeed.

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