A Cautionary Tale for Financial Advisors


Years ago, I had a good friend who ran a very large and successful branch of a NYSE brokerage firm. At the time, that firm’s stock did nothing but go up. I recall visiting with him in his office and, in the course of discussing my favorite topic—asset allocation—I asked him about his own allocation choices. Despite his doing a tremendous job of prudently allocating capital for his clients, his own portfolio was a disaster in the making. It was highly concentrated in the public stock of his employer: It was in his 401(k), his long-term incentive plans, his IRA and his taxable accounts. Since the firm was doing so well at the time, his net worth ballooned.

We all know how this story ends. The secular run-up in this type of stock inevitably ends for precisely the same reason it went up: premise hired is premise fired.
Knowing this, how then should financial advisors consider allocating their wealth? First, we must examine what most people see as their most valuable asset, which is the flow of income we derive from our employment or business. This income stream has a very straightforward net value calculation and it is a relatively straightforward process to assess and hedge its mortality and disability risks through insurance. But the risk doesn’t end there.

Other risks include causal factors that could make these return streams increase, decrease or cease altogether. For financial advisors, this is market volatility affecting the value of financial securities. If our income return stream is correlated predominantly to financial asset values, does it make sense for us to cling to the traditional weightings of these types of assets in our portfolio? My argument is that it does not. This same analysis and risk assessment applies to all investors when we carefully analyze the amount and timing of their income streams and the corresponding risks.

Look, I get the arguments. Some advisors say that we should own what we recommend. Put our money where our mouth is. I will take the other side of that debate. I think we should speak candidly to our clients about precisely why we don’t have the same allocations as they do. Furthermore, we should do the same NPV and risk assessment for them.

To me, this is not a matter of alignment or “skin in the game.” Rather, it is a discussion about allocating wealth appropriately for each individual. Which is the perfect segue to the heart of my message: Asset allocation cannot and should not become so programmatic that it ignores the totality of the client’s individuality. It transcends net worth, age, risk tolerance and investment horizon.

These days, my friend has suffered a massive decline in net worth and was forced to retire at a fraction of the lifestyle he expected to have in retirement. A life’s work was wrecked by over-allocating wealth to what he understood and cared for the most—and that was the very premise that destroyed his retirement plans. There are many people in the energy sector today who are likely experiencing the exact same thing on the eve of retirement. It is a cautionary tale that bears repeating: A portfolio must be allocated as the culmination of a meticulous assessment that identifies and hedges risk in all identifiable forms … and you can’t do that without taking the individuality of the client into account.

Frank Muller

As CEO of Provasi Capital Partners, Frank Muller brings nearly 30 years of experience in building and managing multi-channel distribution services. Frank has been a featured contributor in numerous industry publications, bringing his unique insights and perspectives to relevant issues impacting financial advisors and their clients.

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Frank Muller