A Firm Foundation

Knowing how risky a portfolio is makes for better

When I speak to my former colleagues on Wall Street, I am amazed at the shift in their attitudes toward their businesses since April 2000, when the technology sector corrected after several years of robust growth. But beyond the drop in the overall value of the market, April 2000 is significant because it marked the beginning of a mass awakening to the concept of balancing risk with return.

In the heyday of the bull market in the United States, we were all excited to be involved with the financial services industry. Whether financial companies derived their revenues from management fees or commissions, the top line numbers grew rapidly despite price competition from technology-based upstarts. We all looked like superstars as most of the positions gained in the accounts we managed. Yet, in retrospect, we had our fair share of troubles the whole time.

The words were rarely spoken out loud, but there was always the lingering sense that we could not clearly explain why valuations were as high as they were on many of the companies in which we were invested. Even the boldest investors, if they'd learned anything from Wall Street's legacy, harbored some inexplicable fear that the macro events that could slow capital spending might ultimately undo all of our newfound gains. But that fear was easily pushed aside by the increasingly aggressive expectations of our clients. Of course, we could have always decided to take profits and pull out of the market, but many who did ended up leaving so much on the table as the liquidated stocks kept rolling on that the clients were naturally dismayed.

In this environment, investment managers continued to build bigger portfolios on foundations of sand, perpetuating a climate of sky-high valuations, slim deal allocations, and irrational exuberance. As long as money was being made, customers didn't care about other facets of the service they were receiving. Research became a corrupted commodity. Execution was hard to define as good or bad. And commissions or fees were always too high, even in a market where long positions gained almost daily.

When profits were the most important part of the client relationship and most people were making money, investors could not, or would not, differentiate between superior service and good luck. Now, all that has changed--but it is a change for the better.

Why? In the aftermath of a 17-month-long weakening of the market, you now have a great opportunity to build your assets under management. After learning the hard way that there is much more to sound financial advice than a recommendation to ride the bubble, today's investor will help drive a more efficient market. In this light, the rapid buildup and subsequent burst of the tech bubble could be perceived as the rise of the smart investor.

Fortunately, technology has kept pace with the growing desire of the smart investor to evaluate not only potential return but also the potential loss of an investment. Advisors who build their relationships on a bedrock of smart, prudent decision-making will find that these relationships last through both good times and bad. These advisors will benefit from the combination of a growth of powerful Web-based applications and a more sophisticated population of investors who have been tempered by a challenging market.

Avoiding the Obvious

In an up market, it is interesting to note that many investors will not discuss the downside--the constant, unspoken hazard of investing. Who wants to think about what you could lose? But smart investors do think about this. And attitudes are rapidly evolving to address the deficit of risk consideration in choosing investments. More importantly, investors now seem to be embracing the notion that they should have risk management at the portfolio level.

It's about time. Top-tier institutions have been engaged in the risk management businesses for decades. And no matter what the methodology, the applications available today can be delivered cost effectively through the Internet. They are able to deliver not just raw, unprocessed, fixed data but updated intelligence that is tied directly to a specific inquiry.

How does this impact the relationship between the financial professional and the client? Imagine being able to set up an account and map it to the investment objectives profile of every account you have, logging the information once and instantly recalling it to verify that the account is still within the parameters originally set. This is a positive step for all investors and it comes at a time when it is needed most. Only three years ago, this was impossible.

We are all looking for the best strategies, methodologies, and applications to break down inefficiencies that prevent us from maximizing the value of our assets under management. Are we being compensated for the risk we undertake? Are our expectations for return reasonable? Are clients receiving the best service possible?

As professional advisors continue to adopt technologies to truly empower wise investment decisions, how will the relationships with the customers change in the future? I believe that these applications are going to do more to reinforce the value of the interpersonal relationship than ever. Arguably, clients will recognize the new level of service that will be delivered with productivity-based Web applications. They will notice the ability of their financial professional to tie together via simulation such critical elements of wealth management as taxes, asset selection, and goal-setting. Moreover, this will begin to take place at all levels of the investing spectrum. The cutting edge of wealth management theory will be driven into practice not by a big name, but by the ability to offer customized service and positive results. Along with improved service will come a greater trust and in the long run, a more efficient market.

With the market where it is today and the lingering lack of conviction on the part of many investors, it is a rewarding time to be serving in an advisory capacity. Indeed, the need for professional services is more apparent than ever. By using productivity tools that can offer new perspectives in real time, the advisor can not only give a comprehensive brief on precisely where the account is relative to its investment goals, he can help galvanize his clients to make the kinds of decisions that fuel growth for all of us.

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