Taking Back Money Management

As early as the mid-1980s, someone with an eye on the securities industry could forecast the end of the “customer’s man,” otherwise known as the stockbroker. First the name itself seemed to disappear overnight, almost as if history had been rewritten. The broker morphed into an account executive, then became a financial consultant, and now, with some dispute with regulatory groups, to financial advisor.

Meanwhile, major firms were putting more and more restrictions on a broker’s ability to pick and choose his or her own investments. Perhaps more importantly, many in the industry had discovered that you simply can’t do a good job of both managing money and raising it, and so two separate jobs evolved: raising money and managing it. That separation is almost complete — but not quite.

Over the past year or two, I have noticed more advisors taking back the money management role. As far as I know, all of the major firms let financial advisors do some study, take some tests and earn a mandate to do some form of money management. Outside the wirehouses, I’m seeing a growing trickle of people giving up their securities licenses to become registered investment advisors.

And most recently, I have seen three extraordinarily well-written books written by working advisors who might’ve been called “brokers” a generation ago, giving their own counsel on how they manage clients’ money. The first of these books, which I’ll be discussing this month, is Investing on Autopilot by Robert S. Cable, available at WaterfordWeir.com. (I’ll talk about the other two, Ric Lager’s Forget the Pie! and James O. Lunney’s Surviving the Storm: Investment Strategies That Help You Maximize Profit and Control Risk During the Coming Economic Winter, in future installments.)

Investing On AutopilotI think Bob Cable’s book is useful for both advisors and investors. It is abundantly clear that investor knowledge of financial matters is extremely limited, if not nonexistent; one survey I saw some years ago claimed that 90 percent of investors could not tell the difference between a common stock and a preferred stock and 60 percent did not know the difference between a stock and a bond.

In the early pages of this book, Cable explains the fundamentals, going into detail on topics like what stocks and bonds are and how to invest in them. This should almost be required reading for clients, and it would certainly not be a bad idea for financial planners to have a stack of these books to give to clients who need an upgrade in their education, perhaps even marking required pages.

Frequently throughout the book, complex investment concepts are broken down into simple things almost anyone can understand. For example, Bob explains the concept of a bond by comparing it to buying a house for $300,000, renting it out for a certain amount of money for 20 years, and then selling it for exactly what you paid for it. These explanations and the stories Bob tells are by themselves worth the price of the book if you find just one of them helpful in your conservations with clients and prospects.

The Analytical InvestorWhen it comes to managing money, there’s no question that Robert Cable is an analytical investor. He has developed different strategies based upon data and historical research, and as such, he makes a very strong case that it is the investor’s behavior that gets in the way of investment performance.

To counter this, he has evolved a “rules-based” investment strategy. I have asked many different financial planners and financial advisors what their investment strategy is, and believe it or not, I often get incoherent answers or even blank stares.

If you do have an investment strategy, excellent. If you don’t, a thorough reading of Bob’s book with focus on the “Lessons” that appear in little boxes throughout the book, might be beneficial as you develop your own.

For instance: “And our goal in investing for income is always safety first. It is rarely worthwhile and often very detrimental to use one’s wealth to reach for higher rates of return on fixed-income investments by giving up security. It makes little sense to risk 100 percent of your principal trying to earn an extra 1 percent or 2 percent on your money.”

The RulesSince Bob Cable is an analytical investor with a background in science and engineering, it’s not surprising that his system is statistically oriented. He points out there are three ways to make predictions — and when you invest someone’s money, making predictions is exactly what you are doing.

Model 1: Rely on experience and intuition to make a prediction.

Model 2: Rely wholly on statistical prediction rules (data).