Prudent Impartiality Invites You to “Own the World”

Objective, unbiased advice is the ideal that investors seek when consulting an expert for retirement planning. The popular press insists that only a person compensated through a fee-only agreement can provide such advice. Ironically, this misconception is itself a form of biased and subjective thinking. In fact, for retirees with less than $750,000, fee-only planning may incur more expense and more volatility than products which pay planners through a commission schedule.

The only way to determine which choice is the best for your situation is to examine both paths and make an informed decision based on numbers instead of prejudice.

If you seek objective advice, then you need an impartial assessment that exhausts all of your options. A prudent expert will dispassionately examine the vast universe of investment products in order to find those which will help you attain your objectives and reduce your risk through diversification. In order to examine all of your options, none can be eliminated out of hand. That paring process comes later.

Fiduciary Planning Takes a Holistic View

Since 1994, prudent investor law eliminated the entire concept of an “unsuitable investment.” Now, in order to preserve wealth, more specifically spending power, an expert has to push beyond considering a small universe of perhaps 3 – 4,000 stocks and expand her thinking to include some of the following instruments:

• Global Stocks (Across all markets, foreign and domestic)
• Mutual Funds
• Pooled money, such as Annuity sub-accounts
• REIT’s (Real estate investment Trusts)
• ETF’s
• Government Bonds (Domestic and Foreign)
• Corporate Bonds (Domestic and Foreign)
• Options
• Futures Contracts
• Life Insurance Policies linked to Market Returns
• Short Term and Long Term Money Market instruments
• More arcane instruments, like Warrants, Limited Partnerships and Hedge Funds.

Rather than asking if these are suitable, the advisor needs to evaluate each in terms of various risks and possible rewards, always keeping in mind that the reasoning must be documented and reasonable. Risk in these instruments entails more than just looking at volatility.

Expert Advisors Ask Hard Questions

• Does it help to capture equity risk premium across the span of the investment life?
• Does it work towards reducing the overall volatility of the portfolio, or does it require other investments to help mitigate its extreme volatility?
• If it’s a managed product, can we evaluate the manager without relying solely on performance measured against the SP500?
• If it’s contractual, what are the business risks as well as the value of the guarantees or terms?

It’s not unusual for a particularly diligent advisor to use pools and other instruments to devise a portfolio of literally hundreds of stocks in order to provide the income and protection that someone would need for a 30 or 40 year retirement.

In case of a trust, the “risk tolerance” of the beneficiary is not a consideration. Certainly, market behavior will not change based on a widower’s opinion of the economy nor will the market behave particularly politely if many nervous investors participate. The risk tolerance issue involves the purpose of the portfolio, usually lifetime income and not how someone will feel as she spends it.

Conservative Investors May Violate Prudent Standards

Most conservative investors, guided by a subjective and unique feeling of what should be done with their funds, will exhibit a diversification bias. They will tend to select investments with similar characteristics even as they think they are diversifying. The bias shows up as a preference for Blue Chip or Large Cap Domestic stocks, national chauvinism and value (or growth) orientation.

Impartiality in regard to investments is one of five major differences between a prudent and a conservative investor.