March 16, 2022

Behavioural Investing Series #5 – Transcript

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Behavioural Investing Series

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Fraser Jack
Hello, and welcome to this topic series on behavioral investing, we’re taking a deep dive into the client and advisor decision making process. My name is Fraser Jack. And in this the final episode rounding out the series, we take on not so modern portfolio theory, where we discuss the traditional strategic asset allocation or SAA, and how it compares with dynamic or risk defined portfolios, and what that means to your clients. If investment advice is part of your value proposition, then this episode is for you. Thank you for joining us again, this is episode five in our five part series, we are talking about modern portfolio theory. Now this is this is a classic. I might start with you, Katherine, the research show, you know, I don’t know maybe nearly 70 years ago, we had this thing and you know, it evolved over time modern portfolio theory. It came in it seemed like a great term at the time. But these days, it doesn’t say like it’s the it’s the term we should be referring to it as anymore. What are your thoughts?

Dr. Katherine Hunt
These days, it’s definitely all been thrown out the window. I read a blog post the other day that was titled nothing is real anymore. And it had all of just just the basic fundamentals all mapped against each other. And, and it does make you wonder what’s what’s going on, especially from a macro larger perspective. So the the model for modern portfolio theory is it still has some basic relevance, I think in terms of just just risk in return, you know, that, in general, that kind of basic overlay potentially still has some has some relevance. If we look at, say a cryptocurrency and new cryptocurrency, yeah, all the risk in the world, and potentially all the return in the world. Great, excellent, that’s easy. But for traditional asset classes, this is an absolute nightmare, we always knew that cash was a very risky asset class for young people. Because if we define risk as the chance that you will not achieve your goals, then obviously investing in cash is one one way to almost guarantee that young people won’t won’t achieve their goals because it’ll be eroded by inflation, and tax, and I’ll be going negative, how to achieve goals when you’re going negative, but these days with interest rates, where they are, etc. It’s it’s a it’s a it’s that discussion, but on steroids. And now for everyone, not just for young people.

Fraser Jack
Yeah, no, I think I think one of the things that we’ve guilty of in the you know, in some of the past advice in the in the the evolution around financial advisors that, you know, we’ve sort of hang our hat on this, it’s been easy just to stick with one portfolio there to understand, you know, this defensive and growth assets, and there’s an arc and that law works like this, and it’s probably going to come back to Patricia, I really love what you said one of the previous episodes around, you know, you know, we’re talking about tools, and in today’s world, and today’s today’s advice is very different. Because, you know, we’ve never had what we have today. What are your thoughts around this? And, you know, how do we bring this investment conversation to, you know, around board and portfolio up and describe it with clients and in a way where we might have other things to look at other asset classes or other conversations to be had, but it’s just very difficult to to make it fit within those the traditional boxes of financial advice.

Patricia Garcia
Yeah, I think there’s a lot of complexity here. To be honest, I think it’s a little bit of a Pandora’s box. You know, what we will say in the previous episode about what we consider defensive, not being so defensive anymore with boats for example. But then what do we use you stead. So it is actually quite a difficult period that we’re living in. We’ve never experienced anything like this before. So it makes it really difficult, obviously, for investment managers, and let alone for compliance and to catch up, and then licensees and what’s acceptable, you know, for us to recommend retail clients. So I think we requires, you know, there’s a lot that we need to be looking at. And more and more, we’re seeing some solutions to that. So for example, you know, allowing portfolios to have a higher range of tactical allocation, so that, you know, maybe back in the day, where there would have been only a 10% tolerance, you can see more of a 30% tolerance these days, again, very complex, and I think this is why we need, you know, different layers of professional, professional expertise. That’s why I believe that my job is not to be an investment advisor, as in when are there picking stocks or bonds or determining asset allocation or daily basis where they’re talking to clients, right. So you know, and then you’ve got other investment managers and experts that you lean on, and different product solutions there. You know, as time goes by, we’re seeing different products come to the market, they have different approaches, and they can address different issues, I guess. So I think we just need to continue to evolve there with the solutions that our product providers are giving us to address the complexity, complexities of investing these days.

Fraser Jack
Yep. Now, Catherine, I wanted to ask you about something that you mentioned the previous episode, regarding, you know, with, with risk profiling, and the complaints that have come out of this area with people saying I was in I was I didn’t know, and I was put into this thing. And, you know, it’s not put as per my risk profile. And then the relation ship with risk profiling tools, you know, there might have been out of date or whatever, but then being such a, you know, growth defensive basis and having to stick within those types of realms. It especially when interest rates are so low,

Dr. Katherine Hunt
it’s a nightmare scenario really is, and it’s been built off the back of I think, 30 years of quite high unrealistic expectations of returns. So I’m not sure when it was, but it definitely was a time when the balanced portfolio was 50% growth assets and 50% conservative assets. I’m sure there was a time, I don’t remember it, but I’m sure it exists. And but there was for the last 20 years or so might be a bit extreme, but a balanced portfolio is now 70%, often 70% growth and 30% defensive. And that includes in the industry funds, who are you know, in theory there for their members. And so not only is that kind of asset allocation, an issue, potentially, in the current climate, but also the classification of what is defensive or conservative asset. So if you’ve got cash returning zero, with inflation at 7%, or 5%, doesn’t really feel hostile. Well, there’s not much tax on zero, I suppose. But that is how can that be ever classified? How can a guaranteed negative 5% Return be classified as a conservative asset? If anyone said you, okay, you invest in this thing will guarantee that you lose 5%? Every year? They would say, Well, that sounds terrible. So there’s even just the classification of how we think about each of these asset classes, is a whole whole different discussion. And I think that plays in with, with shares, in particular, Australian and international equities with the evaluation scenario that we’re in, it really makes you think, Are they aggressive assets? Or, or are they gambling at this point? Like, how do we how do we classify each of these asset classes on our on a regular basis, and it’s not like you mentioned Patricia, it’s not really our job as a financial advisor to every day. We’re looking and calculating and trying to figure this out, there are people who it is their job, and it’s is our job to work with clients. So it’s a complicated scenario when you overlaid that with the importance of risk profiling, and how those risk profile in theory leads directly to the asset allocation, which leads directly to the returns regardless of crash or not. So it’s a it’s almost like a perfect storm.

Patricia Garcia
It’s a good point that you made there. Catherine, one of our biggest bugbears is the way that the face of assets are categorized, how there is no consistency or how someone can count balanced portfolio. And it’s a 5050. Or I’ve seen balanced portfolios together and there are like 88% growth. You know, too. How’s that allowed? What about? Yeah, so one of my biggest bugbears is there needs to be consistency between what’s defensive, what growth are the names that we give them, so that clients aren’t misled. There’s plenty of clients in what they think is about once portfolio balance, as the name suggests, should be 5050. Well, it’s not. So I think, yeah, we definitely need to address that. And that requires the government stepped in as well.

Fraser Jack
Yeah, I couldn’t agree more Patricia, on the naming conventions around, you know, what, what are these things? You know, all we’re asking for is consistency across the board. So it’s easy to compare apples with apples. But then if we also throw in, you know, dynamic asset, strategy, you know, tactical, you know, then the you’ve got, you know, risk defined and total assets is there’s all these other categories that are now sneaking in to conversations, does that just confuse the metaphor? Clients?

Patricia Garcia
Yeah, how long does the business drink? I think, you know, for example, do we really, really go into a two hour webinar with clients about our bonds, either different credit securities? Of course not. Right. So they need to know enough. But how technically you’re going to be, it’s important to also make sure you don’t confuse them. So I think that, again, I agree with Catherine’s comment, our job is not that’s not our job, the honors of that should be put back on product providers in how they classify their products, what the risks, there is their moment exactly, I get cash risky today, and essentially relying on them to build those products and have the right labels and for us to then build the right portfolios with the right labels, not for us to always, you know, always think of cash as a defensive, for example, it regardless of what the interest rates out, and inflation. So, I think, again, a bit of Pandora’s box, but definitely a lot of work, there still needs to be done with the product solutions that

Fraser Jack
we have. Yeah, and Catherine, obviously, you know, I feel like it’s a great idea that advisors have an investment philosophy, whether it’s, you know, we’re not investment managers, were advisors, or whether it’s where we’d want to do this. So we want to do their whatever that might be, for that to be clearly displayed on the label, on their website, in their passion in their enthusiasm before clients come in. And then clients can either buy into that concept as a value one of their values, or not one of their values, and they can detract from being a client of that of that advisor. Is that a solution for then people then for advisors to be able to say, this is where I hang my hat, this is my belief, this is my passion, this is my values is my, my, my thoughts on the subject. And this is where, and if I do that on the label, then we’re not really talking about so much around that, you know, you know, I should have done this other thing for the client, but I never do that. And going back to your comments before around, a lot of advisors have that bias anyway.

Dr. Katherine Hunt
So we know that it doesn’t matter what field you’re in. But the best success is probably going to come from a specific niche. So you’re going to be not trying to be everything to everyone, probably, you’re going to be marketing towards a specific niche. And I think that builds on the discussion we had earlier about really being transparent and upfront about what your niche might be. And your niche might be. Like I talked about myself, I started at the end of 2007. Great timing. So I’m very much focused on strategies, and I am overly conservative when it comes to clients money. And that is who I am. And I don’t think that it’s my job to get up in the morning and check the US markets, really, if it comes across my feed fine, but that’s not my job. And I think so I’m not an advisor anymore. But if I was an advisor, now, I would imagine that that’s the kind of positioning that you can acquire by being transparent about what your role is. So not necessarily in how I communicate to them what I don’t do, but in terms of what you do, in a positive sense. I think it can be so empowering. There’s so many really successful stockbrokers and they tell their clients, this is what I do. I pick stocks. That’s what I do. Don’t talk to me about your insurances. I don’t care. You don’t have an estate plan, not my problem. So talk to me about it. It’s not my specialty. Like my specialty is I’m going to pick some stocks for you give me some money and I’m going to get I’m going to pick the best stocks for you and get you a return that’s associated with your your risk tolerance. So they’re very upfront about what their niche is and what they can deliver to clients and And I think we can lose our way as finally as holistic advisors when we start to think that not only do we really spend a lot of time getting the clients to articulate their goals and their values, and we quantify achieving them, we set them up with a plan, we check in with them. Oh, and also, we manage every single dollar down to the T in an environment where, as you mentioned before, Patricia and cash and bonds are no longer really quantitative Lee defensive assets. Yeah, definitely.

Patricia Garcia
I can’t wait until technology can help us with that a lot more for simpler things to be honest. Like, for example, you know, if I have a client doing a regular withdrawal, and we’re doing it because markets are high, they don’t necessarily need it, you know, we’re paying down debt, it shouldn’t be my job to try to remember that I had a client that when the markets crashed, that had to stop the regular draw, you know, things like that, like that. proactivity. So I think there’s a lot of tools that technology should be able to help us we have to be proactive in not just reactive and have flags of things that we should be doing, from a time critical perspective. But yeah, it is not my job to try, remember. And I say that to clients, even say no, with clients that we regularly contributing or withdrawing, I say, I’m not going to remember, you know, we don’t have a list of clients, and we call them every day about what markets are doing, and we’re going to stop or start, it’s not our job. Hopefully, one day technology can help us with that. But at the moment, it’s not our job. But remember our discussions, and if you want to stop, and if something happens, come back to me, and we’ll do it. But I wish I could be more proactive. In essence, I think that there’s some work being done there. And but I’d love you know, technology to help us with that. So our job is to remember, you know, know, what the clients want have flags and triggers to help them with the behaviors along the way, it’s not about what markets are doing as such.

Fraser Jack
Yeah, fantastic. And I love that concept, that both those concepts of what I want about transparency, being an opportunity, you know, this is what I do. This is how I this is how I operate this what I do best and leaning in towards that. And Patricia just you know with yours, you know, your, as you mentioned many times throughout this, you you definitely help the client with goals and their goals on the management, you making their goals and dreams aspirations come true. You’re relating money back to them, you know, you’re not there as a fund manager, and leaning into that concept and explaining that to your clients. Thank you so much, both of you for coming on and chatting in the whole series. I really appreciate it, we often give the listeners an opportunity if they want to continue the conversation. What’s the best way of reaching out to you and continue the conversation? Patricia, if somebody wanted to reach out to you what’s the best way they can find you?

Patricia Garcia
If they just try to find me on Instagram or Facebook? Patricia Garcia shouldn’t be too hard. I think my Instagram is Patricia Garcia advisors is pretty easy to find. And then a website is your vision financial Comdata. You

Fraser Jack
fantastic. I love the fact that you’re on Instagram, not not not just that LinkedIn, the standard LinkedIn area, which is where I play, Catherine, if somebody wants to reach out. If someone wants to reach out to you, Catherine, what’s the best way they can find you?

Dr. Katherine Hunt
Yeah, I’m not as much Instagram icon as Patricia. So probably just a message on LinkedIn would be easiest for me.

Fraser Jack
Yeah, fantastic. And Kevin, you’re also working on a lot of stuff around the ethics in the ethics space in the ethics training space. So I look forward to seeing more of that come out over over time. Thank you so much, really appreciate your help with these episodes. Welcome back, gentlemen, to this conversation, we are covering off on the concept of modern portfolio theory. In particular, things like it’s a risk to find portfolios, we’re getting a little bit deeper into this conversation now where we’re starting to look at, you know, the investment world or the past versus the investment world of the future. Let’s cover Dan, Dan, you want to kick off on this one? What are your thoughts?

Dan Miles
David, I know has got a quote and and believes that Harry Markowitz gets blamed for unfairly and I completely agree with him. And I’ve published a few articles on this in that there’s a huge misinterpretation of what his seminal paper back in 1954 said, which was, the use of diversification, the use of assets that have less than perfect correlation combined together can lead to a result that is either the same level of return for lower risk or a higher level of return to the same level of risk. But at the end of the day, it was about risk management. That’s what it was about. It’s about risk management. He actually said in the paper. This is based on historical data. And when you look at the optimal risky portfolio sitting on the efficient frontier came out at a 6040 US equities and bonds solution. And then the industry took it and turned it into the 6040 portfolio that became prevalent throughout the world. It wasn’t Harry Markowitz, who did it and yet people blame him for it and yet he Never said that in his in his work at all. The thing that I like to point out and one of the one of the core principles of ANOVA is that the the concept of robust rather than optimal portfolios, I had a conversation with a with a very intelligent ex employee of mine who is a CFA qualified. And I talked about this concept of building portfolios based on risk benchmarks, not on capital market benchmarks, but on risk benchmarks, because it’s risk that can cause clients to have negative behavioral responses that can be value destructive, and can derail their entire the entire advice process, which is far more than just investing. And he said to me, yeah, but Dan, if you’re going to be using mental accounting and bucketing, you need to be combining portfolios for different goals, you’re not gonna end up with an optimal portfolio. And I said to this gentleman, yeah, but there’s no such thing as an optimal portfolio. Like, I never referred to any of the modeling that we have as an optimizer because it can’t like it can only optimize to the inputs. And yet the inputs, we know that they will not be exactly how things pan out in the future. They aren’t, they can’t. So we think that, you know, the, the concept of robustness is about, you know, we deal in a world of probabilities. And we can use advanced statistical measures to apply probabilities to outcomes, to build more robust solutions that can be distilled down into some fairly simple messages, you know, like, if the potential upside on an asset or in series of assets is really, really high, and you have a really high level of confidence in them, you know, you may want to concentrate a lot more of your portfolio in those. But if you’re in a period of time, such as now, where uncertainty is really high, and yet, the potential returns are very low. Because you know, valuations are high yields essentially don’t exist, you may want to be far more diversified. You know, that’s not rocket science, you can apply things like the killer criterion, and other very advanced statistical measures to do it. But they do boil down to some fairly simple concepts, which I think can lead to more robust portfolio construction. And I think building them based on risk budgets, to you know, you want to maximize the level of return within those those risk parameters, but benchmarking yourself to risk goes a long way to managing that client behavioral element that we started this whole conversation about in terms of goals based investing goals based advice.

David Bell
Yeah, then you’ve got some big themes to unpack there. And I might just start with this short story arc on just modern portfolio theory. Because I think where we want to get to is really asking ourselves is the CSI approach the right way forward for the advice community say, I’m glad you’re sort of defending proud Harry a little bit. So the modern portfolio theory, guys, so say there’s Harry Markovitz, James Tobin and Bill Sharpe, they’re all Nobel Prize winners in between them all. And sort of over a period of nearly 15 years, they came up with this framework say, You’re spot on, Dan, that really what Markovitz said, is driving that, yeah, there’s a framework here for maximizing return for a given level of risk. And, yeah, that makes sense. And then, between Tobin and Sharpe, they sort of said, well, if you identify this optimal portfolio, then you can use that in conjunction with cash or in conjunction with leverage and, and you know, why everyone should have that same portfolio and leverage it up. And that those two things combined to pretty much bond portfolio theory, what it doesn’t consider, and they’re pretty or open and honest about this. And that’s the thing, academic research always is, is very narrow in a specific area with lots of exceptions put to the side because I just want to explore a particular arc. So Dan’s point about imports is, despite on say, garbage in garbage out, if the efficacy of using that framework comes down to how well you how the quality of your inputs are, it doesn’t account for transaction costs, assumes normal returns. But even with those three things, you can probably still manipulate the framework and use it well. And then you get things like, difference in the liquidity of different investment opportunities. So think about private market assets. Now, it’s only a lot more complex. And then you got term effects. So you know, that whole frameworks This is a single period framework, yet some people making a one month decision, rather than making a 20 year decision. So that starts to get really messy. And then finally, you’ve got um, you’ve used the word intertemporal. A few times dance, I love that word, but try not to use it along with stochastic the now that you’ve you’ve sucked me in this this intertemporal decision. that. And what that means is that you’re going to be updating your decisions through time, you know, each, each period of time you’re going to reassess what’s on offer, the opportunities in the market should be reassessing your goals as well. You reassess your plan and you, you put it in place. And yeah, that really steps outside this framework. Once you do that, it’s it’s really stepping fully outside that framework. So that’s the journey of bond portfolio theory. And then somehow, you know, Vice industry, I think, particularly in the US grab that. And so say the 6040 portfolio works really well. And to be honest, for the last 30 years, I saw some research the other day, that sort of shows it still has outperformed a lot of financial plans. The question now is, is wherever you can, we can all adopt the behavioral bias of anchoring ourselves to something that might have worked for the last 30 years? What is the right approach moving forward?

Fraser Jack
Yeah, that’s a really interesting point for both what you mentioned there, but also what Dan was saying before about optimal portfolios, it’s very easy to find the most optimal portfolio if you’re looking backwards, isn’t it? You can certainly find that which could have been better at the time. Just just in that, then if that’s not necessarily the right answer moving forward, what you know, what, what can we start doing and what can we start looking at, then?

Dan Miles
Well, I think to begin with the question of where the SAA portfolio, will it be appropriate going forward? We will already know what the benefit of hindsight. But if we just think of some fairly simple things that have, when you mentioned 30 years, I’d say 40 years, I’d say since 1981, you’ve had this period of you know, high starting yields on bonds, low valuations on equities, you’ve had expansion, you had both predominantly monetary, looseness that has allowed a tailwind in the majority of asset classes. And we’re at a point now that, you know, I find it very hard to see how that 40 year tailwind can persist for an extended period of time. And so I think a solution going forward is more about being a lot more dynamic. I mean, if you talk to an advisor, engineering client, about you know, what’s in their portfolio, the client doesn’t care if you stick into an essay or not, or they want as the outcome, they don’t, they don’t care what that what they want is for you to give them what it says on the box. And so I think that’s where, you know, some solutions are, should be based around this concept of trying to build robust stability in the face of uncertainty, using, you know, statistical probability, probabilistic methods to try and say, Okay, well, we don’t know what the future is, but we can probability Wait, based on the evidence that’s available. You know, yeah, in hindsight, it probably won’t be the best solution, but at least we can tilt stack the deck in our favor, so that we’re going to be more likely to end up getting a better result. And on top of that, we haven’t gone and done something in terms of the risk associated with the portfolio that blows up the whole behavioral concept that the client has gone through, which is why which is why I founded my firm and which is why we push this this this concept of, you know, portfolio is built around risk benchmarks, because, you know, they allow for robustness, they allow for managing to risk irrespective of the environment, like if we have another 40. tailwind, okay, fine. But if we don’t, okay, that’s fine, too, it actually doesn’t matter. It’s because you met, you’re managing it to that risk amount that you’re trying your best not to breach, because that’s what’s gonna cause the behavior response from the client that could completely derail the entire advice, strategy. And then everything’s gone out the window.

Fraser Jack
Yeah. When you talk about when you say robust, you’ve mentioned a few times, it’s a really interesting concept. Are you talking more around the, you know, the risk side of that, or we’re talking about value type stuff? Like, what, what, how would you simplify that, that

Dan Miles
I typify that in, robust as in under varying stress scenarios, that outcomes are within bands of reasonableness, based on what our client has defined that they can tolerate? You know, whether they are historical tests, or they are forward looking theoretical, stochastic tests. So, you know, you know, like a Monte Carlo simulation of a series of events based on inputs. You know, and you can invent things that could go wrong and how that could potentially affect the portfolio and building portfolios that are a bust under different environments. You know, rather you’ve got the Bridgewater Cross where they talk about economic growth, and then inflation and they talk about their four quadrants, we talk about six kind of blocks in our portfolio that is going to be reasonably robust in in each of those six, but probability weighting the fact that you don’t know the future perfectly, so don’t have all your eggs in one of those baskets, you know, risk weight, the allocation and tilt towards the one that the evidence is telling you is the most likely to occur. And as the information changes, be prepared to change, which comes back to that systematic approach that I referred to earlier. And having some hedges in place in case you’re wrong, because you invariably will get stuff wrong.

David Bell
It’s, it’s I agree with that framing of robust approaches to portfolio and the how you’ve described it, Dan, and I do think it’s a great approach. And I, I just probably found an observation there that there’s a unique opportunity for advisors to do that compared to the superannuation industry, because superannuation industry has a lot more peer group evasiveness about it. And robust portfolio approaches sort of mean that you may not be the participate fully in the most attractive the most upside scenario, because you’re spreading, you’re taking decisions to ensure that you do well in other scenarios, as well do acceptably well. And there’s a little bit of a give up there, you translate that to a peer group the industry in nearly got to pick which scenario is going to be the one that most likely evolves and, and pay for that. So you don’t underperform your peers and say, there’s a great opportunity for advisors to add at the system level huge value to their clients. By adopting approaches like what Dan’s described,

Fraser Jack
it sound like we missed out on having that conversation in the first, in the first episode, we talked about biases that peer group conversation.

David Bell
Yeah, yeah, dominate my life for a while.

Fraser Jack
There’s a lot of comparison, isn’t there about top quartile or, you know, top percentage or whatever it might be?

David Bell
Yeah, so Dan did touch about, you know, the timeframe of your process. I think that’s important. You’re sort of seeing this evolution of SAA with like a dynamic asset allocation approach overlay. And then you sort of have to say, well, actually, I’m just going to be fully dia might be an extension to that. And then what we’re seeing institutional world is sort of emergence of this jargon called total portfolio management approach, or the total portfolio approach is sort of where you no longer having sort of silos across the portfolios into saying, well, here’s my current portfolio, I’m constantly going to be trying to take that portfolio and risk return adjusted basis or a robust, or whatever sort of philosophy I use into a better place, and becomes a whole of team effort, which obviously has cultural challenges to it. But that’s sort of where the institutions are heading down that ta approach, what I always find interesting with the DA type approaches, what’s as you get shorter and shorter, personally, I find it harder and harder to have really quality insights into markets. So how do you sort of tie that up, and maybe Dan has some more insights there, I do sort of feel like, if you’re active in USAA, there’s lots of value that can be out there, because some of the framings that I might use, like, yields is an indicator of bond returns and, you know, P E ratios as a long term indicator of equity market returns. So things I’m Be careful of the biases here. But yeah, I do have a little bit of anchoring on I think they do provide useful foundations, as I get shorter timeframes. I can’t find much anchor on that. Dan’s a practitioner in this space.

Dan Miles
Yeah. So I’ll have to involve some of the some of the stuff we do we, when it comes to modeling and comes to forecasting, we do it over three different time horizons, we look at the short term, you know, not 12 months out the medium term and the longer term out to 10 years. And you’re right, in the short term, it’s very difficult to find things that can necessarily be particularly useful. So you know, we’ve done a series of tests and have found some substantive evidence in regards to a few things that that are prevalent, and some of them are known, such as things like short term momentum, for instance. And things like mean reversion over a 12 month time horizon, well, generally, that’s not a particularly good component, but over over the medium term, yeah, that that that makes it that makes a very big difference and frequently can have a great it can have an inordinate influence on the distribution of the results that you get with that when that reversion actually occurs. So in the short term, we actually combine some quantitative components, like I mentioned, momentum along with qualitative elements where we use common leading economic indicators, we take, each individual has their own individual views that they then put forward based on the information that they’ve got available to them, they started out as equal weighting kind of amounts that are weighted towards it. And then those that have shown that they have maybe more efficacy in one area than another might get a slightly higher weight in, in their input. But the short term component is always apparently going to be a shorter term element to what we do in terms of return forecasting. It’s in the risk forecasting that I think that we can do a lot more in terms of short term. And you know, without divulging too much, and getting into too much technical detail about higher orders and moments in return distributions and the anchoring of valuation and stochastic volatility. There are tools and methodologies that can be used to manage risk in the shorter term while still having that medium to longer term investment horizon and sticking to that as your philosophy.

Fraser Jack
Yeah, the philosophy is, is the word that probably sums all this up, isn’t it because as consumers or clients in a way, we just talked about a lot of information around SAA from TA to dynamic to risk to find we’ve got all these different terms that we’re using, and almost struggle, you know, as advisors and planners to get their heads around them in the first place. And then have clients so expect to understand though that information in inter Yeah, certainly there is a lot of different translations to simplify things on the way on the way through,

Dan Miles
couldn’t agree more couldn’t agree more. In fact, we’ve tried to build solutions with names that it’s pretty easy to they’re just they’re self explanatory. Things like risk defined, who has a good risk Devine because they’re defined by risk? You know, why do you call that a lifestyle preservation portfolio? Because it’s designed to preserve your lifestyle? Why is that a wealth creation portfolio? Because it’s designed to create wealth? Why is that an aspirational portfolio? Well, that’s for aspirational goals long term was, you know, you fill out a risk profile, you’re talking about people with their cars earlier, a colleague of mine mentioned that he thought the names, you know, conservative and balanced. They mean little, you know, he knew somebody sat down and fill out a risk profile questionnaire, and at the end of it, it said they were conservative, conservative, I drove a Porsche 911, how am I conservative, you know, so, trying to use non jargony stuff, that doesn’t mean anything and make it a little bit simpler. But by adding to it, I’ve, you know, maybe we’ve made it simple, but maybe we just added more noise? I don’t know, we’re just trying our best.

Fraser Jack
So the maybe you should do this a challenge to enter name, your portfolio’s after different types of car. So we probably use that sort of circles back around to the beginning of maybe why modern portfolio has been so successful for so long, is it was fairly easy to understand.

David Bell
Yeah, I think yeah, there’s, if I’ve sort of tried to describe some behavioral biases of of the advice industry as a whole, it would be a simplification bias. And you can serve a there’s probably two reasons why it may have occurred, one to create communication, simplicity, and the other property to create business models simplicity, and hopefully, it’s the former dominating the latter. But I think yeah, best advice practices would be advancing your processes to deliver better client outcomes, but really improving, improving improving your communication and framing techniques to clients. And if you can be nice on the journey together, then the quality of advice can only get better and better.

Fraser Jack
Yes, so what you’re saying there to me is an advisors, you know, their, their, their philosophy, and their bid that you know, whether it be the advisor or the planner, whether it be the business philosophy on what they’re doing. And as we said before, around communication and around technology around embracing that and be able to put as much information and content whether it be videos or blogs or podcasts or whatever about that as a thing as a thing that your business does and and the belief that you’re in and the buyers that you have and the way that you do things, for then consumers to be able to listen to that and go yes, that’s the type of person I want managing my money or thoughts.

Dan Miles
Yeah, I couldn’t agree more. We first started our business. I said, Guys, 50% of our job is to run clients money, the other 50% is to communicate with them and tell them what we’re doing, why we’re doing and how we’re doing it is just as important as actually managing the money because if they don’t understand, you know, David’s David’s ambiguity, which is how you make us bias, ambiguity, aversion. And as true advisors, and clients shouldn’t be putting money into things that they don’t they don’t understand, well, they’re not gonna understand them well without the education piece and and as you’ve mentioned, Fraser, there’s been some phenomenal technological advancements that and tools that have been made available to advisors now that they didn’t have 15 years ago that the embracement of just makes this, this idea of communications and who people want to work with, and why they would want to work with them. So much easier for the consumer to make that decision, but also so much easier for the practice to be able to deliver. And I firmly believe it is the role of the people providing product solutions, such as ourselves is to aid in that process is to help with that process is to is to provide, you know, these eight, whether they’re solutions, or it’s content or information, that’s not just to go and sell you your stuff and sell your idea, it’s to help educate, because you’re in a position that you may have vastly more information, and evidence to be able to provide that, you know, advisor, their world is just so huge, their covers, they have such a massive gamut that they need to cover, you know, helping them out. That’s the least you can do.

Fraser Jack
Yeah, I agree. I think that’s definitely a massive call to action for advisors and planners listening to this series in the idea of understanding what your philosophy is being able to communicate and be able to educate your clients on it, bring them along, and understand their, their beliefs and biases, and how they fit with yours. Gentlemen, we might wrap that up. Any final thoughts? Before we go?

David Bell
If I actually come up with one word, I’ve banned myself from big words that would be revisiting. So the ability to engage and revisit with your client and account for new information account for new market updates, the interaction of goals and with the investment outlook, and yeah, that’s going to keep reinvesting in the quality of the relationship and the quality of the outcome that the client receives, say, yeah, hopefully revisiting these multiple revisiting points or through that process.

Fraser Jack
Evolution, then

Dan Miles
I hope that we haven’t just provided the listener with problems that they picked up on that there are solutions out there that if they agree with these sorts of philosophies, there are there are tools, there are providers, there are things that they can do to implement their practice, if they feel it’s appropriate, to provide a better solution to their consumer. And, you know, as David just pointed out, that ongoing, that ongoing relationship with the client can be stronger and stronger and stronger by by taking this sort of approach, as opposed to treating things just as a compliance exercise. I think there’s a huge value add that can be made there not just to the consumer, but also to the advisors business itself. Yes, absolutely.

Fraser Jack
None to the opportunity. And of course, always, we as always, we give our listeners the opportunity to continue the conversation. Polly, we’ll start with you. What’s the best way if somebody wants to continue this conversation that they can reach out to you?

David Bell
Or thanks for opportunity? Fraser? Yeah, we’re contactable. David Bell at the Connexus Institute of David Dugdale at the Connexus institute.org.au. So we’re independent philanthropically funded Institute. There’s already a lot of open source materials on our website that your device world’s Welcome to pull down it probably have been targeted a little bit more the institutional world but yeah, they’re there. There’s, there’s learnings there. And all these things can be adjusted and framed up the right way.

Fraser Jack
Yeah, wonderful. We love great resources, then what’s the best way that people can reach out to your your team,

Dan Miles
the easiest places to go to the ANOVA website, I double N ov a AM. So Nova asset management.com.au. Again, we have a plethora of, you know, quarterly and monthly articles and information available there as well as phone number contact list. And on the x y forum, you know, one of the members of my team, well, if somebody reaches out, we’ll be happy to engage and get back to them. And whether it’s me, or it’s somebody who’s more appropriate than me to speak to them. You know, we’re more than happy to speak to people about things

Fraser Jack
fantastic. And I do I do know about a little tool that you have to for helping helping advisors calculate goals.

Dan Miles
Yes, yes, really? Yes, we do. We, we’ve, we have built a calculator to help and we’ve got some exceptionally good feedback on that, that helps helps clients understand and recognize and look at what things can look at look like into the future a nice and we’re going to go back to the big word stochastic framework where there is variability in the outcomes. And so therefore, there’s probability associated with achieving them. But it doesn’t need to be thought of as that complex it’s, it’s more about, you know, if you if you invest this way, if you leave all your money in cash when you’ve only got 400 grand and you’re 65, you’re going to run out of money by the time you’re between 67 and 69. But if We can invest it slightly differently. It might run out by the time you’re 66. But there’s like a 90% chance it’ll last well beyond your age. Which one which, which works better for you? I think those are those are pretty valuable conversations to have with clients. And they’re far simpler than, than some of the some of the other ones that go on.

Fraser Jack
Yeah, that’s exactly right. It’s always good to have tools that can have shout outs that make clients understand the ramifications of their actions. Gentlemen, thank you so much for joining us on this series. It’s been an absolute pleasure. Very enjoyable.

David Bell
Thank you guys.

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