Journal of Financial Planning: August 2011
Ross Levin, CFP®, is the founding principal of Accredited Investors Inc. in Edina, Minnesota. His new book Implementing the Wealth Management Index, published by Wiley, will be available this fall. His e-mail is ross@accredited.com.
It was the night before a golf tournament and I said to my daughter, “Thirty-six holes over the next two days is a lot of golf. Every girl out there is going to have a few blow-up holes. How you respond to those setbacks will determine whether you will make it to state.” The next day was blustery, and I was 50 yards behind her (the required distance since coaching is not allowed) as she teed off and hit a beautiful drive right down the middle of the fairway. She parred that hole and proceeded to five-putt the next hole and take four putts on the one after that. As she stormed around and tried to hold back tears, she looked over her shoulder to me and mouthed, “I quit.” She was one-ninth of the way done. Her game improved a little bit, but her body language didn’t. By the ninth hole, I had enough and left.
That night, she called from the van back to school and asked whether I could meet her to practice putting. I said, “Sure, but what happened?” She said that the conditions were bad, everyone shot high scores, and she was in sixth place (the top five make it to state). That night, she putted for 45 minutes. On the car ride home, I could not resist the obvious teaching moment. “Vera, I want you to ask yourself how your attitude served you today.” She quickly replied, “Dad, it wasn’t my attitude, it was my putting.”
I think this story perfectly describes wealth management. It is both our putting and our attitude. It is our putting in the sense that we have to be technically sound in order to deliver good advice; it is our attitude because we have to believe with our clients in the long term, even as the short term gets in
the way.
My book Implementing the Wealth Management Index, published by Wiley, will be out this fall. I tried to update a book I wrote 15 years ago and found that I was better off starting over. Although the concept has endured over the last decade and a half, I have way more client and professional experiences from which I have learned. I also have developed some beliefs that have helped shape me that I want to share with you.
Belief Number One: I’m Never the Smartest Person in the Room
There isn’t a smartest person in the room. And believing in false prophets is especially dangerous in this business. There is a ton of smart people who share their views with us. Some of them make us feel like idiots because they are so self-assured in their analyses. Really listen to them and accept some of what they say. Their ideas are not answers, they are possibilities. Even if their possibility works out, it doesn’t mean that it was right or that it was the only answer.
We hardly ever consider alternative histories. This is an extremely important concept with which to become comfortable, because it is the single thing that separates the work we do from what a computer does. We all have decision points that will have an impact on our careers, our clients, our businesses, or ourselves. Try not to look at these as right or wrong decisions based on the results but rather on how the decisions are reached. Think about some of the major life decisions we make when we are least equipped to do so. Our career and our life partner choices are often made when we have little wisdom. It’s amazing to think how often it works out rather than to focus on how often it doesn’t. Sometimes it works out because we got lucky or made a good choice. Other times it works out because we are committed to making it work. But don’t confuse a good result with a good process.
Our practices evolve in the laboratory of client relationships. We react to reinforcing feedback that leads us in certain directions. Whether the feedback is conscious or not is our choice. I try to spend one day a week without client appointments (and often away from the office) so that I can just read and think. Through this, I often discover new ways of approaching things and can critically look at whether I am in alignment.
The willingness of thought leaders in this industry to share their ideas is amazing. Every issue of the Journal is packed with concepts that can be incorporated into our practices. When I read a Bob Veres or Michael Kitces newsletter, I know that I will have something to think about. And when I attend a professional conference, I will learn from some great minds. But each of us is included in collective wisdom. We have to take all of these ideas and quietly discern what is most appropriate for who we are and the firm we wish to create. The answer is different for each of us.
It is even more dangerous when we think that we are the smartest people in the room. I know way more now than I did when I wrote my first book, but I know less than I thought I knew 15 years ago. I am really frightened by those who see their way as the way. I think (but don’t know) that one of the things that has helped us become successful is our willingness to receive outside feedback and make adjustments coupled with a real desire to closely look at what we may be doing wrong so that we can change things. Since we have been regularly reviewing what we are doing, it has helped us avoid sticking with mistakes so long that they compromise the firm.
Amos Tversky said, “It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.”
Belief Two: Everything Changes. Nothing Changes.
I ran into a woman I knew from college at her niece’s graduation party. I said, “Are you Wendy?” She looked closely at me and had no recognition of who I was. I said, “I’m Ross Levin.” She said, “You’re not Ross Levin.” So I guess I have changed. But everything changes.
This single concept is why I hate making irrevocable decisions with clients’ money. I know that one way to protect clients from outliving their money is through annuities, but I generally can’t get myself to use them. If a decision is reversible, I can correct it. If it is unyielding, I am stuck with it, even if life changes. I am not saying that people shouldn’t use these; I am simply saying that I can’t get comfortable with permanence in an impermanent world.
We have tried to work around this by creating buckets for clients. We use a cash-flow bucket for three years of income needs, a bond bucket for years four through eight (or 10), and a stock bucket for beyond. We fill the first two buckets when the third bucket allows us to do so. This does not “guarantee” an income stream, but it even worked for our retired clients during the lost decade of 2000 to 2009.
We all need to choose, but we can make choices where if we are wrong, we can fix them. Buying the wrong house may mean that you take a loss when you sell it, but you can still sell it. Being trapped is our own construct. We bought a home in a suburb that we thought we would love and quickly realized we were city people. We could not really afford the change at the time, but we made it anyway. Our choice was, do we want to live with this bad decision or reverse it?
One of the hardest things for me to handle is that our staff is impermanent. We won’t keep everyone we want. Over the last few years, three of our great employees moved back to their home towns. This was heartbreaking, but appropriate. No matter how much we hate change, it is going to happen.
You can’t believe in mean reversion and think that this time everything is different. Cycles are a fact of life. We keep looking for someone on the foredeck to call out either “all clear” or “trouble ahead,” but that is a momentary observation. Howard Marks writes: “Rule number one: most things will prove cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.”1
Belief Three: Doing Right Is More Important Than Being Right
We are dealing with the lives of many people—our employees, our clients, our families. And yet we are dealing in a business of uncertainty. This means that by definition some of the things we suggest will not work out. The only thing we can really count on is whether we are doing the right thing in the right way at the right time. I tend to think that if this is our overarching operating philosophy, it is only a matter of time before our putts start falling.
Endnote
- Marks, Howard. 2011. The Most Important Thing. New York: Columbia University Press.