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CEO Report: Commitment to Excellence

November 6th, 2013

By Jeff Petersen CFP®

There are many important components to our successful wealth management strategy, but one of the key components took center stage last month. On October 14, 2013, Eugene F. Fama was one of three awarded the Nobel Prize in Economics along with Lars Peter Hansen and Robert J. Shiller “for their empirical analysis of asset prices”.


While I have participated in one Robert Shiller lecture, I have not had the pleasure of listening to a Lars Hansen lecture. I have had the opportunity on numerous occasions to talk with University of Chicago Professor Fama as well as listen to him lecture several times due to our strong relationship with Dimensional Fund Advisors where he sits on the Board of Directors.


We believe that it is important to understand and keep up to date with the latest research in the wealth management field as well as discern whether there is a real world application for the knowledge. Professor Fama’s research expands well beyond the Nobel Prize winning research on asset prices but always has a consistent theme: “risk and reward”. In other words, there is no free lunch with investing. To benefit from his research you do not need to time the market; in fact, you would be doing the opposite (taking on additional uncompensated risk). What Professor Fama and Petersen Hastings have in common is the desire to determine when the reward is adequate for the amount of risk being taken by the investor. As one of our long-time clients likes to say, “is the juice worth the squeeze?”.


There are many investment land mines to locate and steer clear of while investing, some more obvious than others. The cost of one bad decision can set a wealth management plan back years, if not a lifetime. An example of an obvious risk to avoid is a Ponzi scheme (avoid by always having an independent, financial stable,  custodian). Some of the more subtle ones include but are not limited to: a non-diversified portfolio, paying commissions, fee-based advisors (as opposed to fee-only), suitability advisor (vs. fiduciary), missing an investment policy statement, and lacking a comprehensive wealth management plan (roadmap).


As a former teaching tennis professional, my job was to help students reduce the occurrence of unforced errors, mistakes that are either from lacking the fundamentals necessary to strike the ball accurately, or from trying to hit a high risk shot. Many times an error was due to lacking a “game plan” to follow against a particular opponent. Tennis is referred to as “a loser’s game” since most players have a greater number of unforced errors versus winners in a tennis match. One of the classic books comparing tennis strategy to investing, a book that is required reading for many investment professionals, is “Winning the Loser’s Game” by Charles Ellis. It is now in its 6th edition.


As part of our Evidence Based Analysis, our process of reviewing a prospective client’s existing portfolio of investments that is managed by another advisor (or self-managed), we uncover some of the most interesting investment decisions. Usually the investment decisions have nothing to do with the investor’s goals and objectives, but rather are a collection of “investment du jour”. When we ask about the investment plan, usually we find that there is not a plan!


In summary, there are many risks that are opaque in nature but may result in significant cost to investors. Our response is to identify these risks, determine if the reward is adequate for the risk being accepted, and then communicate the results and our recommendation to our clients. Part of this process is to partner with organizations like Dimensional Fund Advisors that provide us with world class research. We are grateful to Professor Fama for sharing his knowledge with our organization and congratulate him on being awarded the Nobel Prize in Economics!