Emotions Are A Key Reason Why People Do Not Make Rational Choices

As members of the human species, we are subject to cognitive biases that enter into our decision making processes that might test the boundaries of what some might consider to be logical. 

I have a 5 hour (plus) flight coming up on Thursday, my RBC Avion visa rewards got me a flight for $0.00 (43,671 points). That is one way, economy. When I went to book my seats yesterday, Air Canada, in their kindest and gentlest sales manner, offered me a Business Class seat for an additional $700. Visions of leg room, bigger seats, no hassle luggage,  free beverages, easy exit, etc. (creature comforts) dangled in my conscious thoughts, tempting me to be completely irrational, defeating the whole purpose of accumulating those points.

Behavioural economics: those that wish to sell to us know exactly how to get us (most of us).

As humans we are vulnerable to pain: physical and emotional. The minute we have an ache we are off to the doctor, the drug store or the massage therapist or the psychotherapist.

But lurking in behind all the logical remedies to pain, or perceived pain, are the folks that have something to sell you and it is not necessarily medical.  Some will certainly be legitimate, real solutions to your challenges. However, there will be others wishing to exploit your pain or anxiety or need for something that they think that you will want (but not necessarily something that you need). 

Now bring that to the world of financial advice.

What is your pain?

For many, it would be the ability to ensure that they had enough money to live in the desired level of comfort that they wished for until the end of their days (i.e. not running out of money). Others might have generational and charitable goals for their legacies. 

But what is enough?

It is personal and specific. Everybody's needs and challenges are going to have different variations. So you have to determine what it is that you want and how you are going to best achieve it. It requires planning. If I let Air Canada convince me that my end goals and plans will be benefited by paying an additional $700 for some additional creature comforts in the short-term (that were not in my original plan) then I have taken a detour which will require something additional (sacrifice) to get me back on track sometime in the future.

If I let a financial advisor convince me to alter my long-term plan with something more exciting for some short-term, immediate gratification (risk be damned approach), I am going to leave myself more vulnerable to not reaching my goals. We  have to be very careful of what is motivating them. I can tell you from experience, if they are proposing a "one size fits all" type of portfolio, they are not looking out for your best interest, only theirs (because it is easier to manage and build scale and commissions). Beware of their conflicts of interest.

The fundamentals tell us that stocks are expensive. If 2019 GDP growth of about 2% was only able to generate 0.2% in 2019 S&P earnings growth. What kind of GDP growth will be needed to generate the analysts expected 9.5% of earnings growth required to justify that which is already built-in to stock prices for 2020. The International Monetary Fund is calling for 2020 U.S. GDP growth of just 2%. So the (rational) math does not quite seem to work.

If stocks are expensive, in time, they will return to being governed by fundamentals. That is rational. Jumping on the "you have got to own stocks because they keep going up" bandwagon is emotional.

Choose wisely.

Bad Advisors Coast To Coast

If you like juicy tales of  the bad element getting caught in their "cheatin' ways", try scrolling through the Investment Industry Regulatory Organization of Canada (IIROC) disciplinary cases for your entertainment pleasure. Here is one that caught my attention, just with the sheer number of allegations and the time period through four, count em', four different financial institutions: Wellington West, National Bank, Industrial Alliance and Aligned Capital and their respective compliance departments over a 7 year period. 22 pages of riveting tales of not knowing the clients, making unsuitable and unauthorized trades and losses in the vicinity of $1,000,000. All with clients  born before 1950 (i.e. older than 70 now).

Or for more harrowing tales, you can visit the Mutual Fund Dealer's Association of Canada Enforcement page and have a look at the bad things that some of those folks have been getting up to.

Do you know the one thing that each of the institutions under the self-regulating bodies have in common? They are not under any fiduciary obligation to the client. That means good luck getting any part of your losses returned to you in any kind of reasonable time frame. Even if the bad advisors are sanctioned and fined, the record of payment is dismal.

In an April 2019 press release, the Small Investors Protection Association (SIPA) stated: " Canadians are losing their savings due to systemic fraud and wrongdoing by a financial services industry that does not put clients' best interests first, disregarding laws or rules and regulations. It has been possible to defraud tens of thousands of clients for up to a decade as indicated by recent No Contest Settlements by paying fines to avoid admitting responsibility and litigation."

The Canadian Foundation for Advancement of Investor Right's (FAIR), "strongly believes that a statutory best interest standard is necessary, desirable and feasible, with respect to securities advisers, dealers and individual registrants in their conduct towards retail investors." but that current proposed amendments by the Canadian Securities Administrators (CSA)

"will not achieve the profound shift necessary to ensure Canadians receive the objective, professional financial advice that is needed and rightfully expected".

The CSA has their own enforcement division if you are interested in more investigative reading.

The point is, that unless your wealth management team is a discretionary portfolio manager (as we are at High Rock), you are going to be vulnerable and must pay extremely close attention to the advice that you are being given. Even if it is suitable at the purchase point, once past that, your advisor only need take a "standard of care", which does not legally bind him or her to ensure continuing guidance. In other words, once you buy it, you as the investor are now liable for whatever happens next. Losses are on you, not your advisor (unless of course the investment was unsuitable in the beginning).  Even if it was unsuitable, it could be years, if ever you are able to recover.

 What happens to your retirement then?

We know that our High Rock client readers understand this and hold us to our code of conduct. For all of you other friends that take the time to check in on my perspective (ranting, drivel, whining, etc.), give it some thought. The potential implications are huge.

It Is The Destination, Not The Journey

5 Years ago I made a change. I wanted to build a wealth management company that created a client experience that was a different and better alternative to the standard and antiquated bank and financial services industry.

I purchased a half interest in a Portfolio Management  company called High Rock Capital Management with the goal of creating a Private Client Division that would do just that. My business partner, the original founder of High Rock, Paul Tepsich and I had a very similar philosophy: We would invest our money in a way that we were comfortable with, that would see us to our end goals. Then we would invite those who wished to join us on our journey to come on board. A group of my clients chose to take this same path with us and as we approach our 5th year anniversary, we are thrilled to have grown our private client business by about four times its original size. We still have some room for those who have the desire for something different and better.

Our philosophy is simple: each client and client family have very specific and distinct goals, therefore their investment portfolios should reflect this. While our mandate is to invest for our clients in the exact same assets as we would own for ourselves, the percent weightings may differ to reflect the individual nature of each client strategy. This strategy is determined after an in-depth analysis of their financial circumstances and their long-term goals and is presented in a Wealth Forecast prepared by our Certified Financial Planning professional (Bianca Tomenson).

Most importantly we (at High Rock) have signed off on and adhere to the highest levels of integrity available to the investing public with our Voluntary Code Of Conduct For The 

Stewardship Of Your Wealth.

Friends, this is not exciting stuff. As I suggest on my Twitter profile (https://twitter.com/JSTomenson) : "Wealth and portfolio management is not about shooting the lights out. It is about slow, methodical planning to reach long-term goals". So if you want instant gratification and excitement, as the advisor and media cheerleaders offer, we are likely not for you. Paul, Bianca and I do not like to take risk outside of the parameters for achieving our goals and unless our clients express the desire for taking greater amounts of risk, specifically, our tendency will be to manage the risk first and let performance be determined as a function of the risk that we take. 

When stock markets are strong, as they were in 2016, 2017, 2019, we will under-perform them (because we run balanced portfolios). When they are weak, as they were in 2015 and 2018 we will out-perform, thereby protecting our clients from volatility and the more difficult to catch-up periods following significant down-side moves to asset prices. However, as per the chart above, we will out-perform over longer periods of time on a return per unit of risk taken basis (red circle). Oh and by the way, despite all the hoopla about stock markets in calendar year 2019, markets are up considerably less from September of 2018, just a few months earlier (but whatever, just a very small part of the much longer journey):

If you want to focus on the stewardship of your wealth which will take you to your destination, give it some thought. Personally, I would rather the journey be comfortable (you can sleep at night) rather than exciting, with a greater chance (less risk) that I will get myself to where I want to go.