What Makes a Better Investor in the ‘New Normal’


Written by Jeff Mount

Monday,  June 22, 2020

Portfolio managers are often asked, “What’s your alpha?” The average investor might not be aware of what this phrase means, but it is asking “What makes you better than other portfolio managers?”

The traditional definition of “alpha” in the investing world refers to “risk adjusted return.” A higher number indicates more return received for the risk the investor took. A negative number indicates the investor took on more risk than they should have, given the paltry return received.

Many financial advisers also discuss “beta.” Beta is a measurement of an investment’s sensitivity to the broad benchmark (like the S&P 500). A beta of “1.00” indicates the investment’s value should move in lockstep with the benchmark. A beta that is lower indicates it is less sensitive to market movements and a beta that is higher than 1.00 indicates that the investment could move to a greater degree in the same direction than the benchmark.

These Greek letters are designed to help an investor make wise investment decisions. However, what is never asked of a financial adviser (and should certainly be asked) is “What is your theta?” Translation: “What value does your financial planning deliver at the beginning of our working relationship, during the critical points of my financial life, and during the funding of my legacy upon my death?”

WHY? Did you know that most financial advisers outsource at least some of the investment management, and some outsource all of it?!

Even if the adviser does do all of the management of the stocks and bonds, it is still fair to ask, “What is your theta?”

Although there are a lot of investors who don’t work with a financial adviser, they should consider how much clearer their financial future could be with assistance of one.

Financial planning is one of the most important functions between a financial adviser and the investor. It humanizes the importance of investment allocations, insurance policy recommendations, discussions around tax consequences, legacy planning, and overall risk management.

However, the financial services industry has become lazy.

Easy access to subscription based financial planning software programs allows financial advisers to engage in a conversation with prospective investors that is nothing more than input/output data collection of a canned, boilerplate financial plan.

These plans often run between 50 and 300 pages. However, the adviser usually spends time reviewing only about 5-7 pages. What is the reason for this? The other pages represent someone else’s idea of a financial plan!

The 5-7 pages that are reviewed are the calculations of the Present Value/Future Value figures that will help set the “goal posts.” This data is delivered through a combination of boring spreadsheets and old-school bar graphs that allow the viewer to follow the cash flow, but it leaves them confused over the strategic discussion moving forward.

Generally, the consequence of this confusion is mistrust. The investor doesn’t completely understand why certain recommendations are being made, which then prompts the question, “Is this person acting in my best interest or their own?” Input/output methods should be reserved for calculators but cannot be the method of real financial planning.


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