Fix It Friday Ep. 27 - Two Roads In Wealth Management: One Often Leads To Success And One Derails It

• Financial planning should begin with clearly defined goals, not investment products.

• Past investment performance is not a reliable predictor of future results.

• Conventional portfolio strategies often focus too heavily on minimizing volatility.

• Inflation poses a greater long-term threat to wealth than temporary market declines.

• Purchasing power is the true measure of financial success.

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Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth LLC, Fusion, is intended for general information purposes only. No [00:00:05] portion of the podcast serves as the receipt of, or as a substitute for, personalized investment advice from Fusion or any other investment professional of your choosing. [00:00:10] Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Jonathan Blau: Hello everybody, and [00:00:20] welcome back to another episode of Fix It Friday. Today, I wanna talk [00:00:25] about something that hopefully will interest every listener, whether you're just starting out as investors or [00:00:30] whether you've been investing for a, a very long time, and whether you have tens of millions of [00:00:35] dollars or hundreds of thousands of dollars, should apply to everybody.

And what I'm gonna talk about is what I [00:00:40] see as the two roads in wealth management, one road that actually drives [00:00:45] success and one road that actually derails it. So let's take a look at that and get [00:00:50] more, uh, deeply into it[00:00:55]

Voiceover: Welcome to the Crazy Wealthy Podcast with your host, Jonathan Blau. [00:01:00] Whether you're just starting out or are an experienced investor, join Jonathan [00:01:05] as he seeks to illuminate and demystify the complexities of making [00:01:10] consistently rational financial decisions under conditions of uncertainty. He'll chat [00:01:15] with professionals from the advice world, entrepreneurs, executives, and more to [00:01:20] share fresh perspectives on making sound decisions that maximize your wealth.

[00:01:25] And now, here's your host

Jonathan Blau: Something today that I'm gonna talk about is something [00:01:30] that hides in plain sight in the wealth management industry, and the more you understand it, [00:01:35] the harder it becomes to ignore. Because when financial advice starts to feel [00:01:40] commoditized or interchangeable, one with the other, meaning one firm's advice with the other, [00:01:45] then it probably is.

A- and that's not surprising, because much of the industry [00:01:50] is essentially producing the same movie. They're just doing it under [00:01:55] different directors, different branding, different slide decks, different personalities [00:02:00] talking about it and presenting it, but underneath it all, it's the same basic playbook. [00:02:05] So today, I wanna walk you through the difference between that conventional wisdom approach, as I refer to it, [00:02:10] and the behavioral investment and counseling approach that we use here at Fusion [00:02:15] Family Wealth.

Because while the starting point when it comes to planning often [00:02:20] looks similar between what a behavioral investment counselor might, uh, say a- and a [00:02:25] traditional, conventional wisdom-based advisor might say, the outcomes can be, and [00:02:30] often are, dramatically different. So let's start with an important point.

Like most [00:02:35] thoughtful advisors, we believe deeply in planning. Real wealth management [00:02:40] should begin by helping clients define their objectives. What do you want your money to do? [00:02:45] Who's the money for? What's the money for? And when will the money be needed? are the three [00:02:50] questions I always ask at the beginning of every planning meeting.

Is it for your life, for your [00:02:55] family, legacy, for your future? And then once we get the answer to those questions, we [00:03:00] build a blueprint, or what we call in the planning industry a financial plan, that's designed [00:03:05] to maximize the probability of helping each investor achieve the goals that they [00:03:10] articulate.

And only after that process of defining [00:03:15] objectives and building a plan do we select investments to fund the [00:03:20] plan. That's what I would call good planning on anyone's part, a behavioral counselor [00:03:25] or a traditional, conventional-based advisor. And I wanna be clear, we deeply believe in the [00:03:30] planning process, so a carefully thought-out, creative, customized plan [00:03:35] should be the foundation of everything we do as advisors in our industry.

The [00:03:40] difference between Fusion and, in general, behavioral investment counselors, and [00:03:45] the conventional wisdom approach of the industry doesn't begin there. [00:03:50] It begins with how the investments are chosen. So in other words, it doesn't begin with the [00:03:55] planning process, the setting objectives, and the building a plan to achieve them.

It [00:04:00] begins with the third step, which by the way, most advisors and investors often [00:04:05] think is the only step. What are the investments gonna be? How'd you do for the last five years? All [00:04:10] those things that really are irrelevant, because how someone did for their clients, meaning the [00:04:15] investments they chose, did for the last five years, is a very narrow question.

But when a client asks [00:04:20] that, they're asking a much broader question. They're saying to the advisor, "Based on your answer [00:04:25] to my question about how your investments did for the last five, how then will I expect to [00:04:30] do for the next five or ten if I hire you?" And with one thing, the other has [00:04:35] nothing to do.

Past performance is never an indication of future performance [00:04:40] at all. That may sound cliché, but it's true. There is no statistical evidence [00:04:45] for the persistence of performance. And so it all begins the difference with how the [00:04:50] investments, again, are chosen by the investment counselor, behavioral investment counselor, and by the [00:04:55] traditionalist, and what those investments are actually designed to protect [00:05:00] against because the behavioral investment counselor designs their investment [00:05:05] portfolios to protect against something vastly different than what the industry conventional [00:05:10] wisdom advisory protocol designs their portfolios to protect against.

So let's dig a little [00:05:15] more deeply into that. So the conventional wisdom path describes most firms will [00:05:20] ultimately move into a very familiar investment approach. It usually sounds something like [00:05:25] this We can forecast the economy consistently. We can [00:05:30] predict which sectors in the marketplace will outperform others and [00:05:35] underperform others and when.

We can identify consistently who, who the best managers of [00:05:40] stock portfolios are going to be prospectively, and we can consistently give you [00:05:45] a timing advantage, letting you know when, based on all of our forecasts, to get in and out of the [00:05:50] markets and in and out of different sectors. In other words, what I call timing, selection, [00:05:55] and prediction.

And those ideas could sound intelligent. They sound proactive. [00:06:00] They sound like value. But they're built on things that cannot be done with any [00:06:05] level of consistency over time. And even beyond that, most firms use the same [00:06:10] optimization models, Monte Carlo planning simulations, and other planning tools.

They're [00:06:15] all built around one very common and very dangerous assumption, and that [00:06:20] assumption is that risk is defined as volatility, that if your [00:06:25] portfolio moves around less, somehow you're safer from an investment [00:06:30] standpoint. And from that assumption flows the conventional portfolio design. More bonds, [00:06:35] particularly as we get older, less fluctuation, more smoothness, more comfort.[00:06:40]

But here's the disconnect. From a conventional standpoint, investments are often chosen to protect [00:06:45] against short-term, temporary fluctuations in the number of dollars showing up [00:06:50] on our portfolio statements each month. And that can feel safer, but feeling safe and [00:06:55] being safe are not at all the same thing.

And this is the point in the [00:07:00] conversation where the paths really diverge. And as Robert Frost wrote, [00:07:05] "Two roads diverged in a wood, and I, I took the [00:07:10] one less traveled by, and that has made all the difference." That's [00:07:15] exactly how I think about wealth management. There are two roads. One's built around minimizing [00:07:20] temporary discomfort, and the other is built around maximizing the probability of [00:07:25] long-term success.

And the difference between those two roads is not academic. Over [00:07:30] time, it becomes the difference between success and failure [00:07:35] Behavioral investment counselors think about risk very differently because strategies [00:07:40] designed to protect against temporary fluctuations often lead to something far [00:07:45] more dangerous, the permanent disappearance of the value of each dollar, [00:07:50] or another way to say it is the permanent erosion of the purchasing power of our [00:07:55] money.

The irony is that over time, this typical conventional industry [00:08:00] approach often produces the very outcome it's meant to prevent, [00:08:05] unnecessary destruction of wealth. Wealth is defined by [00:08:10] purchasing power. Let me say as clearly as possible, volatility is [00:08:15] temporary, inflation is permanent. That's the real risk, [00:08:20] and there's a deeper misunderstanding underneath all of this.

Most people think of money [00:08:25] as dollars. A hundred dollar bill, a million dollars, a portfolio [00:08:30] statement with a certain number on it. But in my view, that's not really money. That's [00:08:35] currency. It's a peerless medium of exchange. I know if I give you a X amount [00:08:40] of these dollars, I can buy that car, and that's all it is.

Our culture, though, treats [00:08:45] these currency units like they're a store of value somehow. They aren't. [00:08:50] The only rational definition of money is purchasing power. In other words, what can those [00:08:55] dollars actually buy? Because if I take one million dollars and preserve it [00:09:00] perfectly in bonds or even under a mattress for thirty years, at [00:09:05] long-term inflation, it might take close to three million dollars to buy what that one [00:09:10] million bought at the beginning of the thirty-year period.

That is not preservation. That's the [00:09:15] slow, irreversible, permanent loss of value. And yet, [00:09:20] that's often what gets labeled as conservative. And [00:09:25] that's the irony. What's commonly presented as safety, in reality [00:09:30] perpetuates the greatest risk of all. So my mentor, as I've said other times on my podcast [00:09:35] and my newsletters, is a gentleman named Nick Murray.

He describes this in a way that [00:09:40] really seems to resonate. He says there are two kinds of money. There's wealth, [00:09:45] whose natural function is to grow, particularly relative to inflation. And then there [00:09:50] is money that runs out. And he points out that while most conventional practitioners think [00:09:55] of themselves as wealth managers, they are in effect managing the second [00:10:00] kind.

Th-they are money that runs out managers. Uh, that's [00:10:05] why at Fusion, we try to simplify portfolio decisions into two categories: [00:10:10] essentials and refinements. The essentials are what actually drive long-term outcomes. [00:10:15] Having more stocks than bonds Being an owner versus a lender, [00:10:20] much more in the portfolio, and making sure you have enough sevens versus [00:10:25] threes, meaning roughly seven percent returns from stocks after [00:10:30] inflation versus three percent returns from bonds after inflation.

That [00:10:35] different matters enormously over multi-decade retirements and certainly over [00:10:40] multi-generational plans. Most investors don't need just a little more return. They need a lot more [00:10:45] sevens than threes if they're gonna reach their most cherished fin-financial goal. Then [00:10:50] there are the refinements. A little more or less small cap, a little more or less [00:10:55] international exposure.

Twenty-five percent versus, say, thirty-five percent, or [00:11:00] twenty percent versus thirty percent. Those refinements can matter, but they are not [00:11:05] what long-term success pivots on. Too often, the industry builds entire value [00:11:10] propositions around trying to get the refinements right While misdefining [00:11:15] the essentials, the big stock versus bond question.

So now I want to share, because I don't [00:11:20] want the audience to misinterpret my feeling in meaning that we don't think bonds [00:11:25] fit anywhere. They do. In our view, they just don't fit for the reason the industry says they [00:11:30] fit, which is to control volatility. We use bonds to control the timing [00:11:35] of necessary withdrawals, particularly as our clients and investors get into [00:11:40] retirement, and that's a very different purpose.

Typically, for an investor in or near [00:11:45] retirement, we might recommend allocating about ten to fifteen percent of a [00:11:50] portfolio outside of equities, meaning to bonds or short-term cash equivalents. [00:11:55] Enough for about two to three years' worth of spending into short-term bonds [00:12:00] again, or cash equivalents. And why do we do that?

We do that so if the investor's spending [00:12:05] needs in retirement happens to coincide with a bear market, which is defined as [00:12:10] a twenty percent decline from a recent high. Now the... And mind you, the average bear market, [00:12:15] that's a definitional bear market. The average bear market has been down thirty-three percent.

[00:12:20] So if we have these two to three years' worth of spending dollars set aside outside of equities, then [00:12:25] the client will not have to sell long-term stock investments while they are at [00:12:30] depressed prices at the wrong time. That's the purpose to us of bonds. Timing, [00:12:35] not, of spending, not volatility control. The rest of the portfolio then [00:12:40] can stay invested in assets designed to preserve and grow purchasing power [00:12:45] over time, protecting our money against its biggest threat.

Not volatility, which by the way, [00:12:50] I don't think of as any threat, but against the permanent destruction of our wealth due to [00:12:55] inflation that compounds relentlessly at about three to four percent annually over time. [00:13:00] And that's very different from telling an investor to hold thirty or forty percent in bonds [00:13:05] largely to reduce temporary fluctuations.

Because the extra allocation to [00:13:10] bonds may certainly make their ride feel smoother, but it can quickly work ag-against [00:13:15] the very outcome the investor is trying to achieve. But once you understand that managing [00:13:20] volatility doesn't protect what ultimately matters, and that timing and selection can't be [00:13:25] executed consistently, the real question isn't whether that conventional approach [00:13:30] is common, it's why it remains so widely accepted.

That's the question [00:13:35] worth asking, because when a process depends on prediction, selection, and optimization, [00:13:40] it becomes commoditized. But when a process is built on clarity, discipline, and [00:13:45] behavior, it becomes durable, scalable, and most importantly, [00:13:50] valuable. So in the end, the two roads in wealth management don't just feel different, [00:13:55] they lead to very different destinations.

One road may leave an investor with a great [00:14:00] deal of currency that has quietly lost all its value. The other is [00:14:05] designed to preserve and grow the one thing that actually matters, purchasing power. And as [00:14:10] Frost reminds us, the road you choose can make all the difference. In wealth management, th- [00:14:15] that difference can ultimately become the difference between financial success and [00:14:20] financial failure.

So that's today's Fix It Friday, and appreciate you [00:14:25] tuning in. Stay crazy wealthy, and you can catch us on our website, [00:14:30] fusionfamilywealth.com, crazywealthypodcast.com, and all of your favorite [00:14:35] podcast venues

Thank you for

Voiceover: [00:14:40] tuning in to another episode of the Crazy Wealthy Podcast. For more [00:14:45] insights, resources, and to sign up for our newsletter, visit [00:14:50] crazywealthypodcast.com. Until then, stay crazy wealthy[00:14:55]

The previous podcast by [00:15:00] Fusion Family Wealth, LLC, Fusion, was intended for general information purposes only. No portion of the podcast serves as the receipt of or [00:15:05] as a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve [00:15:10] varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy or any non-investment related or planning [00:15:15] services, discussion, or content will be profitable, be suitable for your portfolio or individual situation.

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