The Increasing Probability of Unlikely

An 84-month bull market is a low probability event. So was a Trump victory. And while statisticians can point to numerous other outcomes that have, recently, defied the “odds,” the nature of randomness[1] paradoxically, remains constant.  Let that percolate for a few seconds.

The art and science of prediction have taken a heavy blow to the body, straining credibility from opposite sides of the political spectrum. In fact, one thing that the GOP and Democrats can agree on unambiguously is that political forecasting is dangerously unreliable.

Against that backdrop, a new reality is dawning in the sphere of adviser-client relationships where fiduciary responsibility is either everything or nothing. No kidding. Whether DOL’s Fiduciary Rule prevails or dissolves, it is probable (there’s that word again) that trust and confidence will dominate the financial advisory landscape like never before. Even long-time relationships, including those that have survived the transition of generations, may become subject to doubt where little to none existed, even in the face of major market declines such as the Great Recession[2].

The 2016 presidential election has caused or unearthed or stirred or kindled or awakened or enabled or illuminated or empowered a Pandora’s box of differences between friends, among families, across communities. Such diversities, including those that have, in recent years, been celebrated by many, are now giving rise to new or renewed scrutiny and wariness.

Such uncertainty may, on the surface, have little to do with past performance and professional competency. It may have everything to do with conflicting visions of our shared future. Herein lies what may be the greatest challenge in this generation: How to reconcile an outlook for tomorrow that is inherently and severely polarized between optimism and pessimism. 

It may become increasingly difficult to encourage clients convincingly to stay the course and stick with their investment discipline in the face of national or international uncertainties borne of new political realities. Political differences between clients and advisors have been for the last few decades not only tolerated but beneficial in achieving a more balanced perspective on economic and financial issues and developments. Today, however, may be fundamentally different. Those same differences of opinion are likely to be magnified painfully as social advances and reversals are pursued and presented fervently with impassioned support or against active resistance.

Regardless of political persuasion, we have, with high certainty, entered a time of change. And while we think we may know the answers, we may not this time. Certainty, like stability, while desirable, is rarely an effective strategy under pretense. What we have, at our core, is our humanity, that is, our well-honed ability and willingness to listen, without judgment to our clients as they openly discuss their fears as well as their hopes. For in that space of open and honest communication comes understanding and, out of that understanding, comes appreciation and mutual respect, and from that respect, comes trust and confidence.

So as we approach those days that are holy in different ways to different people, may we all find joy in the true spirit of Christmas and Hanukkah and the many blessings that we, as Americans, are so fortunate to experience in our lives. 

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[1] Randomness is the lack of pattern or predictability in events. A random sequence of events, symbols or steps has no order and does not follow an intelligible pattern or combination. https://en.wikipedia.org/wiki/Randomness

[2]The Great Recession was a period of general economic decline observed in world markets during the late 2000s and early 2010s. https://en.wikipedia.org/wiki/Great_Recession

The Culpability of Culture

According to FINRA, fines and litigation costs to firms or their parent companies related to cultural failures are estimated at over $300 billion since 2010. 

For a good part of this year, FINRA has been talking with numerous broker-dealers about their culture and whether that culture encourages the fair, flexible, and efficient participation of retail investors. According to agency insiders, FINRA is now completing their review of “how firms establish, communicate and implement cultural values, and whether cultural values are guiding business conduct.”^[1] The agency will then prepare their next action steps regarding broker culture.

The reality is that most broker-dealers have spent little time to date doing any organizational soul searching.  Higher priorities associated with asset management and growth strategies including advisor recruiting/retention, succession planning, and anticipating the DOL fiduciary rule have relegated initiatives about corporate culture to the staff levels of their HR departments.  But not any more.

Broker-dealers now need to know how they stack up against known standards for the five major culture indicators identified by FINRA:

   1.     Whether the control functions  FINRA values are within the organization;
     2.         Whether policy or control breaches are tolerated;
     3.         Whether the organization proactively seeks to identify risk and compliance events;
     4.         Whether supervisors are effective role models of firm culture; and 
     5.         Whether sub-cultures (such as a branch, trading desk, or department) that may not conform to  overall firm culture are identified and addressed.

Broker-dealers are now well-advised to attain a comprehensive and objective assessment of their culture and its impact on their business practices.  Having such a critical baseline will be a cost-effective insurance policy that can help safeguard the firm when it comes under the increased level of culture scrutiny anticipated from FINRA.  It is time for the firm to reinforce those policies and procedures that may already be optimized for fairness, flexibility, and efficiency for their clients or shore up practices that are determined to be marginal or ineffective.

Contact neil@rifkinwernick.com to learn more about developing a thorough and comprehensive broker culture assessment along with specific and actionable recommendations to maintain your operating and compliance excellence.  

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^[1] http://www.finra.org/industry/Establishing, Communicating and Implementing Cultural Values

Financial Advisors: Let’s Get Political!

At least 100 of my Compliance colleagues just gasped.

Relax.

While not suggesting that you take a public position on the presidential election, I am urging you to be proactive/pre-emptive in addressing client questions and concerns about its probable market impacts. As you already know, the most important thing you need to say to clients is that unless goals, time horizons, or risk tolerance have changed, stick with your current investment strategy. That said, it is both fair and appropriate to also speak to clients about the risk and uncertainty that will likely buffet the market over the next three to four months.

The markets dislike uncertainty. Duh. All considered, Hillary Clinton is a less-risky candidate than Donald Trump and, therefore, represents lower uncertainty for the markets and investors. By the time Election Day happens, however, a rolling avalanche of opinion polls with contradictory or ambiguous findings will drive the whipsaw market impacts of mercurial speculation. Such volatility in isolation will cause great unease among even your most mature clients. Against a context of global and national unrest like that which has dominated the recent news landscape, the market effects are likely to be amplified.  Add to that the dynamics of the predictable fear-greed psychology that accompanies historically high-level market indexes and you have a potentially perfect storm for severe market turbulence.

You cannot change the circumstances but neither can you ignore them. It is critical that you now inoculate your clients against the likely turmoil.  Speak directly to the issues mentioned above.  Speak about expected volatility, even the possibility of an unsettling correction. Some portfolios will probably need to be modified to accommodate diminished risk tolerance, whether reality- or fear-based. Some portfolios will need to be rebalanced, taking some heretofore unrealized gains. Some, perhaps most, asset allocations will not have to be changed at all. But speak and soon, especially to those clients you care about most.  Compliance will understand and probably even help in the process.

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