Faux Financial Planning


The Devil Is In the Details:
The High Cost of Faux Financial Planning

 James W. Watkins, III, JD. CFP®, AWMA®
CEO/Managing Member
InvestSense, LLC

Statistics are a key component in the marketing of financial services.  Mutual funds and money managers routinely claim that they are the “number one” fund or that they have outperformed a certain market index.  However, hidden by such “relative” marketing may be facts that tell a different story.

Statistics can provide valuable information.  They can also be used to mislead investors.  In the financial services industry, claims of outperforming a market index may not reveal that the mutual fund or money manager actually suffered substantial losses, only not as much as the market index or competitor that they are using for comparison.

Three things that every investor should know:

  • Experience has shown that, on average, approximately three out of every four stocks follow the prevailing trend of the stock market.
  • Claims by financial advisers and financial service providers that asset allocation policy alone accounts for approximately 93.6% of investment returns is a blatant misrepresentation of a famous research study.1
  • Studies have consistently shown that over time actively managed mutual funds significantly underperform passively managed mutual funds.2

Over the past decade, the financial services industry has tried to rebrand itself in response to the growth in financial planning and wealth management services.  Titles such as “stockbroker” and “insurance agent” have been replaced with titles such as “financial adviser,” “wealth management consultant” and “personal financial consultant.”

Regardless of their titles, these new financial advisers and their companies often refer to their commission sales routines as “financial consulting” and “wealth consulting,” a primary component of which is to provide a client with some sort of financial advisory document.  The price for these plans can vary wildly, from a couple of hundred dollars to thousands of dollars.

The cornerstone of such financial advisory document is usually an asset allocation/portfolio optimization plan (“asset allocation plan(s)”), a computer generated set of multi-colored pie charts and various numbers and spreadsheets that purport to show a client how they may improve the performance of their investment portfolio by reallocating their portfolio assets.  The financial adviser usually stands ready to recommend specific investment products that can be used to implement the asset allocation plan’s recommendations.

MPT 101

The software programs usually used to produce such asset allocation plans are generally based on a theory known as “modern portfolio theory” (“MPT”).  MPT was introduced in 1952 by Dr. Harry Markowitz, who was awarded the Nobel Prize for his work with MPT.3  With MPT,  Markowitz stated that in order to reduce the overall risk of a portfolio “it’s not enough to invest in many securities,” that effective diversification required the “right kind” of diversification for the  “right reasons.”4   Markowitz introduced the idea that the correlation of returns between investment options should be considered when constructing investment portfolios.

For a couple of hundred dollars, any financial adviser can purchase one of the many commercial asset allocation/portfolio optimization software programs available (“asset allocation programs”) and churn out asset allocation plans, without even having to understand anything about MPT or the assumptions behind MPT.  And therein lies the problem.

  • Markowitz never states that the “optimal” portfolio is the appropriate portfolio for every investor.  In fact, he expressly warns that the “optimal” portfolio may not be the appropriate portfolio for an investor based upon the investor’s needs and financial situation.5
  • Markowitz never states that an investor’s portfolio should never change.
  • Markowitz does state that in assessing an investor’s risk tolerance level, both an investor’s willingness and ability to bear investment risk should be considered.6
  • Markowitz does state that combining assets with a low correlation of returns is a key factor in constructing effective investment portfolios.7
  • MPT has a proven bias toward certain types of investments, often resulting in inappropriate and counterintuitive recommendations.

Congratulations!  You now probably know more about MPT and portfolio management than most of the financial advisers holding themselves out to the public as financial/wealth consultants.

If that opinion seems troubling, consider that

  • A 2007 survey of 1,400 registered investment advisers by Schwab Institutional found  that the investment advisers reported that approximately 75% of the brokerage accounts transferred to them were poorly structured and consistently misaligned with the client’s financial goals.8
  • A 2007 study of 2,094 financial advisers by CEG Worldwide, LLC, a leading wealth management consulting firm, found that only 6.6% of those holding themselves out as wealth managers were “true” wealth managers, based on criteria such as the use of a consultative process, rather than a transactional process, and the provision of specialized services such as estate planning and money management.9

Unfortunately for investors, for too many financial advisers asset allocation plans are simply a means to an end, a marketing tool to persuade a client to purchase their commission-based financial products.  In many cases the quality of the asset allocation plan and the value actually provided to a client are of little or no importance to the financial adviser.

These are some of the reasons that lead me to introduce the concept of forensic financial planning, both as a means of alerting investors to these issues and as a means of allowing investors to be proactive to better protect their financial security.  I have previously addressed some of the issues with financial planning and MPT-based asset allocation in detail in other InvestSense white papers.  I recommend these white papers for a more complete understanding of both the fundamental issues and preventive measures available.

The Devil is in the Details

Financial planning fraud and investment fraud are often subtle and difficult to detect for those unfamiliar with the financial services industry.  Forensic financial planning is a form of reverse engineering, an analytical process that breaks down the different aspects of financial planning to assess both the viability of the processes used in creating financial advice and the quality of the financial advice provided to a client.

One of the best ways to better understand the issues with asset allocation/portfolio optimization is to actually experiment with the asset allocation calculators available on the Internet.  Just search online under “asset allocation calculators,” “portfolio optimization calculators” or a similar term and pick one of the sites listed.

Once you choose a site, experiment by choosing answers and data at both end of the investment spectrum and then combinations in-between.  In most instances, you will receive recommendations that fall somewhere in the range of 60% stocks/40% bonds or 40% stocks/60% bonds, regardless of what you entered in the risk and personal data sections of the program.  The reason for this 60/40 bias is that this split has performed well over time and is considered relatively easy to defend in most cases.

What the 60/40 bias misses, however, are those cases where a client has little or no tolerance for risk or who has a small time horizon for investing, anything less than five years.  In such cases, any exposure to equity based products is generally considered unsuitable under regulatory rules since it is contrary to an investor’s wishes and/or does not provide enough time for an investor to recover from any investment losses they may suffer.

As you experiment with the online calculators, note how often certain allocations are repeated, even though the input data may be significantly different.  This occurs even with the commercial asset allocation programs used by financial advisers to provide “personalized” and “customized” asset allocation recommendations to clients.  This “cookie-cutter” approach to financial planning often results in a client being exposed to unnecessary financial risk.

Determining Risk Tolerance

The asset allocation process usually begins with a client completing some type of risk tolerance questionnaire.  Markowitz stressed that both a client’s willingness and ability to bear risk must be considered.

In theory, the risk tolerance questionnaire allows a financial adviser to assess a client’s risk tolerance level.  The reality is that the questionnaires are often of little practical use due to a combination of poor construction, improper interpretation, and the tendency of investors to overestimate their tolerance for investment risk.10

Another issue with determining a client’s risk tolerance level has to do with defining and quantifying “risk.”  Most investors define risk in terms of the potential for financial loss.  MPT,   on the other hand, defines risk in terms of standard deviation, a statistical measurement of the volatility of investment returns.

A weakness of standard deviation is that it measures total volatility of returns and does not distinguish between “good” and “bad” volatility, volatility greater and less than the average return of a set of returns or a desired return.  Markowitz actually preferred using semi-variance, a statistical measurement that only measures “bad” volatility, which is more consistent with an investor’s definition of risk.  Even though calculations have become easier with the use of computers, asset allocation programs still use standard deviation as the proxy for risk, presumably due to the fact that such calculations are relatively easier.

The final issue with regard to risk tolerance analysis has to do with the two-prong “willingness and ability to bear risk” test.  The two-prong test is not only the standard set forth by Markowitz, it is also the existing legal standard for determining risk tolerance for suitability purposes.11   Most financial advisers are unaware of the two-prong test for risk tolerance.  The two-prong test also helps protect against dishonest financial advisers who might try to falsify client data in order to ensure the approval of certain investment product sales.

“Error Estimation Maximizers”

Once risk tolerance has been addressed, the asset allocation process turns to the generation of asset allocation recommendations.  MPT has an inherent bias toward certain types of investments.  MPT calculations are based on a concept known as “means-variance optimization” (“MVO”).  What this means is that MPT favors investment with a combination of high returns and low variability of returns.

MPT is highly data dependent.  Most of the commercial asset allocation programs use historical performance data for input purposes, even though investment professionals and investment companies are legally required to warn investors that “past performance is no guarantee of future results.”  Markowitz preferred that MPT calculations be based on projections of future returns.12  However, the difficulty in predicting the future and the obvious opportunities for manipulation, especially in light of the recent shenanigans on Wall Street, raise obvious concerns about basing crucial financial decisions on “guesstimates” and subjective data.

When I am asked to perform a forensic financial planning analysis, one of the first things I look for are the data assumptions that were used in preparing the asset allocation recommendations.  Not surprisingly, such assumptions are often not disclosed in the asset allocation plan.  Requests for this information often result in stonewalling tactics or outright refusal to provide such information, often on the basis that such information is considered proprietary and confidential.  Even if the assumption data is provided, an investor may not be able to run the calculations necessary to validate the assumptions.

One of the benefits of forensic financial planning is that it allows investors to uncover attempts to provide them with bogus assumption data or that invalid assumptions were used in preparing the asset allocation recommendations.  Unfortunately, this occurs more often than most investors would like to believe, especially when projected data is used.  By manipulating the data, financial advisers can ensure that certain allocations and/or reallocations will be recommended in order to generate sales of investment products.

If a financial adviser or their company will not disclose the assumptions used in preparing the asset allocation recommendations, you should immediately demand a refund of any and all fees you paid for the recommendations.  In many cases the recommendations are questionable or unsuitable on their face, but the assumptions help to substantiate the intent behind the unsuitable recommendations.

Unfortunately, MPT’s dependency on accurate data renders it both unstable and easy to manipulate.  Even worse, slight errors in the input data can result in disproportionately larger errors.  All of this has led one expert in portfolio management to label MPT-based asset allocation programs as nothing more than “error estimation maximizers.”13

Diversification vs. “Real” Diversification 

The benefits of diversification are well documented.  However, as Markowitz warned, diversification requires more than simply investing in a large number of different securities.  Effective diversification requires the “right kind” of diversification for the “right reason,” factoring in the correlation of returns of the investments under consideration.14

One common problem with investment portfolios is an accumulation of highly correlated investments.  An accumulation of highly correlated investments does not provide the needed downside protection since the investments may move in the same direction (remember, 75% of stocks move in the same direction).

Most asset allocation programs provide recommendations in terms of generic asset categories rather than specific investment products.  In fact, if you ask a financial adviser to re-run the asset allocation calculations using the specific investment products being recommended, you will probably be told that they either do not or cannot perform those calculations.

The calculations can be performed using Microsoft Excel, but it does take time to gather the information and calculate the returns, the standard deviations and the correlations of return needed to run the asset specific allocation calculations.  Then again, re-running the asset allocation calculations might also expose any inconsistencies between the original asset allocation recommendations and the actual portfolio implemented.

But even the generic asset allocation recommendations often raise correlation issues, as the generic categories are often highly correlated and favor equity investments.  There has been a school of thought suggesting that an investor could effectively diversify their portfolio by simply dividing their money equally between large cap mutual funds, small cap mutual funds and international mutual funds.  However, a review of the correlation of returns for these categories over the past decade, on both a five-year and a ten-year rolling return basis, shows that all three types of funds have been highly correlated.

Using four well-known market indices as proxies for four commonly used generic asset categories used by asset allocation programs (i.e., large cap investments, small cap investments, international investments and bonds), Appendix A provides correlation information on the four asset categories over both five and ten year rolling periods.  Two points that immediately stand out are (1) a strong pattern of correlation between the equity-based investments over the past ten years, and (2) a pattern of increasing correlation among the three equity-based investments over the past twenty years.

Consequently, heavy allocations to these equity-based asset categories would not have provided the needed downside protection to investors against a bear market. That is a major reason why many investors, especially investors in retirement plans with limited investment choices, suffered significant investment losses during the recent bear markets.  In some cases, employers sponsoring such retirement plans may have been victims themselves of mutual funds companies, brokerage firms and investment companies who misled the sponsors with regard to the quality of their services and who, in some cases, may have breached their fiduciary duty to such plans.

Chances are such losses never would have happened had investors been properly educated on the importance of correlation of returns and effective risk management techniques.  For those who say that such losses were not really losses since the market has rebounded and most of such losses have been recovered, I would counter with the argument that those losses were genuine losses since they resulted in opportunity costs for the investors, as they lost the full effect of the recent market returns.  It is hard to get ahead, to grow your investment accounts, if you have to spend all of your time catching up for unnecessary investment losses.

Recommendation-Implementation Gaps

Without question, one of the biggest problems within current asset allocation practices is the lack of consistency between the generic asset allocation recommendations and the investor’s actual post-implementation investment portfolio, so-called “recommendation-implementation gaps” (“R-I gaps”).  In many cases, the investor’s actual post-implementation portfolio is less attractive and potentially much riskier than the scenario painted by the asset allocation recommendations.  Again, perhaps this is another reason financial advisers do not go back and perform asset allocation calculations based on a client’s actual post-implementation investment portfolio.

In addition to the correlation issues previously discussed, these R-I gaps are due to the fact that the criteria of the products used in implementing the asset allocation recommendations are often significantly different from the assumptions used in preparing the original asset allocation recommendations.  Most advisers implement using actively managed products instead of index-based options such as index funds and exchange traded funds.  The high fees and expenses generally associated with actively managed investment products, as well as their track record of  underperformance against index-based investment products, takes its toll.

A recent study has suggested that the impact of fees charged on actively managed investment products may be much higher than the stated charges.  Ross Miller, a professor at the University of New York at Albany, has devised a method of calculating a fund’s “active expense ratio” to determine how much an investor is really being charged for the fund’s active management services.15

Miller basically compares the R-squared measures of an actively managed fund and an appropriate index fund.  R-squared is a statistical measure that measures the extent to which a fund’s performance is due to movement in the stock market rather than active management.

The higher a fund’s R-squared score, the less the contribution of active management.  R-squared scores of 90 or above often indicate that a fund’s returns are due primarily to the stock market, not active management.  Consequently, funds with high R-squared scores are often referred to as “closet index funds” since an investor could achieve basically the same results by investing in a more cost efficient index mutual fund or exchange traded fund.

Using his “active expense ratio,” Miller’s study shows that the effective sales load on many actively managed investment products is significantly higher that the advertised cost, sometimes as much as eight to nine times higher.  When you factor in the relative poor performance record of actively managed fund compared to low-cost index funds, you get a better understanding of the true cost of faux financial planning, paying more and receiving much less in return.

Put those same expensive, underperforming actively managed mutual funds in a variable annuity, with its added costs (usually 2-3% annually based on the value of the account) and you understand why there are calls for increased regulation of the financial services to protect investors against abusive marketing and sales tactics often used by the financial services industry.

Another R-I gap issue involves situations where a financial adviser’s implementation recommendations result in an investment portfolio that is totally different from the original asset allocation provided to an investor.  Many of these cases involve financial advisers trying to sell risky, high commission investment products such as limited partnership, joint ventures, private equity projects and financial derivative products.

With some investors paying thousands of dollars for asset allocation plans and the plan supposedly representing the “optimal” allocation for the investor, such a deviation from the original recommendations raises questions of fraud and/or a possible breach of fiduciary by a financial adviser.  In perhaps a sign of things to come, one court has recently recognized the potential liability implications of R-I gaps.16

The Folly of Static Asset Allocation 

Experience has shown that the stock market is cyclical, alternating between bull (rising) and bear (declining) markets.  While index funds are generally a better investment option for investors, they are especially susceptible to market swings due to the fact that they are based on market indices.

The cyclical nature of the stock market makes an effective risk management strategy a critical part of any wealth management program.  While most investors and financial advisers focus on maximizing investment returns, the truth is that risk management, the avoidance of large losses, is the real key to successful investing.17

As mentioned earlier, financial advisers and financial service companies often claim that asset allocation is the most important aspect of investing, accounting for 93.6% of an investment portfolio’s returns.  Based on that claim, they advise investors to maintain the recommended asset allocation at all times, except to rebalance their portfolio annually to restore the original asset allocation percentages.

The problem is that the 93.6% reference is a blatant misrepresentation of what was actually said in a research paper.  What the authors of the research paper actually said was that asset allocation “explained on average fully 93.6 per cent of the total variation in actual plan returns.” (emphasis added).18

The authors had examined 91 large pension plans and their allocation decisions involving three types of assets – equities, bonds and cash.  Historically stocks have been more volatile than bonds and bonds have been more volatile than cash.  So in essence, the study simply found that as a greater percentage of assets were allocated to riskier types of assets, the variation of returns increased. Not really that surprising.

However, by using the 93.6% misrepresentation to convince investors to stick with questionable, if not outright inappropriate, MPT-based allocation recommendations, faux financial planners may have been largely responsible for the trillions of dollars lost during the 2000-2002 and 2007-2008 bear markets.19  Investors who followed the “buy-and-hold” mantra during the past decade actually lost money.20  One has to wonder whether the financial advisers providing such irresponsible advice were possibly influenced by the annual compensation usually paid to financial advisers as long as their clients continue to own certain investments.

Static asset allocation is simply illogical.  The stock market is dynamic.  Returns, correlation of returns and standard deviations are constantly changing.  Consequently, an investor’s wealth management strategy should be dynamic too to effectively manage overall portfolio risk.  Dr. William Sharpe, a Nobel Laureate for his work in the area of investment management, has stressed the need for a dynamic, flexible approach to portfolio management.21

There are those who dismiss a dynamic approach to wealth management, citing studies that state that market timing does not work.  They are absolutely right in terms of the classic definition of market timing.  Classic market timing refers to attempts to capture short-term swings in the stock market and being either totally invested in the stock market or being completely out of the market.

Dynamic asset allocation, on the other hand, focuses on intermediate to long-term trends in the stock market, the goal being not to maximize returns, but rather to reduce overall portfolio risk and to provide some downside protection by reallocating and/or replacing some assets in the portfolio when certain economic and market conditions develop.  That is simply a prudent risk management strategy to avoid unnecessary large investment losses, not market timing.

The True Cost of Investment Losses

An effective risk management program does not require the radical “all or nothing” approach of classical market timing.  The goal of risk management is not to call the exact short-term turning points in the stock market in an attempt to maximize investment gains.  The odds of successfully using such an approach on a consistent basis, as well as the costs that would be involved, would be overwhelming.  Furthermore, as Markowitz himself pointed out, those who accept the value of diversification must necessarily forfeit the pursuit of maximizing returns.22

The goal of risk management should be to re-allocate assets defensively in the face of intermediate or long-term indications of deterioration within the stock market and/or the economy in order to preserve an investor’s investment capital.  The value of such a risk management approach has been validated by a recent study that shows that avoiding significant losses in the stock market has a far greater impact on an investor’s long-term total returns than the impact of possibly missing a few of the stock market’s “best” days.

In “Black Swans, Market Timing and the Dow,” Professor Javier Estrada of the IESE Business School studied the impact of missing the best and the worst days on the Dow Jones Industrial Average Index (“DJIA”).23  Professor Estrada found that over the period 1900-2006, missing the best 10, 20 and 100 days on the DJIA would have reduced an investor’s terminal wealth by 65%, 83.2% and 99.7% respectively.  Conversely, avoiding the 10, 20 and 100 worst days on the DJIA over the same time period would have increased an investor’s terminal wealth by 206%, 531.5% and 43,396.8% respectively.

Professor Estrada also performed a similar best days/worst days analysis on the DJIA for the period 1990-2006, finding that missing the best 10, 20 and 100 days on the DJIA would have reduced an investor’s terminal wealth by 38%, 56.8% and 93.8% respectively.  Conversely, avoiding the worst 10, 20 and 100 days on the DJIA over the same period would have improved an investor’s terminal wealth by 70.1%, 140.6% and 1,619.1% respectively.

The numbers support the potential advantages of implementing effective risk management programs to avoid significant market losses, especially when intermediate and/or long-term market and/or economic indicators indicate the possibility of a secular bear market.  The wide disparity in the best day/worst day returns also emphasizes the fact that actual losses of capital are far more costly than reduced returns due to missed opportunities.  For example, an investor suffering a 40% loss would not only have to achieve a return of 66.7% in order to recover the original loss, but would also suffer the opportunity cost in having to use the 66.7% return to make up for such loss.

The High Cost of Faux Investor Protection

In my twenty plus years as a securities attorney, compliance officer, certified financial planner™ professional and accredited wealth management advisor™ professional, I have seen numerous developments in the financial services industry, some good, some not so good.  Financial planning and wealth management, when done properly, can be invaluable.  Conversely, when they are done improperly, whether intentional or not, the results can be disastrous and life-changing.

Unfortunately, for reasons discussed herein, too often current asset allocation/portfolio optimization and wealth management practices come close to being a sophisticated form of bait-and-switch, a commercial practice that is illegal.   Clients are charged significant fees for financial and asset plans that may contain lots of pages, but often little or no true value to the client.  The implementation of such plans and the resulting investment portfolio are often significantly different from the feel-good projections presented in the original asset allocation plan, often exposing a client to unnecessary financial risk.

The financial services industry is well aware of the issues discussed herein and has been for some time.  Since few investors know how to detect financial planning and investment fraud and existing laws generally favor the financial services industry in case of disputes, the industry has had little incentive to make any changes.  The current resistance in Congress to imposing a fiduciary duty on everyone who provides investment advice to the public, even given the financial abuses exposed by the recent bear markets and current Congressional hearings involving alleged investment fraud by Goldman Sachs, is further proof of the seeming indifference of lawmakers to the continuing abusive practices within the financial services industry.

Additionally, despite a government commissioned 2007 study by the Rand Corporation24 that clearly reported that the public was confused on the issues of personal titles used in the financial services industry and the exact legal obligations owed by whom to whom, the Senate is proposing that the government waste money on yet another study.  The new study would be used to ask the public, in essence, the following question – “Should stockbrokers and insurance agents providing investment advice of any kind to the public be allowed to put their personal financial interests ahead of the people they are advising,” or put another way, “Should stockbrokers and insurance agents providing investment advice of any kind to the public be required to always put a client’s interests first.” Incredible!

Strategies to Avoid the High Cost of Faux Financial Planning

I am often asked what the most effective wealth preservation strategy is.  My response – proactive risk management.  Asset allocation and diversification are actually risk management strategies.

A proactive approach to wealth management is the cornerstone of the InvestSense PACE program.  The proactive investor can avoid investing in questionable investments altogether and avoid unnecessary financial losses caused by such investments.  The proactive investor can avoid large investment losses by recognizing when changes in the economy or the stock market might make a reallocation of assets a prudent risk management strategy.

The InvestSense PACE program focuses on four essential elements for any successful wealth management program: proactive risk management, absolute returns, correlation of returns and expense management.  Proactive risk management actually incorporates the other three elements.

Proactive risk management also requires the implementation of a dynamic risk management program that provides ongoing monitoring and assessment of an investor’s portfolio and/or financial adviser.  InvestSense has developed proprietary fiduciary oversight and portfolio decomposition analysis programs that provide such services.

Common sense can also be a valuable factor in effective wealth management and preservation.  Simple yet valuable strategies include

  • Carefully reviewing investment related contracts before you sign them, especially with regard to fees/expenses and any disclaimers or other forms of exculpatory clauses.
  • Always obtaining and maintaining copies of any investment related documents you fill out and/or sign.
  • Asking questions and maintaining a healthy dose of skepticism.
  • Educating yourself as much as possible by reading and attending seminars.  Check the “Research” section of the InvestSense web site regularly for new papers and research.
  • Avoiding the temptation of confusing brains with a bull market!  Remember, three out of four stocks move in the direction of the general trend of the stock market.  It is hard not to make money in a bull market.  The true value of a financial adviser is how well they manage investment risk in down markets.
  • Never assume that an investment is suitable just because a financial adviser recommended it or because a sale was approved.  There is still the possibility that someone other than the compliance officer approved the trade for financial reasons.
  • Just say “no” to variable annuities and structured settlements.  These are products/ agreements that are heavily structured in favor of the insurance industry, both in terms of fees/expenses and the ultimate disposition of the assets. For further information on variable annuities, please read “Variable Annuities: The Other Side of the Story” at the InvestSense web site (www.investsense.com).


The past decade has seen unprecedented growth in the number of firms and individuals offering financial planning and wealth management related services.  Most notably, the financial services industry has attempted to rebrand itself by offering such services in one form or another, as the industry tries to shift to a business model based more on advisory fees.

In too many cases it appears that quantity, rather than quality, has been the focus of the financial service industry’s financial planning and wealth management services, with financial plans and asset allocation recommendations simply serving as a means to end, a marketing tool to facilitate the sale of commission-based financial products.  The situation has deteriorated to the point that Dr. Sharpe has described the current situation as “financial planning in fantasyland.”25

The recent scandals on Wall Street cast doubt on the government’s ability to effectively protect investors.  The ongoing developments in Congress, particularly the Senate’s refusal to implement an industry-wide fiduciary standard for the financial services industry, raise questions as to whose best interests Congress is really trying to protect.

Simply put, going forward investors must assume greater responsibility for their financial security.  Fortunately for investors, various investment strategies and investment products are available that are both effective and cost-efficient.  However, an investor must take the initiative and take action to better protect their financial security.  In the areas of investment management and wealth preservation, the power of the proactive investor should never be underestimated.


  1.       Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower, “Determinants of Portfolio Performance,” Financial Analysts Journal 42 (July/August 1986), 39-48.

2.       Various SPIVA reports at www.spiva.standardandpoors.com/indices/spiva/en/us.

3.       Harry M. Markowitz, “Portfolio Selection,” Journal of Investing, March 1952, 89; Harry M. Markowitz, Portfolio Selection, 2nd ed. (Cambridge, MA: Basil Blackwood & Sons, Inc., 1991), 6-7.

4.       Markowitz, “Portfolio Selection,” 89.

5.       Markowitz, Portfolio Selection, 6.

6.       Markowitz, Portfolio Selection, 6.

7.       Markowitz, Portfolio Selection, 6.

8.       Brooke Southall, “Wirehouse accounts don’t match client goals,” InvestmentNews, March 12, 2007, 12.

9.       Charles Paikert, “Poll: Few Advisers are ‘real’ wealth managers,” available on the Internet at www.investmentnews,com/article/20071029/FREE/710290324?template =printart

10.       Solveig Jansson, “Is Preservation of Capital Making a Comeback,” Institutional Investor, April 1974, 55-57.

11.       In re James B. Chase, NASD Regulation, Inc. Disciplinary Proceeding No. C8A990081 (September 25, 2000).

12.       Markowitz, Portfolio Selection, 187-194.

13.       Richard Michaud, Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation (Boston, MA: Harvard Business School Press, 1998), 36.

14.       Markowitz, “Portfolio Selection,” 89.

15.       Ross Miller, “Measuring the True Cost of Active Management by Mutual Funds,” available on the Internet at papers.ssrn.com/sol3/papers.cfm?abstract_id=7469264.

16.       Johnston v. CIGNA Corp., 916 F.2d 643 (Colo. App 1996).

17.       Charles D. Ellis, “Investment Policy: How To Win the Loser’s Game,” 2nd Ed., (Chicago, IL: Irwin Professional Publishing, 1993), p.49.

18.       Brinson, 43.

19.       www.marketwatch.com/story/correct-sp-500-losses-nearly-1-trillion-more-than-2000-02; www.marketwatch.com/story/us-stocks-slip-as-early-rally.

20.       E.S. Browning, “Stocks Tarnished by ‘Lost Decade’,” Wall Street Journal, March 26, 2008, Section A.

21.       William F. Sharpe, Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice (Princeton, NJ: Princeton University Press, 2006), 207-208.

22.       Markowitz, Portfolio Selection, 207.

23.         Javier Estrada, “Black Swans, Market Timing and the Dow,” available on the Internet at papers.ssrn.com/sol3/papers.cfm?abstract_id=1086300, 3-7.

21.         Angela A. Hung, et al, “Investor and Industry Perspectives on Investment Advisers and Broker-Dealers,” available at http://www.sec.gov/news/press/2008/2008-1_randiabdreport.pdf.

22.       William F. Sharpe, “Financial Planning in Fantasyland,” available on the Internet at http://www.stanford.edu/~wfsharpe/art/fantasy/fantasy.htm.



Rolling 5 Year Correlations of Return
SP500/2000 SP500/EAFE 2000-EAFE SP500/LB 2000/LB EAFE/LB
2005-09 0.987 0.985 0.973 0.022 -0.730 -0.072
2004-08 0.970 0.999 0.974 -0.204 -0.319 -0.242
2003-07 0.975 0.991 0.978 -0.129 -0.265 -0.228
2002-06 0.974 0.999 0.968 -0.781 -0.653 -0.786
2001-05 0.959 0.962 0.862 -0.815 -0.653 -0.821
2000-04 0.982 0.961 0.905 -0.866 -0.849 -0.882
1999-03 0.955 0.969 0.898 -0.836 -0.699 -0.827
1998-02 0.625 0.940 0.620 -0.579 -0.841 -0.782
1997-01 0.567 0.792 0.418 -0.288 -0.583 -0.680
1996-00 0.557 0.634 0.320 -0.309 -0.609 -0.735
1995-99 0.303 -0.478 -0.318 0.962 0.232 -0.421
1994-98 0.698 0.108 -0.506 0.925 0.698 0.213
1993-97 0.868 -0.396 0.104 0.782 0.938 0.216
1992-96 0.779 0.090 0.092 0.769 0.934 0.206
1991-95 0.811 0.140 0.110 0.697 0.886 0.195
1990-94 0.954 0.471 0.549 0.697 0.595 0.095
Rolling 10 Year Correlations of Return
SP500/2000 SP500/EAFE 2000-EAFE SP500/LB 2000/LB EAFE/LB
2000-09 0.947 0.975 0.903 -0.472 -0.426 -0.523
1999-08 0.948 0.980 0.900 -0.582 -0.480 -0.587
1998-07 0.716 0.929 0.774 -0.593 -0.658 -0.733
1997-06 0.730 0.766 0.736 -0.387 -0.549 -0.736
1996-05 0.729 0.757 0.725 -0.407 -0.545 -0.703
1995-04 0.751 0.739 0.734 -0.034 -0.231 -0.460
1994-03 0.770 0.752 0.708 -0.070 -0.044 -0.372
1993-02 0.791 0.648 0.566 0.115 0.111 -0.230
1992-01 0.634 0.560 0.331 0.238 0.269 -0.177
1991-00 0.611 0.388 0.210 0.393 0.476 -0.129
1990-99 0.660 0.405 0.409 0.525 0.439 -0.065
Correlation of +1.00 indicates positive/high correlation of returns
Correlation of -1.00 indicates negative/low correlation of returns


Annual Returns
          S&P Russell MSCE Capital
500 2000 EAFE Agg Bond*
2009 26.50 25.20 27.70 5.93
2008 -37.00 -34.80 -45.10 5.24
2007 5.49 -1.57 11.17 6.97
2006 15.79 18.37 26.34 4.33
2005 4.91 4.55 13.54 2.43
2004 10.88 18.33 20.25 4.34
2003 28.68 47.25 38.59 4.10
2002 -22.10 -20.48 -15.94 10.26
2001 -11.89 2.49 -21.44 8.43
2000 -9.11 -3.02 -14.17 11.63
1999 21.04 21.26 26.96 -0.82
1998 28.58 -2.55 20.00 8.70
1997 33.36 22.36 1.78 9.64
1996 22.96 16.49 6.05 3.64
1995 37.58 28.45 11.21 18.46
1994 1.32 -1.82 7.78 -2.92
1993 10.08 18.88 32.57 9.75
1992 7.62 18.41 -12.18 7.40
1991 30.47 46.04 12.14 16.00
1990 -3.11 -19.48 -23.45 8.96
* Formerly known as Lehman Brothers Aggregate Bond Index

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