​EUREKONOMICS™ principles vs. investment products

By Jeffrey Reeves MA

EUREKONOMICS[tm]


EUREKONOMICS™ is not opposed to investing.

On the contrary, EUREKONOMICS™ is based on a principle of investing that is as old as money and as new as the 21st century.

Benjamin Graham, the Dean of Wall Street and Warren Buffett’s mentor, captured this principle in a single sentence in his classic works, Security Analysis (1934) and The Intelligent Investor (1949). “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

When we parse this sentence within the framework of EUREKONOMICS™ we discover that the concept rests on Graham’s fundamental idea — the promise of safety of principal — as the foremost consideration when it comes to investing the money that enters your clients’ lives. The EUREKONOMICS™’ corollaries to Benjamin Graham’s basic principle are:
  • Whatever you and your clients deem a satisfactory return must be consistent with that basic premise
  • An investment that doesn’t meet that criteria is not an investment at all, but a speculation — in simpler terms a gamble
The promise of safety of principal
The insurance and financial services industry, and the professionals that act on behalf of their clients within the industry, tend to seek out the wealthiest Americans as clients. That’s OK; however, it also has the unintended consequence of creating a view of personal economics that is skewed toward the small percentage of the population that have already created family wealth.

That perception permeates the manufacturing side of the industry as well, especially among financial businesses that create investment products. Most products that masquerade as investments actually fall into what Benjamin Graham calls speculative, offering neither safety of principal nor a satisfactory return.

Of course, one can project a decent return on any insurance or investment product by implying higher-than-realistic interest or growth assumptions. However, the facts supporting the actual performance of actual investments held by actual clients do not support safety of principal and satisfactory returns for most of the financial products available in the market today.

Consider mutual funds, for example. No honest advisor would dare promise — as Benjamin Graham’s definition suggests — that an individual mutual fund offers safety of principal or a satisfactory return. In fact, the regulators at FINRA would likely haul such an advisor before a disciplinary board to be tarred and feathered — figuratively, of course.

Advisors can, and do, suggest that hypothetically and “over the long term,” this fund or that or some combination of funds will perform well enough to assure safety and returns. The advisor, based on guidelines from the SEC and FINRA, needs only complete a couple of simple forms — suitability and risk tolerance — to protect him or herself from the overreaching arm of regulators in the event an investment fails.

One needs only review both the performance of these types of investments and the resulting losses by clients over the past decade to recognize that tremendous failures have led to only a few disciplinary actions — and those mostly for thieves running Ponzi schemes.

The promise fulfilled
The problem is not that insurance and financial advisors are in any way irresponsible or engaging in deceptive practices. The problem is that most of the insurance and investment products that are available in the marketplace are designed to serve the needs of the wealthy. They are not designed to help the vast majority of Americans seeking wealth to attain wealth, although that is what the manufacturers of these products would have us think.

It’s easy for us, as insurance and investment advisors, to recognize the truth of this assertion. Look at your own financial progress. I’ve been practicing for almost 40 years and have met only a handful of peers that started out with wealth. Most of us have gained wealth by struggling for years to:
  • educate ourselves about saving, investing, risk management, etc.
  • build equity in our homes, our businesses, our insurance policies and savings accounts
  • support our clients and earn commissions and fees for doing so
Almost every advisor I have met could relate to that model. Why, then, would we suggest our clients follow any other path to wealth? I’ll leave that answer up to each insurance and investment advisor. However, I caution you that conventional wisdom will rear its ugly head and suggest that advisors are fools that rely on education for wealth creation for themselves and their clients, building equity in prosaic things like their homes, savings accounts, whole life insurance policies — especially whole life insurance policies — and a strongly rooted recognition that their clients deserve nothing less.