Can George Clooney save your practice?Article added by Jason Kestler on June 3, 2014
Ranked: #32 (1,624 pts)
Have you ever asked yourself the question, "Am I a weather forecaster or a news reporter?" Probably not, but your livelihood may
depend on it.
Consider the movie, "The Perfect Storm." In one of the early scenes, an excited meteorologist begins to see the makings of a significant weather event; a hurricane moving up the east coast, a cold front moving in from Canada and the makings of a "perfect storm." In this scene, his assistant appears bored to death. She's rolling her eyes and trying to ignore her boss's passion about the potential storm.
Meanwhile, Clooney's character, an experienced sword boat captain, ignores the forecast and, disappointed with the local fishing, heads to a distant and dangerous fishing ground in search of the elusive swordfish.
Throughout these scenes, there are multiple, historical references: "In the past, people have had huge catches out there." "The Andrea Gail (his fishing boat) has never met a storm she couldn't handle." As you probably know, the results of this "historical” thinking were disastrous for the Andrea Gail and her entire crew.
Now consider your practice. Your clients may enjoy listening to history, but they are hiring you as a forecaster. Yesterday's news can add perspective. It can also be used to effectively press any agenda. The human mind remembers the past, the colors, sounds, and smells. But unfortunately, it is incapable of predicting the future. That may be why so many clients and advisors seem to be making decisions about their future by focusing solely on past events and ignoring current weather conditions.
Here are four forecasts that should be obvious today:
1. The vast majority of your clients are moving from an accumulation mode to a distribution mode and, as they do, everything that has been learned thus far about managing money begins to change. As 76 million baby boomers transition to retirement, we and they must change.
The planning horizon moves from a known time frame (I want to retire at age 65) to an unknown time frame (How long will I live?). The planning model must shift from an asset allocation strategy to a distribution strategy. And as this shift takes place, the tools and techniques you used to get them to this point (old news) may not be the tools and techniques necessary to move them safely through the next phase in their lives.
2. The bond market isn't what it used to be. In October 2008, the stock market began the second worst decline in history. As that happened, we directed our clients to the relative safety of bonds. Over the last 30 years, that strategy has served us and them well. As interest rates steadily declined, the bond market enjoyed a 30-year rally (old news). However, the trend has recently reversed and rates have begun to rise. As they do, bonds may begin losing value for the first time in over 30 years. Are you forecasting this for your clients, or are you still reporting on the old news?
3. Longevity can be both a blessing and a curse. Far too often, when planning a retirement strategy, we make some erroneous assumptions. According to traditional life expectancy at birth charts, average life expectancy is somewhere around age 80. But that reflects average life expectancy at birth across the entire population. Since this is the average, you are planning to fail 50 percent of the time.
In addition, accidents, wars and severe health issues bring down the average. If you have clients who been lucky enough to dodge the mortality risks and make it to retirement age, life expectancy could be significantly longer. In fact, there is almost a 1 in 4 chance that a couple retiring at age 65 will still have a survivor living at age 100!
But let's take it one step further. I would propose that these aren't your clients. This is still the average. If you are working with clients who have some wealth, they should live even longer. On the whole, they have healthier lifestyles and can afford better medical and health care. Have you built these assumptions into your forecast?
4. What are your inflation assumptions? Are you using the 30-year historical average of slightly over 4 percent, or are you forecasting the potential of significantly higher inflation rates in the future? Consider this: Most economists will tell you that one of the primary drivers of inflation is money supply. While the money supply has remained relatively level over the last 30 years, according to the Board of Governors of the Federal Reserve System, between 2009 and 2012, the U.S. money supply has increased by over 83 percent!
Why haven't we seen inflation, you ask? Because the Fed's quantitative easing (QE 1, QE2, etc.) has held much of it in check. However, as quantitative easing begins to back off, it is logical to assume that we will see potentially significant inflation in the future.
Have you planned for this in your forecast, or are you still reporting on yesterday's news?
Unfortunately, our clients are probably better news reporters than weather forecasters. They have 30 years or more of hindsight. They don't have the three Ts — time, training, and temperament — necessary to forecast the future weather. But you do. The question is, are you heeding the forecast or sailing your business and your clients into the eye of the perfect storm?
The views expressed here are those of the author and not necessarily those of ProducersWEB.
Reprinting or reposting this article without prior consent of Producersweb.com is strictly prohibited.
If you have questions, please visit our terms and conditions