10 Reasons Why the Financial Services Industry Doesn’t Believe in Plan B

If you listen to the show or read my writings, you know I am a big advocate having a dual approach to investing – Plan A and a Plan B.

So, why doesn’t the financial services business (referred to below as the industry) take the same approach?

They just advocate a Plan A approach which works well when the market is going up but is a disaster when the market is going down.  Here are 10 reasons- (none of which are doing you any good.)

1)      Career Risk – The way the industry is set up, advisors are discouraged from making decisions on risk.  Most advisors can keep their jobs in a declining market if everyone else is losing money at the same time.  Making a decision to change strategies and being wrong is career risk that most aren’t willing to take.  Said another way, making decisions to do something that everyone is not doing and being wrong, can be career suicide.

2)      Too complicated, stick to the script – The industry can justify recommending that everyone stay invested in a declining market for one main reason.  They teach advisors that the market almost always goes up over time and can show you the chart to prove it.  It is a powerful script and implies to any investor that doing anything else but sticking with plan A is a mistake

3)      The Industry doesn’t want their advisors to do anything but invest – Truth be told most financial services companies don’t want their advisors managing money.  They want them just investing.  Making changes because of risk involves management.  – see reason 1.  Plus, financial services companies want their advisors out getting new clients and new investment dollars rather than spending their time managing money.

4)      They are not equipped to do so – When I say equipped I don’t mean that they are not smart enough.  There are many sharp advisors working in the markets today.  The industry doesn’t equip advisors with the processes to efficiently and quickly make changes over many accounts at once.

5)      They don’t have the discretion to do so – In order to manage money, an advisor would need to be able to do so at his or her own discretion.  Making changes would require getting the client’s permission.   With hundreds of clients on the books, it would virtually be impossible to do so in a timely manner.

6)      They don’t believe that big declines can happen –The industry looks at the financial crisis plunge between 2007 and 2009 as a once in a generation occurrence that could never happen again.   Most thought the same thing after the -86% loss in the stock market between 1929 and 1932.  A once in a lifetime decline just happened meaning that another large decline has to be decades away. Unfortunately, the stock market started another -60% decline in 1937.

7)      The industry doesn’t support a plan B because of the money – Simply put the mutual fund industry doesn’t get paid if the money is not invested in mutual funds.  Sometimes a Plan B requires you to sell a portion of your investments and go to cash.  Cash pays the company nothing.

8)      A plan B involves alternative mutual funds and strategy – The financial services industry does not train their advisors on the use of alternative investment strategies and they certainly don’t want their advisors learning on their own.  There is too much risk of being wrong.  It is more profitable to keep things simple.

9)      Advisors are taught you can’t time the market – No one can time the market perfectly.  That is true. The industry can show you all of the studies that show how much investors lose when missing the best days of the market.  Of course, they don’t publish the studies which show what happens when you miss the worst days.  Bottom line is that it is not about market timing. It is about managing risk.

10)   There are more good years than bad yearswho needs a plan B? – This has got to be my favorite reason that makes no sense.  They will tell you sitting through a declining market is ok because there are so many more good years than bad years. Although that is true, there is a good reason for it.  The bad years are so bad you need twice as many good years to recover from them.  At one point the financial crisis erased 13 years of stock market gain in a mere 18 months.  Now you see why you need so many more good years?

Unfortunately, you don’t benefit from the agenda of the industry.  However, you can benefit from gaining an understanding of how the system works and thinking for yourself.  For more information about Plan B investing, feel free to contact me at bob@prudentmoney.com

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