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How to Create Meaningful Conversations When Presenting Portfolio Performance to Clients · Root Ready

• 0:00
  Speaker 1: Today on the Root Ready podcast, we're going to be discussing how you should present performance to a client and, specifically, how should you present this in years where their portfolio is underperforming the market as a whole and, if you recall a couple of episodes, we talked about the importance of helping clients to organize their thinking, and that theme is going to be something that is continued throughout this conversation here.
• 0:18
  Speaker 1: So let's talk about what usually happens.
• 0:21
  Speaker 1: Performance comes up.
• 0:22
  Speaker 1: Client comes in, their portfolio is performing at some rate of return, but they look at the S&P 500 and the S&P 500 is performing at a different in this case let's assume higher rate of return.
• 0:32
  Speaker 1: They ask you why is this?
• 0:34
  Speaker 1: Well, what do we usually say?
• 0:35
  Speaker 1: We might say well, client, it's because you're diversified.
• 0:38
  Speaker 1: And then you go on for 10 minutes to talk about the benefits of diversification and 10 minutes later your client is wishing they never even brought it up.
• 0:44
  Speaker 1: This is not the right way to do it.
• 0:46
  Speaker 1: After a while they're just gonna start thinking why would we diversify it If we continue to underperform?
• 0:51
  Speaker 1: Why is it that you think this diversification thing is such a great thing?
• 0:54
  Speaker 1: It's not helping just to say, oh well, you're diversified and that's why you're underperforming, and I don't care how many great slide decks you have, how many charts you have, it's not going to connect great with your client.
• 1:05
  Speaker 1: Another thing you might do is you might take a look at the funds that you're in and show the client.
• 1:08
  Speaker 1: You might say, hey, well, look, if we zoom out, look at how these funds have done over the last 10 years.
• 1:12
  Speaker 1: Well, so what?
• 1:13
  Speaker 1: We're not making decisions for 10 years ago.
• 1:16
  Speaker 1: So how on earth does that help me today with my concerns?
• 1:19
  Speaker 1: Today, if I'm that client wondering why on earth am I underperforming the S&P 500?
• 1:23
  Speaker 1: Or you may respond to your client you're not just invested in the S&P 500, which, yes, that's true.
• 1:28
  Speaker 1: But again, going back to that diversification piece, it's not helpful.
• 1:31
  Speaker 1: It's not helping to organize the clients thinking about how should you be looking at performance?
• 1:35
  Speaker 1: What should we be looking at here to know if we are still invested the right way or not?
• 1:40
  Speaker 1: So those are the wrong ways to approach this.
• 1:42
  Speaker 1: And what we're going to do today, what I'm going to talk about today, is how do I think you should frame this conversation?
• 1:47
  Speaker 1: Now, a few things before we get started.
• 1:49
  Speaker 1: This is how I've done it.
• 1:50
  Speaker 1: There's not one perfect, right or wrong way to do it.
• 1:53
  Speaker 1: This is just a way that I have presented this to clients that I have found to be effective.
• 1:57
  Speaker 1: And another thing to note is we use dimensional funds as one of our core portfolio holdings, so I'm going to use their funds as an example here.
• 2:04
  Speaker 1: Big disclaimer none of this is intended to be a recommendation.
• 2:07
  Speaker 1: None of this is intended to be advice.
• 2:09
  Speaker 1: We are going to talk about specific funds and even performance of specific funds.
• 2:12
  Speaker 1: In no way is that a guarantee.
• 2:14
  Speaker 1: This is just trying to use specifics to have a helpful example to frame this conversations in the best possible way to clients.
• 2:21
  Speaker 1: So we will talk about this, but it's not an endorsement or recommendation, advice or any of clients.
• 2:26
  Speaker 1: So we will talk about this, but this is not an endorsement, a recommendation, advice or any of that.
• 2:28
  Speaker 1: So let's go through this.
• 2:29
  Speaker 1: And I actually want to talk both about how to frame this in times when a client portfolio is outperforming the market and in this case we're just going to use the S&P 500 as a proxy for the market versus how would you have that conversation when they are underperforming?
• 2:41
  Speaker 1: And let's start by assuming underperformance, because that, of course, can be a more difficult conversation but and I mean this with all sincerity this is, when this happens, the perfect opportunity to build trust, to strengthen your relationship, to show clients how much you care about them, using underperformance at least perceived underperformance as something as a springboard to help you do so, and I'm going to walk you through what that means in just a second.
• 3:07
  Speaker 1: So start with this.
• 3:08
  Speaker 1: When a client comes to you, start by understanding how they're most likely thinking about it.
• 3:13
  Speaker 1: They see the S&P 500 and it's performing at some rate of return, and then they look at their portfolio and it's performing at a lesser rate of return.
• 3:20
  Speaker 1: What's going through their head?
• 3:22
  Speaker 1: They're probably thinking well, I'm working with my advisor, but he or she is underperforming the market.
• 3:26
  Speaker 1: Are they good at what they're doing?
• 3:27
  Speaker 1: They maybe are thinking whatever we're doing, it's not working.
• 3:33
  Speaker 1: They're probably a little bit fearful.
• 3:33
  Speaker 1: Am I getting enough growth to stay on track with the goals I have to accomplish my retirement needs or whatever other needs that I have?
• 3:38
  Speaker 1: So these are the things that are going on in their mind.
• 3:41
  Speaker 1: Step number one is address that.
• 3:43
  Speaker 1: Do not skirt around it.
• 3:45
  Speaker 1: Don't go to the client and say, hey, yeah, you're underperforming because you're diversified.
• 3:49
  Speaker 1: Here's 10 minutes worth of diversification data and charts.
• 3:51
  Speaker 1: So, anyways, how's the family?
• 3:53
  Speaker 1: Don't do that.
• 3:54
  Speaker 1: Do not take the route of talking to them, talking at them and then going to a different subject altogether, trying to avoid the difficulty of the conversation.
• 4:03
  Speaker 1: Do not dance around the issue.
• 4:05
  Speaker 1: They have one thing on their mind and they will begin to distrust you, as they should, if you try to avoid the issue.
• 4:11
  Speaker 1: Instead, show them you understand, and there's a quote that I'm probably going to reference a handful of times through different episodes on this podcast, and I don't know that it's perfectly relevant in this situation here, but there's at least aspects of it, but this is a quote from Blair Warren, and Blair says people will do anything for those who encourage their dreams, justify their failures, allay their fears, confirm their suspicions and help them throw rocks at their enemies.
• 4:35
  Speaker 1: End quote.
• 4:36
  Speaker 1: Now, obviously, that could be used to be manipulative in certain cases, but understand this quote is essential.
• 4:41
  Speaker 1: Do you want to build trust with your clients?
• 4:43
  Speaker 1: Allay their fears, confirm some of their suspicions, help them throw rocks at their enemies, encourage their dreams?
• 4:51
  Speaker 1: Now, some of those things maybe don't necessarily have any relevance to explaining performance data, but some certainly do.
• 4:58
  Speaker 1: So what does that look like?
• 5:00
  Speaker 1: Well, let's assume that you're in a review meeting with your clients.
• 5:02
  Speaker 1: When you're in that review meeting, I'm going to make the assumption that you're not starting with performance.
• 5:06
  Speaker 1: Ideally, you're getting a little bit of a personal check-in.
• 5:08
  Speaker 1: You're going over some plan updates, you're going over some planning strategies.
• 5:11
  Speaker 1: Then, by the end, you are certainly addressing performance.
• 5:13
  Speaker 1: But don't avoid the issue up front.
• 5:16
  Speaker 1: From the very beginning of the meeting.
• 5:18
  Speaker 1: Let them know that this is on your mind and that you are going to be discussing it.
• 5:21
  Speaker 1: Say to them we're going to discuss performance today.
• 5:24
  Speaker 1: We're going to walk through exactly how you're performing, but, most importantly, we're going to walk through how you're performing compared to the rest of the market, because, as your advisor, I always want to make sure that we're monitoring your portfolio's performance to ensure we're using the right strategy, the right funds, the right everything to ensure we are maximizing the chance of you reaching your goals.
• 5:43
  Speaker 1: So what you have done is you want to beat them to it.
• 5:46
  Speaker 1: You know that it's top of mind for them.
• 5:48
  Speaker 1: How could it not be?
• 5:49
  Speaker 1: They're seeing what the market is doing and again, the assumption here is this is a period of time where the S&P 500 is outperforming their portfolio, which I'm assuming is going to be a more diversified portfolio.
• 5:59
  Speaker 1: So this is in that case.
• 6:02
  Speaker 1: Beat them to it.
• 6:03
  Speaker 1: It so this is in that case.
• 6:03
  Speaker 1: Beat them to it.
• 6:03
  Speaker 1: It shows them that you're not hiding from difficult conversations and that builds trust.
• 6:07
  Speaker 1: It shows them that you're not oblivious to the concerns that they're feeling.
• 6:10
  Speaker 1: That shows awareness.
• 6:11
  Speaker 1: It shows them that you empathize with how they're feeling, which builds that relational equity in that connection.
• 6:17
  Speaker 1: And what it starts to do is show them that I don't have to worry about my advisor trying to skirt around these difficult conversations.
• 6:23
  Speaker 1: They're actually coming to me with this and this is making me feel good, because sometimes the client doesn't want to raise that.
• 6:29
  Speaker 1: Sometimes the client might feel like it's a little bit of a me versus you confrontational conversation to bring that up.
• 6:34
  Speaker 1: So they are going to be so grateful that you did, because you can rest assured that is on their mind.
• 6:39
  Speaker 1: And then, finally, when you talk about performance in the way that we're going to talk about it, it demonstrates expertise and it's going to confirm their belief that you're the right advisor for the job and it's ultimately going to strengthen the relationship.
• 6:50
  Speaker 1: So this is key View.
• 6:53
  Speaker 1: Market downturns None of us like to go through them.
• 6:55
  Speaker 1: It's not fun to look at the market go down.
• 6:57
  Speaker 1: It's not fun to see the impact on client portfolios.
• 6:59
  Speaker 1: It's not fun to think, oh, this is not going to be the easiest conversation.
• 7:02
  Speaker 1: But reframe that.
• 7:03
  Speaker 1: View market downturns and periods of underperformance as the opportunity to strengthen the relationships you have with your clients.
• 7:11
  Speaker 1: Because I can say with conviction and I think many advisors can say with conviction that the relationships they have have been strengthened after going through difficult markets and are remaining steadfast in your conviction and then coming out on the other side.
• 7:24
  Speaker 1: So those two things are key is addressing this issue head on and remaining steadfast in your conviction and then coming out on the other side.
• 7:28
  Speaker 1: So those two things are key is addressing this issue head on and remaining steadfast in your convictions throughout the downturn.
• 7:31
  Speaker 1: So keep that in mind.
• 7:32
  Speaker 1: So what will be done?
• 7:34
  Speaker 1: So far, we have addressed the issue head on, we've acknowledged it to the client.
• 7:38
  Speaker 1: Now here's how you're going to frame it when actually comes time to discussing portfolio performance, which might be at the beginning of the conversation If this is a standard review meeting or it might be closer to the end of the conversation and you, as the advisor, can read when is the appropriate time to do this.
• 7:52
  Speaker 1: So, once you've addressed the issue head on, here's where I go next.
• 7:55
  Speaker 1: First, I'm going to tell the client directly.
• 7:56
  Speaker 1: I'm going to say look, the S&P 500 this year is up, fill in the blank.
• 8:01
  Speaker 1: Your portfolio is up, fill in the blank.
• 8:04
  Speaker 1: Year is up, fill in the blank, your portfolio is up, fill in the blank.
• 8:06
  Speaker 1: There's probably going to be discrepancy here and, for the sake of comparison, I'm going to use 2023 as an example.
• 8:10
  Speaker 1: 2023, I'm using as an example, not as a recommendation when I'm talking about certain funds, not as a guarantee when I talk about certain performance numbers, but an example because, as much as that was a great year for the market as a whole, it was a difficult year to be diversified because it was primarily those large cap growth stocks, large tech stocks, the Magnificent Seven, that were driving so much of the returns of the market where everything else, for the most part, did well but underperformed comparatively.
• 8:36
  Speaker 1: So if you look at that year as a whole, the S&P 500 returned 26.3%.
• 8:40
  Speaker 1: So if I'm talking to a client, I'd say, at the beginning of early 2024, what I'm going to say is look, last year the S&P 500 was up 26.3%, your portfolio was up.
• 8:50
  Speaker 1: Fill in the blank, I'm just going to make up a number, let's say 16%.
• 8:54
  Speaker 1: So, as your advisor, what I'm looking at, mr or Mrs Client, what I'm looking at is what is the reason for that?
• 9:00
  Speaker 1: Why is that performance different?
• 9:02
  Speaker 1: Because there's two reasons.
• 9:06
  Speaker 1: There's two core reasons that you're going to have a discrepancy when we're looking at the market returns versus the returns you're actually accomplishing, and this is the key part here.
• 9:11
  Speaker 1: It could either be a fund issue meaning we're using the wrong investments, the wrong ETFs, the wrong mutual funds.
• 9:17
  Speaker 1: Those funds are underperforming the benchmark they're supposed to be capturing, the performance of which they're supposed to be capturing or it's an asset allocation issue the mix of different types of stocks and different types of bonds is wrong or is off.
• 9:31
  Speaker 1: So, if it's okay with you, let's explore that, asking the client for permission, and, of course, they're going to say yes, I would love to, let's do that.
• 9:38
  Speaker 1: So what you're then going to do is you're going to say to the client what I really want to know, as your advisor, is where is this discrepancy coming from?
• 9:46
  Speaker 1: And by doing this, here's what you've done so far.
• 9:48
  Speaker 1: Number one you've helped to organize their thinking.
• 9:50
  Speaker 1: You've helped them to clearly identify the issue.
• 9:52
  Speaker 1: So you've quantified it for them.
• 9:54
  Speaker 1: There's this discrepancy in performance, and you've shown them the two reasons this issue may exist, going back to that concept of helping to organize their thinking here, to view things properly, to be asking the right questions, not just this vague.
• 10:06
  Speaker 1: Why on earth am I underperforming?
• 10:08
  Speaker 1: Number two you've positioned yourself as a champion of their success.
• 10:12
  Speaker 1: You're not just sitting around saying this too shall pass, wait it out.
• 10:16
  Speaker 1: Diversification works, all of those things are true, but when you say that to a client, their immediate reaction isn't to say, oh, that's someone that's on my team.
• 10:23
  Speaker 1: No, no, their reaction is okay, here's another person giving me the same old tired answer, and I guess I'll just accept it because I don't know how to get a better answer.
• 10:32
  Speaker 1: So what you've done is you've organized their thinking and you've positioned yourself as a champion of their success.
• 10:38
  Speaker 1: So let's go back to the two components.
• 10:39
  Speaker 1: Look, if there's a discrepancy, it could either be a fund issue or it could be an asset allocation issue.
• 10:44
  Speaker 1: So let's start with the fund issue.
• 10:46
  Speaker 1: Here's what I would say to the client.
• 10:47
  Speaker 1: What we really want to do is not just see how did your total portfolio compare to the S&P or the NASDAQ or the Dow Jones or any index.
• 10:55
  Speaker 1: What we really want to do is compare each individual fund.
• 10:58
  Speaker 1: What I'm doing as your advisor is I'm not just looking at the big picture number.
• 11:02
  Speaker 1: I'm saying how is each fund doing?
• 11:04
  Speaker 1: How is each fund doing relative to what we need it to do to ensure that you're still on track for your goals?
• 11:10
  Speaker 1: I like to use Vanguard as a proxy for this.
• 11:12
  Speaker 1: I like to use Vanguard because I think Vanguard's great.
• 11:14
  Speaker 1: With most of their funds, they're not trying to outperform the market, they're just trying to capture the market.
• 11:18
  Speaker 1: So if you own VOO, for example, the S&P 500 fund from Vanguard, you're not expecting to outperform or underperform the S&P 500, you're just expecting to perform.
• 11:29
  Speaker 1: You're expecting to capture the performance of the S&P.
• 11:32
  Speaker 1: So if the S&P 500 is up 20%, you expect to be up 20%, minus, of course, a very small amount for the fund fee.
• 11:39
  Speaker 1: The S&P 500 is down 20%, you expect to be down 20%, minus a very small amount for the fund fee.
• 11:47
  Speaker 1: So I like to use Vanguard as a comparison for a few reasons.
• 11:51
  Speaker 1: Reason number one is Vanguard is going to serve as a great proxy for an index because of their approach with most funds.
• 11:57
  Speaker 1: They do have some actively managed funds, but with most funds they are just tracking the index.
• 12:01
  Speaker 1: So that's a great place to start.
• 12:03
  Speaker 1: If we could not outperform this, why not just use that?
• 12:07
  Speaker 1: If we can't outperform the index, vanguard's a great option.
• 12:10
  Speaker 1: So let's use that as the benchmark of our success.
• 12:12
  Speaker 1: Because if we're underperforming this, that might be a great opportunity to say, well, let's just use Vanguard here for the specific purpose.
• 12:18
  Speaker 1: But number two using Vanguard is a much more tangible example to most clients than some random index.
• 12:25
  Speaker 1: Sure, they've heard of the S&P 500, but they haven't heard of the FTSE index, they haven't heard of the EFI index, they haven't heard some of these other indices that you should be using to appropriately benchmark your success to.
• 12:36
  Speaker 1: But if instead you could say, yeah, there's a Vanguard fund that tracks the performance of international developed markets or international emerging markets or real estate or whatever the case might be, that feels more tangible to your clients and you are using this comparison or this benchmark that you could very well say look, this is a great option if the performance of the funds we're using isn't consistently keeping up.
• 12:59
  Speaker 1: Now here's where you do have to be very careful.
• 13:01
  Speaker 1: You cannot be misleading here.
• 13:02
  Speaker 1: You can't use some arbitrary Vanguard fund that is not tracking the same benchmark, or at least a very similar benchmark, to the fund that you're using.
• 13:09
  Speaker 1: So be very careful here to make sure that you're using appropriate comparisons.
• 13:13
  Speaker 1: And this again is not to say this is the only way of doing it.
• 13:18
  Speaker 1: I've just found it to be a very tangible way that connects with clients when you actually use that as a comparison.
• 13:21
  Speaker 1: So let's go back to 2023.
• 13:22
  Speaker 1: 2023, client, your portfolio was up 16%, which is a great performance, and again, I'm just making that number up.
• 13:29
  Speaker 1: But the S&P 500 was up 26.3%.
• 13:33
  Speaker 1: So again, what we're trying to do is say where is that discrepancy coming from?
• 13:36
  Speaker 1: But before we go there, let's look at each individual fund and let's again compare it to Vanguard, because Vanguard is simply capturing the performance the market gives us.
• 13:45
  Speaker 1: So let's actually use something very similar to the S&P 500.
• 13:48
  Speaker 1: Vanguard has a fund called the Vanguard Total International Stock Index.
• 13:53
  Speaker 1: The ETF ticker symbol is VTI.
• 13:55
  Speaker 1: In 2023, it was up 26%, wonderful.
• 14:00
  Speaker 1: Now what fund are we using?
• 14:01
  Speaker 1: Now?
• 14:02
  Speaker 1: This is specific to us at Root.
• 14:03
  Speaker 1: This is, again, not a recommendation.
• 14:04
  Speaker 1: This isn't even in every single client portfolio.
• 14:07
  Speaker 1: I'm just using specific examples because I think that's going to make this more tangible and effective, but in no way an endorsement.
• 14:13
  Speaker 1: We use ticker symbol DFUS.
• 14:15
  Speaker 1: It's a dimensional US equity fund, essentially saying it's owning the total US stock market, with some exclusions.
• 14:21
  Speaker 1: The dimensional applies to their portfolio.
• 14:23
  Speaker 1: But what I'm telling clients is this is a very close comparison.
• 14:27
  Speaker 1: This is a more of an apples apples to comparison, because they're tracking the same thing.
• 14:31
  Speaker 1: For the most part, they're owning the same types of investments in DFUS, even though your portfolio was up I'm using 16% as an example here DFUS was up 26.3.
• 14:41
  Speaker 1: What we're comparing that to is VTI, which was up 26%.
• 14:45
  Speaker 1: So what we can see is, so far, this fund is doing exactly what it needs to do.
• 14:50
  Speaker 1: It's capturing the performance of a very closely related index or very closely related fund.
• 14:55
  Speaker 1: It actually is exceeding it a little bit.
• 14:57
  Speaker 1: But let's look at other funds we also want to own, let's say, small cap value investments.
• 15:04
  Speaker 1: Vanguard has a small cap value fund.
• 15:05
  Speaker 1: It was up 16% in 2023.
• 15:08
  Speaker 1: So what we're looking at here is that Vanguard fund.
• 15:11
  Speaker 1: It's not underperforming the market.
• 15:12
  Speaker 1: You know 16% is different than 26.3%, which is what the S&P 500 was up, but it's not underperforming.
• 15:19
  Speaker 1: And the reason I say it's not underperforming is it's just tracking an entirely different index.
• 15:24
  Speaker 1: It's tracking small value companies in the index, or the benchmark for that is 16% if we're using Vanguard as the comparison.
• 15:32
  Speaker 1: Now the question is how did our fund compare that year?
• 15:34
  Speaker 1: Well, we're using the dimensional small cap value fund ticker symbol, dfsv.
• 15:39
  Speaker 1: In 2023, dfsv was up 19.2%.
• 15:44
  Speaker 1: So, talking to the client, I'm going to say this is where perception really matters, because if I'm comparing that 19.2% to the S&P, which was up 26%, I'm feeling like I underperformed.
• 15:54
  Speaker 1: But if I'm comparing that to a more accurate benchmark, if I'm comparing that to, how did a Vanguard equivalent fund do?
• 15:59
  Speaker 1: What I'm actually looking at is I actually am looking at an outperformance of about 3% last year, but what that's telling me is this fund is doing what I want it to do.
• 16:09
  Speaker 1: Now let's take a large cap value fund.
• 16:11
  Speaker 1: This is going to be the one that creates a little bit more of that challenge in a year like that.
• 16:15
  Speaker 1: If I look at Vanguard Vanguard's value ETF ticker symbol, vtv in 2023, it was up 9.3%.
• 16:23
  Speaker 1: Once again, if you compare that to the S&P 500, you're going to think I underperformed.
• 16:28
  Speaker 1: It's not underperformance.
• 16:30
  Speaker 1: So remember, what Vanguard is doing is Vanguard is simply capturing the performance of the index that it's tracking, so it's appropriately capturing that performance.
• 16:38
  Speaker 1: That asset class just so happened not to grow at the 26% that the S&P 500 did, so it was up 9.3%.
• 16:46
  Speaker 1: If I compare the fund that we are using as I'm talking to clients let's say that it's the dimensional large cap value mutual fund that was up 11.4%.
• 16:55
  Speaker 1: So if I'm comparing it to the S&P, I'm feeling like underperformed, but if I'm comparing it to the appropriate benchmark, I actually outperformed by a couple percent.
• 17:04
  Speaker 1: Now, big disclaimer again, because I know talking about performance is a very big thing to be careful about.
• 17:09
  Speaker 1: This is not about guaranteeing performance.
• 17:11
  Speaker 1: It's not about recommending these specific funds.
• 17:13
  Speaker 1: It is using these specific examples to help position performance in a way that is both and this is key it is both accurate and it's helpful in getting the client to understand more clearly how they're invested and how the individual components of their portfolio are performing.
• 17:29
  Speaker 1: Now, going back to talking to the client go through all their funds.
• 17:31
  Speaker 1: So obviously this requires prep work ahead of time, but you should be doing this.
• 17:34
  Speaker 1: You should have a sense of how are we doing relative to the market, and the key here is do not just cover the funds outperformed.
• 17:41
  Speaker 1: That would, of course, be very misleading.
• 17:43
  Speaker 1: But, more importantly, you're skirting the issue again, you're avoiding the issue again.
• 17:47
  Speaker 1: If you have multiple funds in your portfolio, there is a very high chance that some even sometimes maybe most are underperforming in any given year.
• 17:56
  Speaker 1: Point it out.
• 17:57
  Speaker 1: The client's not dumb.
• 17:59
  Speaker 1: They are going to recognize that.
• 18:00
  Speaker 1: They're going to sense when you are trying to divert the conversation or avoid certain conversations and I would say that to them.
• 18:06
  Speaker 1: Talking to the client, I would say this specific fund it underperformed its benchmark.
• 18:09
  Speaker 1: So that is something that we are keeping an eye on and if that continues consistently, then we will make a change.
• 18:14
  Speaker 1: Now we expect that, quarter to quarter, year to year it's not going to be outperformance every single quarter, every single year, every single time period but if it's consistently underperforming, then that is something we are looking at internally to see if we should make any changes.
• 18:27
  Speaker 1: And then, once you've done this, you can say, okay, that's just for one year.
• 18:31
  Speaker 1: So I'm still using 2023 as an example, where the portfolio as a whole underperformed the S&P 500.
• 18:37
  Speaker 1: But if you were to go through a lot of the individual fund components, that was a year where a lot of the dimensional funds in our portfolio outperformed their benchmark.
• 18:46
  Speaker 1: Their benchmark was not the S&P 500.
• 18:48
  Speaker 1: So stop there and you can say hey, client, what we've done so far is we've looked at for 2023, how did each of your funds compare, not to the S&P 500, but to their individual benchmark, to the things they're trying to track?
• 19:01
  Speaker 1: And what we're seeing is across the board not every single fund, but for the most part, what we're seeing is that our funds are doing exactly what they need to do.
• 19:09
  Speaker 1: Now let's zoom out.
• 19:10
  Speaker 1: Was this an anomaly?
• 19:12
  Speaker 1: Was this a one-time thing?
• 19:13
  Speaker 1: Or can we have some confidence that there's at least a high probability that this continues?
• 19:17
  Speaker 1: That's where you can use certain material from dimensional funds.
• 19:22
  Speaker 1: In this example, this piece I'm going to be referencing here is called dimensional versus the industry.
• 19:25
  Speaker 1: Again, this is not an endorsement.
• 19:26
  Speaker 1: This is not a recommendation.
• 19:27
  Speaker 1: I'm actually looking at something as of the end of 2023, because that is the numbers that I'm referencing here, as we're using these as an example and you can say look, if you look at the industry as a whole, over the past 20 years actively managed funds, only 18% of them outperformed their benchmark.
• 19:44
  Speaker 1: In other words, only 18% of them would have outperformed, say, a Vanguard ETF or a Vanguard mutual fund tracking the same benchmark, which really means 82% of them underperformed.
• 19:56
  Speaker 1: Those aren't great odds.
• 19:57
  Speaker 1: If that was the approach we're taking, I would say we might as well use Vanguard, because Vanguard's excellent and it's going to get us the performance there.
• 20:04
  Speaker 1: But and this is the key here if we look at dimensional funds as a whole, over the past 20 years, 88% of their funds have actually outperformed their benchmark.
• 20:14
  Speaker 1: So, yes, client, as we're reviewing your 2023 performance, we're feeling really good about the funds that we're using to capture the performance we need.
• 20:22
  Speaker 1: And even once we zoom out, what we're seeing is this has been a consistent trend.
• 20:29
  Speaker 1: This is in no way a guarantee.
• 20:30
  Speaker 1: I cannot tell you what's going to happen and is this going to continue to outperform.
• 20:33
  Speaker 1: What I can tell you is we're going to continue to monitor this to make sure that you're always using the absolute best investments to help you accomplish your goals.
• 20:40
  Speaker 1: So what we have done so far is we've accomplished.
• 20:42
  Speaker 1: Step one Is the discrepancy in your portfolio performance a fund issue?
• 20:46
  Speaker 1: And what we can say here, using these examples, is no, this is not a performance issue, so it must be an asset allocation issue.
• 20:54
  Speaker 1: What do I mean by that?
• 20:56
  Speaker 1: Well, asset allocation is the different types of stocks and bonds that you're using Now.
• 21:00
  Speaker 1: For you, we have a very intentional mix of stocks and bonds.
• 21:02
  Speaker 1: We have US stocks we have.
• 21:03
  Speaker 1: For you, we have a very intentional mix of stocks and bonds.
• 21:05
  Speaker 1: We have US stocks.
• 21:05
  Speaker 1: We have international stocks, we have emerging market stocks.
• 21:07
  Speaker 1: We have large cap, we have small cap, we have value, we have growth.
• 21:09
  Speaker 1: We have a whole bunch of different things, even within your bond allocation.
• 21:12
  Speaker 1: We have different durations, different maturities.
• 21:15
  Speaker 1: But what I want to remind you of talking to the client is why do we select these specific asset classes?
• 21:20
  Speaker 1: And a common talking point here is in retirement, it's not enough to have a strong average return.
• 21:26
  Speaker 1: I don't care what your average return is over the next 20 or 30 years.
• 21:29
  Speaker 1: We need to make sure that we're maximizing the consistency of your returns and there's no way to get a positive performance every single year, at least a high positive performance that's going to allow us to meet all of your goals.
• 21:41
  Speaker 1: But we do need to make sure that we have optionality.
• 21:48
  Speaker 1: We do need to make sure that we don't have all your portfolio in one asset class.
• 21:50
  Speaker 1: Let's call it the S&P 500.
• 21:51
  Speaker 1: That's not really an asset class, whether it's large cap growth, whether it's large cap value, whether it's small caps, whatever the case might be, if all of your money was in one single asset class, you're not giving yourself optionality, we're not giving ourselves flexibility so that when the market is down, if everything was in just one asset class, all these asset classes will go through prolonged periods of underperformance and if everything's there, we are forced to sell that asset class at a pretty significant discount versus if we own all these different asset classes, all these stock asset classes that have, over time, had really strong performances.
• 22:26
  Speaker 1: What we are doing for ourselves is we're giving ourselves options when it comes to where should we draw money from this year.
• 22:33
  Speaker 1: If the US large cap growth portion of your portfolio is up the most, like it was in 2023, wonderful.
• 22:39
  Speaker 1: We have an allocation there.
• 22:41
  Speaker 1: That's the part of your portfolio that we're going to sell from to free up cash for future living expenses.
• 22:46
  Speaker 1: If we go back to 2022, that happened to be the worst performing part of your portfolio.
• 22:51
  Speaker 1: So in 2022, we want to make sure we didn't just have all of our money there, but we had other types of investments that we could draw from, so that whatever we're selling is not forcing you to liquidate at the bottom and then you can't recover from that downturn.
• 23:05
  Speaker 1: So this, of course, is going to depend upon what the asset allocation is for the client.
• 23:08
  Speaker 1: But once you've gone through that, you now can tie it all together.
• 23:11
  Speaker 1: You can look at all this and you can look at your client and you can say we've viewed all of this.
• 23:15
  Speaker 1: Now I feel very strongly about the funds you're in for the reason I outlined.
• 23:19
  Speaker 1: I feel strongly about the asset allocation we have for you because it gives you the highest likelihood of accomplishing your goals.
• 23:24
  Speaker 1: The trade-off for this, the trade-off for being diversified, for having these different asset classes, is there are going to be years, like 2023, where you see the US markets doing one thing and you see your portfolio doing something else.
• 23:36
  Speaker 1: Now, that is a price we are more than willing to pay, because the downside is significantly outweighed by the upsides of doing this the upside of protecting your portfolio, of giving you optionality, of giving you flexibility while still positioning you for great long-term returns.
• 23:53
  Speaker 1: Is there anything you're talking to the client?
• 23:55
  Speaker 1: Is there anything you don't feel fully confident in, as we've gone through this, and then you pause and let them talk and, of course you should been letting them talk through different parts of this to see if there's questions.
• 24:04
  Speaker 1: But what you've done here, as we start to wrap up, is you have addressed head-on the concerns that you know your clients have.
• 24:10
  Speaker 1: You have given them a thorough explanation, not throwing charts, not showing graphs at them, but a thorough explanation that is unique to them for why you feel confident in the approach that you're taking.
• 24:20
  Speaker 1: And then you're checking in with them to see what questions they still might have, to ensure you fully address their concerns, to make sure those concerns are alleviated by the time that you walk away from the meeting.
• 24:30
  Speaker 1: Now, what did I say not to do?
• 24:32
  Speaker 1: At the very beginning I said don't start by just saying diversification works.
• 24:36
  Speaker 1: Don't start by saying, look at how this would have performed over the past 10 years.
• 24:39
  Speaker 1: Don't start by saying, well, we aren't just invested in the S&P 500.
• 24:42
  Speaker 1: Those are not great ways to start, but as we've taken the approach I just laid out, you have still confirmed all these things.
• 24:50
  Speaker 1: You've confirmed that diversification works and why You've looked at performance over the past 10 plus years.
• 24:55
  Speaker 1: You've confirmed why you're not just invested in the S&P 500, but you're doing it in a way where the client feels way more confident in their portfolio, they feel smarter walking away and they feel a deeper sense of trust with you, because you took the time to help them see their performance in the proper perspective, which goes back to that concept of organizing their thinking to help them see clearly where that discrepancy is coming from.
• 25:16
  Speaker 1: Now one more time, just a big disclosure, because I need to be very careful when talking about performance.
• 25:20
  Speaker 1: Once again, this is not an endorsement, this is not a recommendation.
• 25:23
  Speaker 1: These are numbers from previous years and you should always have relevant client information and up-to-date numbers to present.
• 25:29
  Speaker 1: Don't just pull these numbers, of course, and put them in front of a client.
• 25:31
  Speaker 1: This is also intended for a professional audience.
• 25:34
  Speaker 1: This message is intended for financial advisors who help their clients or help have these conversations with clients.
• 25:40
  Speaker 1: The guidance isn't intended for individual investors and it's certainly not a recommendation.
• 25:45
  Speaker 1: Now, real quick last thing here.
• 25:46
  Speaker 1: I said we were gonna talk about what happens when you have underperformance and also what happens when you have outperformance.
• 25:51
  Speaker 1: Now, the outperformance years can be.
• 25:53
  Speaker 1: They are a lot easier, but don't waste the opportunity there.
• 25:58
  Speaker 1: Yes, it's a much easier conversation, but use that.
• 26:01
  Speaker 1: Use it as an opportunity to do a lifeboat drill.
• 26:03
  Speaker 1: Don't just say, yeah, we're outperforming, we're so great.
• 26:06
  Speaker 1: You're not so great.
• 26:07
  Speaker 1: You're outperforming because of diversification.
• 26:09
  Speaker 1: You're outperforming because of what the market's doing, and so be honest about that and set the expectation that it will not always be this way.
• 26:16
  Speaker 1: Nick Murray talks about the concept of a lifeboat drill.
• 26:19
  Speaker 1: Talk about a coming downturn.
• 26:20
  Speaker 1: Not predicting when it's going to happen, but telling them on average, the market's going to drop by this amount in entry year declines On average.
• 26:27
  Speaker 1: We're going to have a bear market every so often.
• 26:29
  Speaker 1: And put that in real dollar terms.
• 26:31
  Speaker 1: Don't say, yeah, everything's good right now, but expect to be down 25% at some point in the next few years.
• 26:39
  Speaker 1: Put it in real dollar terms.
• 26:40
  Speaker 1: You have a $2 million portfolio.
• 26:41
  Speaker 1: That $2 million portfolio, there's a chance.
• 26:42
  Speaker 1: This time next year we're having another meeting and that's down to $1.5 million.
• 26:46
  Speaker 1: What's that going to feel like Now?
• 26:49
  Speaker 1: Not just what's that going to feel like, but you're retired now.
• 26:51
  Speaker 1: You're not adding money to your 401k and using that as an opportunity.
• 26:55
  Speaker 1: You're actually living on this money.
• 26:57
  Speaker 1: You've got more free time to tune into the news and what's going on.
• 27:00
  Speaker 1: This is going to be a much scarier event and I want to walk you through the strategy that we have for you to make sure that you're going to be able to withstand that.
• 27:08
  Speaker 1: Now, that's a different conversation for a different day.
• 27:10
  Speaker 1: But even when markets are up, it is a chance to remind clients of your investment strategy and it's a chance to prep them and you should be continuously prepping them for there will be downturns and we've engineered your portfolio in advance not to avoid those downturns I think that's frankly impossible but to make sure you have the right types of asset classes to be able to weather those storms without having to sacrifice your lifestyle or not be on track for your goals.
• 27:33
  Speaker 1: So that is it for today's episode of the Root Ready podcast.
• 27:36
  Speaker 1: If you are listening and you have a question that you want me to answer sometimes the more specific the better so it can be a very general question.
• 27:42
  Speaker 1: It can be a super specific question, something that came up between you and a client or between you and someone on your team.
• 27:47
  Speaker 1: The link to the episode webpage is in the show notes, so go ahead and click on that and there's a chance for you or a place for you to submit a question that I will look at and look to answer on a future episode.
• 27:55
  Speaker 1: That is it for this.