What Makes Us Different?

Every financial advisor claims they are different from one another.  But is it true?  Let me tell you a quick story.  About five years ago, I thought I was different from other advisors.  I built portfolios differently than other advisors.  In fact I took pride in the fact that I didn’t take 100% of my firm’s research and implement them. I picked stocks differently, I screened mutual fund and money managers differently, and I moved in and out of the market at different times than other advisors.

My hope was that this would lead to better results for my clients. It didn’t.  I quickly realized it didn’t matter that the stocks or bonds or mutual funds or money managers in my portfolios looked different from other advisors’ portfolios.  When we would compare notes, we all realized that at the end of the day we were not producing additional returns or providing value for our clients.  We all had our own ways of building portfolios but this was not the point of differentiation!

At one point I was so disenchanted that I wanted to quit the business. But then I made a life-changing discovery.  I realized that there are really only three critical factors that differentiate one advisor from another.  They are: the Investment Philosophy—Active Management vs. Structured Investing, Portfolio Construction, and Coaching vs. Selling.

Investment Philosophy—Active Management vs. Structured Investing

In the investment world, there are really two different and diametrically opposed philosophies—Active Management and Structured Investing.  Most investors do not realize this because Wall Street firms, their brokers, and the financial media only push the first.  And who can blame them? By its very nature active management makes more money for them and moreover, they are not paid to educate the investor–they are paid to sell them products.

Active Management believes that the advisor can create value for the client by helping them either time the market or pick the right stock, mutual fund, money manager, IPO, bond issue, or whatever.  The believers of this philosophy include:  Wall Street firms at-large, the financial media (CNBC, CNN, Fox News, Bloomberg), all major mutual fund companies, all major brokerage houses, and my guess is that unless you’re working with a financial coach, we can put your financial advisor in this group as well.  Active Management is built upon the foundation of Timing, Selection, and Track Record Investing.

The second investment philosophy believes just the opposite.  It believes that Timing and Selection is a fool’s errand; that the markets are efficient, diversification is essential to long-term success, and asset allocation is the reason why your portfolio gets what it gets.  Believers include me, my money manager, (Matson Money), Dimensional Fund Advisors (DFA), Nobel Prize winning economists, and world-renowned academics.  Structured Investing is founded upon the principles of Academics and Economics.

Neither investment philosophy is right or wrong.  It’s what you believe works FOR YOU.  But I do think you need to enter this game knowing the rules and with your eyes wide open.  So know this: there is not one shred of evidence to support Active Management as a successful long-term investing strategy–NONE whatsoever.  (In fact, all the evidence supports the use of Structured Investing). There is no academic paper, research, dissertation, or theory that proves someone can know IN ADVANCE which investment will be the winning one. There is only anecdotal “evidence”.

Portfolio Construction

If you look at your investment statements it will have a variety of products—mutual funds, individual stocks, and maybe some fixed income (bonds)—some will look familiar, others will seem foreign.  Whatever you have I can guess with a high degree of certainty that the underlying investments that make up your portfolio all employ some sort of active management—either strategically or tactically.  And because active management is based on predictions and active trading, it increases costs and decreases tax efficiency.

Our portfolios are made up of Structured Funds.  Unlike traditional mutual funds (or index fund funds for that matter), Structured Funds are specifically designed and engineered to capture risk-return dimensions identified in the Three Factor Model.  These are the premiums that exist in the small cap and value arenas which have been identified through academic research.

Also, any trading within the portfolio is pre-defined by our Investment Policy Statement (IPS) and is usually triggered by rebalancing. Mutual Fund trading is at the mercy of the mutual fund manager’s predictions and index funds are forced to buy and sell specific securities as they fit (or do not fit) the criteria of the specific index.  This adds costs by incurring trading commissions and bid-ask spread costs. Because Structured Funds are never forced to buy or sell any security nor are they at the mercy of the manager’s prediction, they usually lower trading costs and increase tax efficiency.

Coaching vs. Selling

Many of my clients bemoan the fact that their previous financial advisor only contacted them when they wanted to sell a product.  And that’s because their advisor was under the Selling model.
We believe that there’s a better way and that’s the Investor Coaching model. Investor Coaching is made up of two parts. The first is Investor Education which is really the prerequisite to investment success.  This is the foundation upon which your portfolio needs to be built. Quite simply, there are a number of questions that investors need to answer about their portfolio before they can achieve complete peace of mind regarding their investments.

The second part of our process relates to Coaching Investor Behavior.  Proper Investor Behavior trumps all other factors in investing.  Research shows that equity investors overall get only about one-third of market returns—mainly due to improper behavior—either their advisor’s or their own.  Investor behavior is more important than portfolio construction, lowering costs, using Structured Funds, proper diversification or even education.  Nothing works without proper behavior.  It is THE critical function, THE critical factor, THE critical ingredient in successful investing.  Without it, nothing works. Without proper behavior, you’re setting yourself up for failure.

To that end, we conduct Investor Coaching Workshops, conference calls, special events, and meetings throughout the year designed to increase awareness, answer ‘The 20 Must Answer Questions’, and encourage proper Investor Behavior. The ‘Clients Only’ section of our website has these investment coaching materials for the exclusive use for our clients.

In conclusion, my hope is that you are starting to realize what makes us different from Wall Street and other advisors. It all starts with the investment philosophy. This in turn drives portfolio construction, which then is supported by educational and behavioral coaching.

This is what makes us different.

Wishing You Peace of Mind and Every Success In The World – John Choi