At the Los Angeles Business Journal, our ears are always to the financial ground, and there are a number of questions that we’ve been hearing repeatedly from readers navigating the wealth management landscape. To take a closer look at the latest concerns and trends in wealth management, we have turned to two leading experts, Selwyn Gerber, CPA, Founding Member at RVW Investing LLC and Andy James, Co-Founder and CEO of BitTrust IRA. They graciously weighed in for a discussion and shared some insights on the state of wealth management in 2018.

Describe the current investment environment and what you consider to be the best investment approach, in general terms?

GERBER: We adhere to evidence- based investment principles regardless of the environment, because RVW portfolio design is more science and less art than most. The research of Nobel Laureates Prof. Eugene Fama and Prof. Harry Markowitz; academics like Prof. Jeremy Siegel; and storied investors like Buffett and Munger inform our approach - and we implement resilient portfolios tailored to the long term needs of each client for growth, safety income and tax minimization. The data indicate that over 80% of managers who engage in stock picking and market timing (“active management”) have underperformed their benchmark indexes over any 10 years - and that over the long term stellar rewards awaited those who owned quality stocks and endured the volatility. Our typical portfolios comprise a group of broadly diversified, low cost enhanced-index based funds with an overweighting towards factors that have historically delivered higher expected returns. Bonds mute volatility and provide interest income. A selection of superior dividend paying equities delivers growing taxminimized income.

JAMES: This economy has been bolstered by record monetary stimulus and it’s important to recognize exactly where we are in the cycle. We encourage our clients to be deliberate in managing risk by using asset allocation. A lot of the traditional asset classes are at historically high levels and they’re all fairly correlated. This makes diversifying more of a challenge. Alternative investments like cryptocurrency have proven to be an attractive option for those looking for an asset that has no linear relationship with the major indices. For investors with a high-risk tolerance, the ROI has just been off the charts.

What are the major changes for the business of wealth management in the last five years and what key strategy changes do you anticipate in the next five?

JAMES: We’re lucky to live in a time where individual investors have a great deal of opportunity and the costs to invest their capital are very low. This means they can take control of their own financial destiny rather than relying strictly on advisors who may be more interested in gathering assets than establishing the best investment strategy. However, the invention and adoption of an entirely new asset class has been the most important and disruptive force in the financial world over the past half decade. Cryptocurrency is a real game changer. Alternative investments like Bitcoin will continue to be a growing avenue for investors looking for atypical diversification and the potential for better than average ROI.

What is “atypical diversification?”

JAMES: “Atypical Diversification” is the new normal in 2018. It’s a concept that every investor should get comfortable with. This is a very different landscape as compared to past decades. We often say: you can’t rely on your parents’investment strategy. Atypical diversification is a natural reaction to an erratic market. For many of our clients, cryptocurrency investments (like Bitcoin, Ethereum and Ripple) have proven to be a potent x factor in their portfolio. The cost to invest is very low, but the returns can be impressive.

What is your general market outlook for the remainder of 2018?

JAMES: Interest rates have almost certainly bottomed. We don’t foresee a sharp rise in rates this year. Equity markets are fully valued and have weathered geopolitical headlines thus far, but it feels like there is increased risk to the downside. We’ve clearly turned a page and are entering into a more volatile future. It’s going to become more challenging to find steady growth. We can’t necessarily expect the same generous risk returns we’ve had in the past. In cryptocurrency, we’re seeing continued interest from investors and wider adoption globally. We expect significant further returns.

Given your firm’s outlook and forecast for the year: what is the next advice for longer-term portfolio asset allocation?

GERBER: Asset allocation for our clients is similar each year independent of what “experts” forecast, especially since they have such an abysmal record of being right - and is responsive to the specific situation of the client rather than to the outlook de jour. If one had invested $10,000 in the S&P 500 in 1997 that would have grown to around $50,000 by the end of last year. However, those who missed the 10 best trading days during that time would have earned only half as much. Market timing generally produces sub optimal returns. We are long term mega-bulls and have 100 years of history to back up our position. The key is to have the emotional fortitude and the financial diversification to be able to endure the severe bear markets that take place from time to time, with equanimity. They are simply part of market and economic cycles - and each bear market eventually turned out in time to be a compressed spring that pushed the markets up to evergreater heights. The problem is that normal market volatility never feels normal when you’re in it. I arrived in the USA from South Africa in 1977 when the Dow was around 850 and it is now well over 24,000 excluding dividends that would have been paid out over that time. It has grown over 34-fold with dividends reinvested. The fact that there were a dozen major market collapses over that period is now irrelevant to those who were invested over that time. Each RVW Wealth Advisor is also a CPA and Personal Financial Planner. We have a ruthless focus on the bottom line and on income tax minimization, because it’s not what you earn but what you keep that counts.

What can advisors do to keep news-driven distractions out the clients’ heads to keep them focused on their long term plan and goals to grow wealth and prevent them from exiting out and entering into the market at the wrong time?

JAMES: Cryptocurrency tends to generate its share of headlines. The bottom-line is this: keep your clients informed. Investors need a clear road map for their financial future. The focus should be on establishing goals based on their risk tolerance and their requirements. Rather than respond to the market, we respond to the needs of the individual investor. This means that we answer every email, every phone call. It can be time consuming, but that’s our responsibility. We share every piece of market data that we receive. When our clients are informed they’re far less likely to react to sensationalist headlines.

GERBER: Each client’s ship is guided by the stars and not the prevailing winds. We regard the news largely as noise, and generally ignore it. Media messages negatively affect investors’ performance by reporting with dramatic headlines which tend to cause them to panic and sell. For example, many investors exited the markets after Business Week’s famous “Death of Equities” issue in 1979, which was just before a multi-decade bull market, and there was a similar stampede out in 2008. Those who reacted to the headlines paid dearly. We are counter-cyclical educators - in bearish markets we let our clients know that all bear markets end eventually and that history is solidly on the side of the bulls. In frothy markets we invoke the immortal words of Buffett that “trees don’t grow to the sky” and that in time reversion to the mean will cast a spell of bearish reality. Suppressing one’s instincts and ignoring the pundits are key attributes of the savvy equity investor.

In today’s economic environment, which industries and markets show opportunity? Any emerging industries of interest we should be keeping an eye on?

JAMES: This answer may be a bit obvious coming from us, but with the disruptive technology that is Blockchain we see opportunity being created at an ever increasing rate for investors. We think we’re only in the second inning of a nine inning game in terms of the evolution of digital currency. We started with just Bitcoin and now we have many many others. We continue to see astounding growth. A lot is going to happen over the next three to five years. You definitely have not missed the boat.

What are best strategies to help build and protect wealth in this global economy?

JAMES: Diversification. Think longer term – not in months but over multiple years. Think globally – It’s key not to have a US only investment portfolio. One of the great attributes of cryptocurrency is the enthusiasm and interest and support we have seen from all over the globe. Think about where the greatest value is being added and invest your capital alongside this value creation. Blockchain and cryptocurrency are creating a more advanced financial landscape that was not even conceived only a few short years ago.

How do investors manage the complexities of the current investment market?

GERBER: Investing should not be complex in any market environment. Complexities in investing are often associated with excessive fees, hidden charges and deceptive sales practices. We favor a simpler approach to investing where each client knows what they own and why, in a liquid, low cost and transparent manner. The advent of ETFs (Exchange Traded Funds) enables investors to access broad groupings of investments with common characteristics under a single umbrella at low cost. Companies that no longer meet the selection criteria of the fund are automatically dropped - and new ones are added as they begin to fit the rules of admission. We regard this approach as a Darwinian best-of-breed selection process. Combining a grouping of funds is much like creating a financial orchestra where each fund functions as an instrument, bringing a different attribute to the overall harmony of the portfolio.

What keeps your clients up at night in 2018?

GERBER: Financial peace of mind is our #1 promise. Being invested in a diversified group of successful enterprises selected in an objective manner and laddered secure bonds where appropriate, our clients have absolutely nothing to worry about at night, and they know it. They understand that the portfolio has been properly designed to withstand volatility, and over time to meet their expectations. In addition, our educational process ensures that our clients understand what they own and the expected volatility of each element within their portfolio. If they’re not sleeping peacefully we have failed in our primary task.

JAMES: For some clients they simply fear missing out on the next big opportunity. For other clients it’s more complicated. Many have come to us because they’re looking down the road and realizing that they don’t have enough savings to live the life they want in retirement, and this can be panic-inducing. The window of opportunity is closing rapidly and they see no way to fill the gap in time. In both cases, our clients want to make sure they are not missing out on the greatest opportunities for investment returns. They’re forward thinkers. They’re not thinking month to month. They’re thinking long term. And they see cryptocurrency and the blockchain as incredibly disruptive technology with the potential for huge upside.

What should clients be asking their advisors in 2018?

GERBER: The first key question is to understand if there are any conflicts of interest in the recommendation of investments. The distinction between suitability and fiduciary standards is a good starting point. Fiduciaries are obligated to place the interests of each client ahead of their own and will bring objectivity and genuine care to the wealth management process. Most traditional stockbrokers adhere to the less rigorous suitability standard. Understand what the total fees and charges - direct and indirect - amount to for each investment, and what incentives if any are provided to the salesman for each sale. Many classes of mutual funds charge higher fees in order to compensate the advisor more generously. Investors should understand if the portfolio is well diversified across geography, sectors, and stocks to avoid concentration risk - and how similarly designed portfolios have previously performed in times of market stress. Always inquire about the educational qualifications of your advisor and check public records for violations. Request periodic reporting that is clear and readily understandable.

What are some mistakes individuals make when working with their wealth management advisors?

GERBER: Blindly trusting the advisor without understanding the investment philosophy or the process is a key mistake. Complexity is often a way to hide costs and fees - and to mislead. In addition, the investment process should ensure that there are absolutely no conflicts of interest between the advisor and the investor. “Flavor of the month” is for ice cream not for portfolios and we ignore the latest trends or fads in investing like hedge funds, alternatives and venture capital. Concentration risk in a specific region, sector, or stock can lead to permanent loss of capital, and diversification is the only free lunch for investors because it transforms risk into volatility. Portfolio design is not a one-size-fits-all exercise and you should expect your advisor to design an investment program responsive to your own situation, needs and risk tolerance.

What is the best formula for creating a successful and valuable relationship between you and your client?

JAMES: Education + Transparency = Trust. Our primary objective is to educate investors on cryptocurrency and blockchain technology. We exist as a resource to help people and welcome the opportunity to talk whether the conversations result in you becoming a client today, tomorrow or never. It’s such a new phenomenon that many otherwise savvy investors are just not informed enough to fully recognize the opportunity. Secondly, navigating the crypto markets can be as complicated as the technology itself. We make sure our clients understand exactly how our signature process works and the fees associated with it. By doing these first two things correctly we are then able to build long lasting, successful relationships built on a solid foundation.

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