You want to do the right thing for clients – You measure their risk, you try to get them good returns, you do fundamental analysis and technical analysis. You have business processes designed to help your clients. Isn’t diversification important enough that you should measure and build business processes around it too?
Your promise it, so deliver it – You tell clients that you are building diversified portfolios. Do you really know if that is true or not? If you are unable to actually measure diversification you simply do not know. If you do not know, you may or may not really be delivering on your promises.
You can educate clients –According to the Securities Industry Association the number one complaint of investors is that advisors don’t educate them. If you learn to tell clients what diversification is, show them how it is measured and no one else can do the same, what does that do for your clients’ confidence in you?
You can be one of a few – While this science is new and in the adoption phase, you can have the benefit of being the only guy on the block who can measure and then graphically show diversification. Imagine telling investors, “let me run your portfolio through my Diversification Optimization and show you how much diversification you have… if your portfolio is poorly diversified, I’ll make a recommendation that will diversify you.” Doing exactly this, our clients close 30% more new general business and 50% more new high net worth business than they did prior to using G-Sphere.
You can maximize assets under management and get more return for investors – And, you can do so without changing your business practices. Diversification protects portfolios from downward movements in the market. Maximizing diversification maximizes protection. When bull markets go into micro-down cycles, your investors don’t lose money in the portfolio. That money is there to achieve gains when the market moves back up. This is the essence of efficient portfolio construction.
You can protect investors from the next bear market – Everyone knows that investors hate to lose money. Everyone also knows that the market moves in cycles and bear cycles are imminent. Proper diversification will mean less losses for your clients when the next bear cycle starts. Less loss means less attrition. Protect your bottom line through diversification.
Liability – the arbitration case load increases three times when bear markets occur. Investor lawsuits and arbitration are expensive…win or lose. Legal precedent edicts that diversification is the primary component of fiduciary prudence.
If you are contemplating using a risk optimization such as mean-variance optimization you may be sacrificing returns. Investments generally have a diminishing return for incremental increases in risk. Therefore, a risk-based optimization favors low risk / low return investments. Diversification optimization favors non-correlated, high performing investments.
Becoming one of the early adopters of Diversification Optimization can give you enough credibility to open up new markets and opportunities.
