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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E
W E A L T H C A R EW E A L T H C A R EManaging Portfolio Managing Portfolio
UncertaintyUncertainty
Presented by:
David B. Loeper, CIMA®, CIMC®
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 2
Let’s Start With A Simple Test…Write Down Your Answers…
Question #1:Would a Wealthcare Plan with 20% Confidence Be Sufficient?a) No b) YesWhy?
Question #2:Would you INTENTIONALLY mislead a client/prospect about their
confidence level?a) No b) Yes
Question #3:If you were UNINTENTIONALLY MISLEADING THEM, would you
want to correct it? a) No b) Yes
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 3
Let’s Start With A Simple Test…Write Down Your Answers…
Question #4:Would you consider it misleading if an advisor told a client they
had 80% confidence, but in reality they had only 63%-71% confidence?
a) No b) YesWhy?
Question #5:Have you ever had a fund/manager that significantly
underperformed the market?a) No b) Yes
Question #6:When you picked them, were you seeking an investment that
would perform poorly? a) No b) YesIf No, then why did you pick them and what went wrong?
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 4
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 5
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
#2 – Would you INTENTIONALLY mislead a client?a) No – If you answered “Yes” you may be excused
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 6
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
#2 – Would you INTENTIONALLY mislead a client?a) No – If you answered “Yes” you may be excused
#3 – If you were UNINTENTIONALLY misleading clients, would you correct it?b) Yes – If you answered “No” you may be excused
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 7
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
#2 – Would you INTENTIONALLY mislead a client?a) No – If you answered “Yes” you may be excused
#3 – If you were UNINTENTIONALLY misleading clients, would you correct it?b) Yes – If you answered “No” you may be excused
#4 – Is it misleading to tell a client they are in the comfort zone when they really are well below the comfort zone?
b) Yes – If you answered “No”, you may be excused
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 8
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
#2 – Would you INTENTIONALLY mislead a client?a) No – If you answered “Yes” you may be excused
#3 – If you were UNINTENTIONALLY misleading clients, would you correct it?b) Yes – If you answered “No” you may be excused
#4 – Is it misleading to tell a client they are in the comfort zone when they really are well below the comfort zone?
b) Yes – If you answered “No”, you may be excused
#5 – Have you ever had a fund/manager that significantly underperformed the market?
b) Yes – If you answered “No”, you are either: Lucky, Inexperienced, Kidding Yourself, a Liar… or…..Brilliant
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P r o v i d i n g W E A L T H C A R E PAGE 9
Answer Key#1 – Is 20% Confidence Enough?
a) NoWhy? – Because the stakes are too high, the client only has ONE
LIFE
#2 – Would you INTENTIONALLY mislead a client?a) No – If you answered “Yes” you may be excused
#3 – If you were UNINTENTIONALLY misleading clients, would you correct it?b) Yes – If you answered “No” you may be excused
#4 – Is it misleading to tell a client they are in the comfort zone when they really are well below the comfort zone?
b) Yes – If you answered “No”, you may be excused
#5 – Have you ever had a fund/manager that significantly underperformed the market?
b) Yes – If you answered “No”, you are either: Lucky, Inexperienced, Kidding Yourself, a Liar… or…..Brilliant
#6 – Were you seeking an investment that would perform poorly?b) Yes – you may be excused
No…Then What Went Wrong?SOMETHING
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P r o v i d i n g W E A L T H C A R E PAGE 10
BOTH sides use the same “evidence” as support for their position:
For Example: Universe Rank – Market at 40th%-tile:
“Passive…therefore” • passive will outperform 60% (or so) of active managers
“Active…therefore” • some managers have skill and we can pick them
Who is right? Is the evidence PROOF or just data? What is the CAUSE?
BOTH perspectives on the “evidence” require accepting other UNPROVEN premises if they are to be valid EVIDENCE:
Passive: Requires that past performance is indication of future resultsThis has not be proven…therefore the “passive therefore” is invalid
Active: Requires that the CAUSE of out-performing to be skill and not luckEquivalent of saying that someone that flipped heads six out of ten coin flips is better than average at flipping heads!?
In money management we do not know whether the cause was skill or luck…(in coin flips we know it is luck) therefore unless we can PROVE skill the “active therefore” is invalid
The Active versus Passive Debate (click here for white paper)
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P r o v i d i n g W E A L T H C A R E PAGE 11
The Active versus Passive Debate (click here for white paper)
BOTH sides use the same “evidence” as support for their position:
Efficient Market Theory:
Passive: Markets are efficient and any “incorrect pricing” is quickly corrected, therefore one cannot consistently find inefficiently priced securities.
Active: Most money is actively invested, and people wouldn’t do that if markets were efficient, and “some” securities are not as efficiently priced (i.e. small cap, foreign).
Sharpe’s Mathematics of Active Management:
Passive: In the end, the market must equal itself! The average dollar invested must equal the market less expenses.
Active: That’s why we don’t pick average managers…we pick above average!
If you have a debate and both sides use the same “evidence” to prove their contradicting conclusions, either the conclusion or the evidence should be dismissed
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P r o v i d i n g W E A L T H C A R E PAGE 12
Do you understand timing Risk?
Year
Projected Portfolio Values
12.15%
» Investor with $2 million in an Aggressive taxable portfolio
» $118k retirement income» 30 year plan
» Do not dip into principal in real terms» Assuming 12.15% return EVERY year» Default tax & inflation assumptions: » Ending Value: $2,062,442
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P r o v i d i n g W E A L T H C A R E PAGE 13
That represented the 50th-percentile result…an average…one of many potential outcomes…Timing risk is exposed by including UNCERTAINTY:
» Investor with $2 million in an Aggressive taxable portfolio
» $118k retirement income» 30 year plan
» Do not dip into principal in real terms» Assuming 12.15% return EVERY year» Default tax & inflation assumptions:
» Ending Value: Broke in year 8 to more than $29mil
Year
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P r o v i d i n g W E A L T H C A R E PAGE 14
That represented the 50th-percentile result…an average…one of many potential outcomes…Timing risk is exposed by including UNCERTAINTY:
» Investor with $2 million in an Aggressive taxable portfolio
» $118k retirement income» 30 year plan
» Do not dip into principal in real terms» Assuming 12.15% return EVERY year» Default tax & inflation assumptions:
» Ending Value: Broke in year 8 to more than $29mil
Year
Simplified to their
confidence… comfort (or lack
thereof)
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P r o v i d i n g W E A L T H C A R E PAGE 15
Do you understand the difference between Average Return (arithmetic mean), Compound Return (geometric mean) and how uncertainty affects them?
EXAMPLE 1: Average Return: 20% with no variance
% Return $ Return Ending ValueStart $100Year 1: 20% $20.00 $120Year 2: 20% $24.00 $144 Compound = 20.00%
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P r o v i d i n g W E A L T H C A R E PAGE 16
Do you understand the difference between Average Return (arithmetic mean), Compound Return (geometric mean) and how uncertainty affects them?
EXAMPLE 1: Average Return: 20% with no variance
% Return $ Return Ending ValueStart $100Year 1: 20% $20.00 $120Year 2: 20% $24.00 $144 Compound = 20.00%
EXAMPLE 2: Average Return: 20% with SOME variance
% Return $ Return Ending ValueStart $100Year 1: 39% $39.00 $139Year 2: 1% $1.39 $140.39 Compound = 18.48%
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P r o v i d i n g W E A L T H C A R E PAGE 17
Do you understand the difference between Average Return (arithmetic mean), Compound Return (geometric mean) and how uncertainty affects them?
EXAMPLE 1: Average Return: 20% with no variance
% Return $ Return Ending ValueStart $100Year 1: 20% $20.00 $120Year 2: 20% $24.00 $144 Compound = 20.00%
EXAMPLE 2: Average Return: 20% with SOME variance
% Return $ Return Ending ValueStart $100Year 1: 39% $39.00 $139Year 2: 1% $1.39 $140.39 Compound = 18.48%
EXAMPLE 3Average Return: 20% with WIDE variance
% Return $ Return Ending ValueStart $100Year 1: 60% $60.00 $160Year 2: -20% -$32.00 $128 Compound = 13.14%
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P r o v i d i n g W E A L T H C A R E PAGE 18
Compound Return: 12.15%
Based on Modeling a CERTAIN AVERAGE (arithmetic mean) of 13.8%
And Standard Deviation (extent returns will vary from their average) of 19.6%
Let’s Examine the confidence level of our example client…
But make an assumption that we are CERTAIN that we will AVERAGE a 2% Alpha (market out-performance)
For our example client, the variance in the aggressive portfolio made the 50th-percentile COMPOUND (geometric mean) return…
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P r o v i d i n g W E A L T H C A R E PAGE 19
This extra performance dramatically improves the investor’sconfidence and comfort of producing:
$118,000 a year in inflation adjusted incomeNet after tax (default assumptions – 100% turnover, 50% of gains long term)$2 Million Ending Value in spending power
Confidence (comfort) equaling the market:
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P r o v i d i n g W E A L T H C A R E PAGE 20
This extra performance dramatically improves the investor’sconfidence and comfort of producing:
$118,000 a year in inflation adjusted incomeNet after tax (default assumptions – 100% turnover, 50% of gains long term)$2 Million Ending Value in spending power
Confidence (comfort) equaling the market:
Confidence WITH 2% AlphaEACH YEAR
Thus why you select investments that outperform by 2% every year
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P r o v i d i n g W E A L T H C A R E PAGE 21
You may even improve on this by selecting Tax Efficient investments that outperform by 2% every year:
$118,000 a year in inflation adjusted incomeNet after tax (default assumptions – 100% turnover, 50% of gains long term)$2 Million Ending Value in spending power
Confidence WITH 2% AlphaEACH YEAR
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P r o v i d i n g W E A L T H C A R E PAGE 22
You may even improve on this by selecting Tax Efficient investments that outperform by 2% every year:
$118,000 a year in inflation adjusted incomeNet after tax (default assumptions – 100% turnover, 50% of gains long term)$2 Million Ending Value in spending power
Confidence WITH 2% AlphaEACH YEAR
Tax Efficient (15% turnover and 100% of gains long term) with
2% Alpha each year:
Your advice puts them in the comfort zone!!!
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P r o v i d i n g W E A L T H C A R E PAGE 23
Active Management is a VERY GOOD THING and CLEARLY we should do it when:
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P r o v i d i n g W E A L T H C A R E PAGE 24
Active Management is a VERY GOOD THING and CLEARLY we should do it when:
We are CERTAIN we will AVERAGE 2% more than the marketAnd we do exactly that each & every year…
Equal Market:
Tax Efficient (15% turnover and 100% of gains long term) with
2% Alpha each year:
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P r o v i d i n g W E A L T H C A R E PAGE 25
Active Management is a VERY GOOD THING and CLEARLY we should do it when:
We are CERTAIN we will AVERAGE 2% more than the marketAnd we do exactly that each & every year…
Equal Market:
Tax Efficient (15% turnover and 100% of gains long term) with
2% Alpha each year:
Does Anyone See Any Problems In This?
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P r o v i d i n g W E A L T H C A R E PAGE 26
Active Management is a VERY GOOD THING and CLEARLY we should do it when:
We are CERTAIN we will AVERAGE 2% more than the marketAnd we do exactly that each & every year…
Two Obvious PROBLEMS:
» First, we are not 100% certain we will AVERAGE 2% More than the market (we will ignore this for now and assume you all will average 2% more than the market anyway)
» Second, there is TIMING RISK uncertainty in our active management
(sometimes we out-perform by a lot, sometimes a little, and every once in a while…we might even under perform by a little)
What happens when we ignore TIMING RISK?
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P r o v i d i n g W E A L T H C A R E PAGE 27
Measuring the UNCERTAINTY of Active Management Timing RISK
For an aggressive portfolio, how far might returns vary from the market in one year?
Sample Universe 8.0% Spread from average (1SD) With 2% Alpha Implies:
In Favor Out of Favor NormalRelative Performance +10.36% -5.01% +1.46
Average of all markets: +2%
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P r o v i d i n g W E A L T H C A R E PAGE 28
Measuring the UNCERTAINTY of Active Management Timing RISK
For an aggressive portfolio, how far might returns vary from the market in one year?
Sample Universe 8.0% Spread from average (1SD) With 2% Alpha Implies:
In Favor Out of Favor NormalRelative Performance +10.36% -5.01% +1.46
Average of all markets: +2%
Is this reasonable to you?
Which is a more realistic model?
A) Assume we beat the market by the exact same amount each year?B) Assume we will beat the market by 2% on average, but our market
relative performance will vary from year to year?
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P r o v i d i n g W E A L T H C A R E PAGE 29
Measuring the UNCERTAINTY of Active Management Timing RISK
Effect of Timing Risk for Market Relative Performance:
2% Average Alpha & 8% Standard Deviation0 7.00%
5 4.02%
10 3.51%
15 3.21%
20 2.88%
25 2.65%
30 2.43%
35 2.19%
40 2.01%
45 1.80%
50 1.61%
55 1.44%
60 1.21%
65 1.01%
70 0.87%
75 0.64%
80 0.39%
85 0.13%
90 -0.18%
95 -0.69%
100 -3.07%
Percentile
MarketRelativeReturn
Market Relative Performance INCLUDING TIMING RISK – 30 Years:
Despite AVERAGING 2% above market
The compounding effect of that uncertainty leaves us a 50% chance of only beating the market by
1.61%:
AND exposes us to the Timing Risk we previously ignored
A 10% Chance of Underperforming even though on average we outperformed
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 30
Just as Considering TIMING RISK in plans exposes uncertainty…We can blend the market relative performance variance and measure confidence WITHOUT IGNORING Active Management Timing RISK
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:
Without Timing Risk (Assume 2% Alpha
EACH YEAR)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 31
Just as Considering TIMING RISK in plans exposes uncertainty…We can blend the market relative performance variance and measure confidence WITHOUT IGNORING Active Management Timing RISK
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:
Without Timing Risk (Assume 2% Alpha
EACH YEAR)
WITH Timing Risk (Assume 2% Alpha but there is some variance)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 32
WITH Timing Risk (Assume 2% Alpha but there is some variance)
With CERTAINTY of Averaging a 2% Alpha, INCLUDING Active Timing Risk, We Still Add Value on AVERAGE
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:Equal Market:
Just not as much as we thought!
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 33
WITH Timing Risk (Assume 2% Alpha but there is some variance)
With CERTAINTY of Averaging a 2% Alpha, INCLUDING Active Timing Risk, We Still Add Value on AVERAGE
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:Equal Market:
Just not as much as we thought!
Oops…forgot one thing… In the market portfolio we
assumed 100% turnover and 50% of the gains taxed
as short term
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 34
WITH Timing Risk (Assume 2% Alpha but there is some variance)
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:
Funny thing about UNCERTAINTY…DESPITE Averaging a 2% Alpha, If We INCLUDE Active Timing Risk, Our VALUE ADD EVAPORATES!
Equal Market, Same Tax Assumptions as
Active:(15% turnover, 100% of
gains as long term)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 35
WITH Timing Risk (Assume 2% Alpha but there is some variance)
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:
Passive Management:0.49% NEGATIVE
ALPHA (certain underperformance), 30
bps variance from market & tax efficient
Of course, we can’t invest in the market for free and even index funds vary from the market a little…
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 36
Our Sample Client – Tax Efficient Results with CERTAIN 2% Alpha:
Passive Management:0.49% NEGATIVE
ALPHA (certain underperformance), 30
bps variance from market & tax efficient
Of course, we can’t invest in the market for free and even index funds vary from the market a little…
WHEN WE INCLUDE TIMING RISK… A CERTAIN 2% Alpha adds 3 points of confidence relative to our passively managed portfolio
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 37
That ALPHA provides hope of a higher income…
CERTAIN 2% Active Alpha (with timing risk) Vs. OUR Portfolio…Confidence of supporting $168,000 Inflation Adjusted Income:
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 38
That ALPHA provides hope of a higher income…
CERTAIN 2% Active Alpha (with timing risk) Vs. OUR Portfolio…Confidence of supporting $168,000 Inflation Adjusted Income:
OUR Passive Management with
CERTAIN negative alpha…
Only a 29% Chance!
ACTIVE INCLUDE TIMING RISK, CERTAIN 2%
Alpha,39% Chance of $168k
Income!
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 39
But we do not plan on coin flip odds or worse THAT CONTRADICTS comfort & confidence…
Confidence of supporting $60,000 Inflation Adjusted Income:
Result With Market Results – Tax Efficient
No CostNo Variance From
Market
ACTIVE INCLUDE TIMING RISK, CERTAIN
2% Alpha,
84% Chance of $60,000 Income!
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 40
But we do not plan on coin flip odds or worse THAT CONTRADICTS comfort & confidence…
Confidence of supporting $60,000 Inflation Adjusted Income:
ACTIVE INCLUDE TIMING RISK, CERTAIN
2% Alpha,
84% Chance of $60,000 Income!
Price to OUR Passive Management with
CERTAIN negative alpha & some
variance…86% Chance
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 41
Didn’t most of us have some investments that under performed?
Do you think you can really pick 10 out of 10 that will AVERAGE 2% more than the market?
All the analysis so far made that assumption
Out of 10 Picks, How Many Will Be Winners?9?8?7?6?5?4?
This is another UNCERTAINTY…and we can model the risk your confidence (or lack thereof) has on the client’s overall confidence
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 42
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 10 OUT OF 10
84% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 43
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 9 OUT OF 10
81% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 44
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 8 OUT OF 10
78% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 45
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 7 OUT OF 10
75% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 46
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 6 OUT OF 10
72% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 47
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
PICK 5 OUT OF 10
69% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 48
Has Anyone Been Bothered By This CERTAINTY of Averaging a 2% Alpha?
$60,000 incomeTax Efficient Passive
Certain negative alphaSome additional timing risk
relative to the market:
86% Confidence
Active $60,000 incomeTax Efficient, 2% Alpha
HEAVEN FORBID!PICK 4 OUT OF 10
65% Confidence
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 49
THIS is WHY WE JOINED THE ENEMY!
NOT BECAUSE OF:Fees, Taxes, Or Where Indices Fall in Universes…
But Because of the PRICE to our clients ONLY life!
Confidence of $60,000 Income-
Tax Efficient Passive: 86%
Active, Tax Efficient 2% Alpha:10 for 10: 84%9 for 10: 81%8 for 10: 78%7 for 10: 75%6 for 10: 72%5 for 10: 69%4 for 10: 65%
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 50
The PRICE TO OUR CLIENT’S LIFE IS HUGE! The Price to Active Uncertainty
INCOME TO HAVE SAME CONFIDENCE AS TAX EFFICIENT PASSIVE:
$60,000
Confidence of $60,000 Income-
Tax Efficient Passive: 86%
Active, Tax Efficient 2% Alpha:10 for 10: 84%9 for 10: 81%8 for 10: 78%7 for 10: 75%6 for 10: 72%5 for 10: 69%4 for 10: 65%
$52,000$47,000$40,000$34,000$31,000$30,000$23,000NOT A TYPO!!!
ARE YOU DISCLOSING THIS
RISK!!!???
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 51
“But I’m Not Attempting to Out Perform – I’m About Risk Control!”
Actual Allocation Risk Vs. Returns 80 Years Ending 12/31/2005And Wealth Results for "Saver" Wealth Management Plan
Aggressive Growth
Growth
Bal Growth
Balanced
Bal Income
Risk Averse
Superior Selection$22.7 Million Wealth
Management$26.7 Million
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
11.50%
12.00%
7.00% 12.00% 17.00% 22.00% 27.00%
Risk (SD)
Ret
urn
(G
eom
etri
c)
I’m not looking for this:
I’m Controlling Risk!
Then What’s This???
80 Year Efficient Frontier
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 52
The Bottom Line to Your Clients…
If you are implementing with active management:
1. The confidence level represented by MARKET returns is a MATERIAL misrepresentation of the client’s true confidence level» 89% confidence for market – 84% Active, 2% Alpha, Pick 10 of 10» 75% confidence for Active if you pick 7 of 10
(ARE YOU DISCLOSING THIS?)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 53
The Bottom Line to Your Clients…
If you are implementing with active management:
1. The confidence level represented by MARKET returns is a MATERIAL misrepresentation of the client’s true confidence level» 89% confidence for market – 84% Active, 2% Alpha, Pick 10 of 10» 75% confidence for Active if you pick 7 of 10
(ARE YOU DISCLOSING THIS?)
2. At coin-flip confidence (near 50%-tile), Picking 10 of 10 add 3 pts of confidence versus passive at the same level of income
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 54
The Bottom Line to Your Clients…
If you are implementing with active management:
1. The confidence level represented by MARKET returns is a MATERIAL misrepresentation of the client’s true confidence level» 89% confidence for market – 84% Active, 2% Alpha, Pick 10 of 10» 75% confidence for Active if you pick 7 of 10
(ARE YOU DISCLOSING THIS?)
2. At coin-flip confidence (near 50%-tile), Picking 10 of 10 add 3 pts of confidence versus passive at the same level of income
3. The active bet versus our passive portfolios equates to this…» ASSUMING YOU CAN PICK WINNERS 7 of 10 TIMES IGNORING FEES:
» 20% chance of having 9.2% more income» 50% chance of having 5.5% LESS INCOME» 20% chance of having 29% LESS INCOME
WOULD YOU MAKE THIS BET?
ARE YOU DISCLOSING THIS RISK?
ARE YOU AND YOUR CLIENT CONCIOUSLY ACCEPTING THIS RISK?
OR, ARE YOU ASSUMING THERE IS NO RISK?(like we used to do in financial plans)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 55
The Bottom Line to Your Clients…
If you are implementing with active management:
1. The confidence level represented by MARKET returns is a MATERIAL misrepresentation of the client’s true confidence level» 89% confidence for market – 84% Active, 2% Alpha, Pick 10 of 10» 75% confidence for Active if you pick 7 of 10
(ARE YOU DISCLOSING THIS?)
2. At coin-flip confidence (near 50%-tile), Picking 10 of 10 add 3 pts of confidence versus passive at the same level of income
3. The active bet versus our passive portfolios equates to this…» ASSUMING YOU CAN PICK WINNERS 7 of 10 TIMES IGNORING FEES:
» 20% chance of having 9.2% more income» 50% chance of having 5.5% LESS INCOME» 20% chance of having 29% LESS INCOME
WOULD YOU MAKE THIS BET?
ARE YOU DISCLOSING THIS RISK?
ARE YOU AND YOUR CLIENT CONCIOUSLY ACCEPTING THIS RISK?
OR, ARE YOU ASSUMING THERE IS NO RISK?(like we used to do in financial plans)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 56
In Summary, The Choice is Yours…
You Can:» Implement in manner that reduces confidence except for the remote probabilities of
a relatively small improvement (20% chance of 9% more income, but 50% chance of less)
» Intentionally mislead your clients about their confidence
» Evade correcting previous unintentionally misleading representations
» Continue to represent they are in the comfort zone when you know the way you implement is putting them below it
» Seek investments that out-perform
» Despite the price to your client’s life of doing so
IS THIS HOW YOU ANSWERED THE QUESTIONS IN THE QUIZ?
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 57
You Can:» Implement in manner that reduces confidence except for the remote probabilities of
a relatively small improvement (20% chance of 9% more income, but 50% chance of less)
» Intentionally mislead your clients about their confidence
» Evade correcting previous unintentionally misleading representations
» Continue to represent they are in the comfort zone when you know the way you implement is putting them below it
» Seek investments that out-perform
» Despite the price to your client’s life of doing so
Isn’t there a way of making the most of the only life your client has WITHOUT NEEDLESSLY ACCEPTING THESE RISKS?
DON’T ALL OF THESE ACTIONS (OR INACTIONS) CONTRADICT:Comfort? Confidence? And…AVOIDING: UNDUE SACRIFICE?
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 58
You can gamble your client’s future, and your career…
» By representing your value as picking investments(despite the price to the client’s life)
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©Copyright Financeware, Inc., d/b/a Wealthcare Capital Management 2003-2008 All rights reserved
P r o v i d i n g W E A L T H C A R E PAGE 59
You can gamble your client’s future, and your career…
» By representing your value as picking investments(despite the price to the client’s life)
Or, you can deliver the Wealthcare Value Proposition of making the most of the one life each client has…
Providing confidence & comfort in achieving that which the client uniquely values…
Without accepting undue sacrifices to their lifestyle
And avoiding ANY investment risks (including the bet on active) that DO NOT BUY the client something they value
Questions?