The Myth of Portfolio Customization

by Benjamin Beck, CFP® Benjamin Beck, CFP® | May 17, 2022

When you walk into Merrill Lynch or Fidelity – these are two different firms and I’d like to point out that the specific firm is irrelevant, this is simply an example – but a large firm like that, you would likely meet with a financial advisor. Let's imagine that this financial advisor has a hundred different clients. I'd be willing to bet you, based on my experience, that those hundred clients all would have very different looking portfolios, different types of managers and different asset classes. There's no pattern to what client A is invested in versus client B or someone else for that matter. This difference between the individual clients’ portfolios would not only be celebrated by the financial advisor, but even advertised and promoted with some pride and self-congratulation. 

Coming up through Merrill myself, new to the business, I thought this was so weird. How come these people all had different portfolios? Have you ever given thought to this? I believe that David Mallach speaks to this in Dancing with the Analysts, about how, in the conventional industry, portfolios are so different from one person to the next. When you question why this is so, the answer that all the investing firms lean into is what? “Well,” they say, “everyone is different… one size doesn’t fit all…” and then they say something about how they put so much care into creating a customized portfolio that meets the client’s appetite for risk and aligns their time horizon. 

We know that this is absolute nonsense. Okay fine, so let’s say I’m 42 years of age. Clearly, I am at a different age than someone who is 60. That implies that all else being equal, a 60-year-old should have a different looking portfolio than mine, given that because they're 60, their needs are a little bit different than mine. Maybe they need more income from their portfolio than I need at 42 because I'm still working. Perfectly valid. But the fact that their portfolio, in terms asset classes is significantly different than mine, just doesn't reconcile. How you make money in the stock market is not different for a 60-year-old versus a 42-year-old.

I’ve talked about this in the past, about comparing it to a CrossFit workout for a younger person versus a much older person. The intensity of the program for the 65-year-old versus the 30-year-old should be different. But the type of investment doesn’t need to be significantly different. No, my dad should not have 400 pounds on his back doing squats with a bar. But fundamentally doing a squat, and perhaps it's a squat in the sense of putting a bench or a chair behind him and saying, "Hey, with no weight whatsoever, I want you to sit down into the chair and then raise yourself back up without using your hands.” It’s the same functional movement as the 400-pound squat, just at a different intensity. And that's how I've always looked at the investment world, since I got started in CrossFit, about eight or nine years ago. It’s made me wonder, why do all these other financial advisors do a million different things for a million different people? 

I want to ask them, “Don't you all have a philosophy on how the investment world works and shouldn't that apply evenly to everybody?”  And, “Shouldn’t the only difference from one client to another hinge on when that particular client needs income?” The advisor needs to consider how much of a portfolio should be positioned to generate income versus how much of it needs to be allocated to capital appreciation. In a nutshell, that's investing. You buy a piece of property for the income. You buy utility stock for the income, you buy Apple, or Lulu Lemon, or a growth stock for the capital appreciation, not the income. The degree to which you invest a person in either of those buckets should absolutely be represented by that person’s income needs, today

Not only is the traditional investment world working with a flawed investment model, but it also doesn’t make sense as a business model. Wouldn’t it make sense, for consistency’s sake, for quality’s sake, for your ability to scale and grow, to create a product that is the best product possible, and then allow small tweaks that satisfy the very specific need of the customer? Apple, for example, doesn’t make a lot of different products. They perfect a small portfolio of products, and then they offer some choices. They don’t sell seventeen versions of the iPhone. Obviously, they upgrade as they improve the technology. But aside from that, they make a phone, and they say, “Here’s our phone. You can buy it in this many colors and have a few customization options. Take it or leave it.” 

That’s how we feel about our portfolios. We put an enormous amount of energy and research into creating the best product available given the information that we have. We put great care into ensuring that our clients are educated as to what investing really is, and what it is not. We encourage our clients to plan for a long life, and to invest and treat their bodies and their families as though they will live forever. We allow a few tweaks, but not much. 

Take it or leave it.

Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.

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