ProcessAlmost universally, people describe their financial program in terms of affinity and trust for their advisor. It’s only natural that relational ties would play such a central role in one of our most intimate relationships. But are trust and affinity enough? Are these feelings sufficient foundation for the confidence we place in these individuals and their companies for one of the most important roles of our lives?

There is a common presumption among the investing public that providers of financial services are all pretty much alike. Indeed, the industry powerfully and continually reinforces this perception as they market to a narrow set of focus group findings that people desire to maximize their wealth, and be assured they will be OK.

If all services are viewed as pretty much alike and universally available, then it becomes easier for us to accept, even have confidence, that our best golfing buddy, or our first cousin, or our tax accountant will be just as capable as the next guy in ably guiding our financial future. But here’s the rarely asked question: How do golfing prowess, social likability, family ties, or professional credentials in unrelated fields address competence in ensuring you will reach every financial goal you value?

We believe the foundational principle of determining the best financial advisory relationship for you and your family should be PROCESS. Process is a series of actions that produce something or that lead to a particular result. Trust and affinity are important, but process is key.

In fact, there are all kinds of processes in the financial services industry. By far the most significant is the process of brokers’, insurers’, and bankers’ selling of packaged products, such as mutual funds, annuities, and limited partnerships, to the investing public. The focus is clearly directed toward the product (for the advisor, the focus is selling the product) with little or no attention given to how that product will impact the client’s overall investment program. The process is transactional, narrowly focused, and non-integrated.

Investors who work with brokers or advisors who place them with money managers sit through meetings that consist of equal doses of history and prognostications about the future. They view colorful charts showing them how far they’ve come since the last meeting, what changes have taken place, and why. Since no one can actually predict the future, any real value in this process can be described as 100% backward-looking.

So here are seven important considerations to help you determine if your advisor’s process is best for you:

1. What Are Your Purposes?

What results do you want to accomplish beyond building or preserving wealth? You can’t select the best process until you understand and codify the results you want to accomplish. It is amazing how little attention people give to the purposes and goals in their lives, whether basic or ideal.

2. Can the Process Be Dependably Delivered?

A deliverable investment process demonstrates control over what is controllable in the investment process – costs, taxes, and under-performance – to maximize wealth creation and preservation. Just as importantly, it recognizes what cannot be controlled – market uncertainty – and provides measures to address it satisfactorily. For instance, a portfolio manager can show you a track record of profitable tactical bets that worked out, but he cannot guarantee similar results in the future.

3. Is It Forward-Looking?

Planning must be integral and central to the process. No successful human enterprise succeeds without a plan. The plan will almost certainly change, but to start without one all but ensures less than optimal results. In fact, without a plan, there is NO way to identify threats and opportunities, beyond gut feel. A gut decision may be fine on the casino floor in Vegas, but it is not a reliable process for your family’s financial future.

4. To What Degree is the Process Integrated?

The components of your financial process should be completely integrated with your life as well as among its components. Your plan describes every need, want and wish you have as well as a clear statement of the measures you would most agreeably take to address any shortfalls that develop when lives change or markets misbehave.

5. Does Your Process Monitor Your Progress and Identify Risks and Opportunities?

The best way we know to monitor plan’s progress and confidence is through the use of Monte Carlo Simulation. Plans contain a bundle of cash flows in and out of your portfolio. We know when we want them to occur, but we cannot know what the market will be doing at those times. Monte Carlo helps us identify threats and opportunities. But for the testing to have any value, the Monte Carlo engine must simulate the investments you own. Therefore, if you own a handful of actively managed mutual funds and at the same time depend upon a Monte Carlo engine based on total markets, you cannot expect to reliably identify threats and opportunities that exist with a more volatile portfolio than is modeled.

6. Does The Process Expose You to More Risk Than You Understand or Need?

There are many ways to accomplish your life’s goals. Stock market risk is but one of them. If you have been advised to take as much risk as you are able to bear, you are likely exposing yourself and your ability to stay the course to more risk than is necessary. A complete picture of your expected cash flows, like inheritances, willingness to save more, work longer, extend or reduce certain less important goals can all serve to reduce the need for extra market risk.

7. Does Your Process Minimize Sacrifice?

The best financial planning and management processes recognize that clients are much more likely to stay with a plan that aligns its requirements with their willingness to meet those requirements. Goals are generally off into the future, but the steps we must take to attain them require some sacrifice on our parts today. For instance, one client enjoys his work and may be willing to go a couple extra years to meet important goals rather than save more today. Another might be comfortable with market volatility and prefer that the market do the heavy lifting to meet goals over reducing current spending to save more. Conversation is required to identify these nuances. And it is better spent on these subjects than on who will be our next president or . . .

While likability and trust are important, isn’t it better to have an advisor who puts every goal you value at the heart of a comprehensive process that ensures meeting those goals? Likability and trust surely grow strong in a relationship like that.