by Thornton W. Morris 

During the melt-down of 2008, we again observed the phenomena that occurred with the high technology bust of 2000. In both cases, a large percentage of investment advisors adhered rigidly to the security of the diversified portfolio. It had served them well during the 90s and from 2003 through 2007. The excuse which we most often heard for the huge reduction of portfolio value was that the market was down, and therefore, there was no place to go other than with it. This was especially a common theme in irrevocable trust administration.

And to some extent, clearly that was the case. However, the question which comes to mind, is whether an alternative to most any situation exists if a person has the ability to seek it out and the courage to act on it.

What most of us observed was a strict adherence to the established investment model, a repetition of what other financial institutions were advising, and how the particular asset class responded relative to its assigned benchmark. In other words, the established strategy appeared to be to stay in the middle of the crowd and to not venture very far from that center in any direction. This seemed to provide the most security for the financial advisory institution, allowed any criticism to be deflected by the continual discussion of "a falling market", and allowed the advisor to hide behind some established benchmark.

To the outside world, the established financial institutions appear to do things the same as their peers. The question to ponder is whether the institutions’ need to follow the crowd is a reflection of standardization due to the huge influx of advisors into the industry, the industry rules and regulations, or might there be other forces at play which need to be taken into consideration when selecting an investment advisor.

Investment advisory services are composed of humans, as are the medical and legal professions, the ministry, plumbers and electricians. An issue to consider is whether the human aspect of the equation is just as important as the various investment models, sell and buy signals, and the other technical formula that is touted by various advisors to show that their particular company has some kind of edge when it comes to the investment of portfolios. Clearly, disciplines within the operations of a company help with the execution of strategy, but an equally important issue might be whether a particular investment advisor even has the ability to go beyond or against the herd mentality.

There are at least two major factors which seem to force humans to all go in the same direction. Both social and genetic forces press humans to follow large numbers of people and to not venture outside the realm of the accepted. These factors are more than simply not thinking of a viable alternative. SOCIAL CONSIDERATIONS – We humans are "clan", "group", "pack", "herd" oriented beings, and it appears that at some level, most all humans need the approval of others. Basic insecurities that exist within the human species seem to make us, as a group, look to others for approval of our own actions. We want to be accepted. We want praise and adulation. We want "atta-boys" and "atta-girls". Humans are social beings who want to be accepted, and this applies to investment advisors, especially those in trustee capacities. (Obviously, there are liability considerations, but even those considerations are often-times based upon the established "reasonable" behavior for a person within that particular professional community.)

GENETIC CONSIDERATIONS – Recent research in the area of genetics seems to reveal that humans possess some form of a "herd mentality" gene. There are many reasons why individuals who lived within groups seemed to prosper, reproduce, and thus establish a genetic link. However, the point to be noted here is not why it might exist, but the fact that it apparently does exist and affects all of us including investment advisors.

Given that there may be both social and genetic reasons why individuals follow a crowd, the selecting of an advisor who can help clients through these erratic periods of history may be much more challenging than any of us suspect. If whomever we employ to handle the investment of capital will constantly have both social and genetic pressures to follow the movements of everyone else in the profession, we need to consider not just the technical models that are being sold by a particular advisor, or the strategy that is being recommended, but also these even more subtle, and normally never-noticed, pressures placed upon the individual. The existence of both social and genetic pressures to conform to a "herd mentality" may help explain how advisors can retain investment models in falling markets, and watch for an extended period of time, the principle of a portfolio substantially decrease.

IRREVOCABLE TRUSTS – The reactions of most all trustees to the reductions in value of their trusts appear to be similar in the administration of trusts in general, but especially with irrevocable trusts. Because of the inherent difficulty in changing trustees, those trustees are not particularly concerned with losing the business of the beneficiary. In addition, with the inherent complicated nature of the human interaction between trustees and beneficiaries, as well as, keeping in mind the social and genetic restraints in decision making that will affect an investment advisor-trustee, the selection of a trustee and the working with it over several generations is a very important decision for a family and one which will affect that family for years to come. Unfortunately, most people do not spend the necessary amount of time on the initial issue of the selection, and subsequent management, of a trustee that it warrants.

By Thornton W. Morris

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