financial concepts

Profound Concepts

October 12,2020

Today I turned sixty-eight. As I age, I tend to reflect on the more important moments I have experienced and people I have been blessed to encounter in my life. Early in my career I remember hearing a speaker say:

“You will be the same person in five years as you are today except for the people you meet and the books you read.”

In today’s world, the “book part” has greatly expanded to TED Talks, blogs, speeches, etc. As a result, I have modified the books you read part to be the profound concepts that have affected your life.

As I look back, here are five of those Profound Concepts:

Mathematics (and by extension, Technology)

Math and technology can be used to solve the real and important life problems for individuals and families, not just businesses. Math in college focused on physical problems. My graduate school experience focused on the quant side of business. I later saw that those same methods powerfully translated to the personal side of life as well. Technology has permitted the application of that math on a scale I could never have imagined. This tandem quickly became a driving force in my professional life.

Holistic thinking

This is more powerful than transactional thinking. In 1980, I was working on a new professional designation and the first course was a general overview of financial planning. The author presented the case for a totally new concept that “individuals and families benefit most when they view financial decision-making holistically rather than transactionally.”

Internists have understood that about the human body for many years. This concept may seem obvious today, but there was no way to do holistic planning in 1980. Personal computers would not be available for two more years and the first versions was extremely limited.   

Behavioral finance

This may be the most important contribution to financial thinking and analysis in my lifetime. In 1987, one of my colleagues shared the proceedings book from a Chartered Financial Analyst conference. This was my first exposure to the work of Daniel Kahneman and Amos Tversky.  Sadly, Tversky died from prostate cancer in 1996. Kahneman received the 2002 Nobel Prize in Economics for the work described in that proceedings book, which we used to build our risk tolerance instrument for clients.

Modern Portfolio Theory (MPT)

MPT helped extract portfolio design out of the dark ages of sales and voodoo economics. In 1990, Harry Markowitz won the Nobel Prize in Economics for his 1952 dissertation on portfolio optimization. Soon after, a program became available that permitted us to employ his concepts in the real world. As computer-processing power improved, we were able to optimize all client portfolios. This made a huge difference in the transparency of the risk level in their portfolios and their ability to weather the volatile periods we have experienced in the past thirty years.

The Duty of a Fiduciary

This is paramount in giving sound advice about issues and problems where the ultimate outcome may not be known for half a century. There are some decisions that are short-term in nature. For example, if you take a specific action, it could lower this year’s tax liability. Yet there are many decisions where the results may not be known for twenty, thirty or even fifty years.

The commission-based world is highly incentivized to push customers to engage in a transaction – now. Yet, the promises made may just be the fluff needed to make the sale. The ultimate outcome gets little, if any, thought or analysis. I feel fortunate to have spent the bulk of my professional career on the fiduciary side of the table.

While this is not an exhaustive list, it covers the high points of the profound concepts that have made a difference in my professional life. What are yours? Each of us have them.

It’s important to pass them on to the generations to come. I want my children and grandchildren to find purpose in their lives. Purpose can come from a winding path over many years. It is not always a Eureka moment. I think this is most likely to happen when they spend their lives with thoughtful, considerate people and focus on the profound concepts in life.

If we can be of help, email or call if you want to set up a Zoom meeting or talk by phone.

Rick Adkins, CFP®, ChFC, MBA

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