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tion, even if that option has a lower
expected return compared to alternatives,
without violating the standard.
A registered investment advisor
MUST select the investment with the
best expected return AND the least
expensive cost. Generally RIA’s invest
only in no or minimal cost investments
and charge an overall advisory fee
based on the size of assets under management
– the more the assets grow,
the larger the RIA’s fee. Client and advisor
sit on the same side of the table.“
In Edwards’ opinion, the broker-dealer
business model is adversarial
to the client’s best interest because
the success of the BD is based on how
much commission can be charged, not
how well the client’s assets grow. In
what Edwards calls the “daily battle”
for client assets, ever more individual
brokers are moving to registered investment
advisory firms. This transition
of tens of billions of client investment
dollars constitutes an existential
threat to traditional brokers and to
FINRA, which is dependent on fees
from brokers to fund its operations.
Edwards doesn’t hesitate to say,
“The whole discussion of the fiduciary
standard is not to raise broker-dealers
to the standard that RIAs currently
work under, but instead to ‘dumb
down’ the existing RIA fiduciary standard
so that broker-dealers are less
disadvantaged.”
“What’s good for broker-dealers
is not necessarily good for average
Americans,” he emphasized.
What Edwards does view as beneficial
for American investors is a forward
looking investment philosophy. Edwards
tells his clients that comparing a
portfolio’s rate of return to benchmark
index returns is like referencing the tachometer
in your car. “The tachometer
tells you what the engine is doing,” he
noted, “But if you focus only that one
instrument, you will crash your car.
A good driver must look through the
windshield down the road, monitor
what is coming next and be ready to
make changes in anticipation.”
Edwards tells his clients that there
will be scenarios during which his investment
strategy will under-perform
the market. In 1999 he refused to buy
Internet stocks even as the NASDAQ
doubled that year. “I saw a huge bubble
there and did not want to have
anything to do with it,” he said. “My
clients thought I was an idiot,” he said
with humor in his voice, “until the
following year when the NASDAQ
crashed 80 percent.” Edwards was
perfectly happy to buy Amazon, Cisco,
and EBay in 2002 because the risk/
reward ratio had tilted dramatically in
his favor.
Edwards believes his job to show
his clients how they can realistically
achieve their financial dreams - an early
retirement, a second home, funding
a grandchild’s medical school tuition.
Edwards will take on just enough risk
to achieve those dreams, but no more.
He is a practitioner of “Purpose Based
Asset Allocation,” which is a process of
segregating a client’s assets into multiple
accounts with different strategies
for short, medium and long term needs.
For example, if a client needs funds in
a month or so for a tax payment, tuition
payment or house closing, Edwards
will invest those funds only in
non-volatile assets like money markets
and treasury bills. For long term needs
such as retirement where the horizon is
5-20 years in the future, Edwards will
choose volatile but higher returning
assets like US and international stocks,
and commodities.
“Risk is not volatility – the amount
that a particular asset will rise or fall on
a given day,” says Edwards. “Risk is
the chance money won’t be there when
you need it. We can’t take any investment
risk for cash payments need in
the next 30-90 days, and we invest very
conservatively for cash flows due in the
next 3-12 months. Funds set aside for
retirement MUST be invested aggressively
when the client is younger to
achieve the higher returns derived from
more volatile securities. As the client
approaches retirement, we will systematically
increase the fixed income component
of the portfolio – lower overall
return, but less volatility.” Edwards
closed by commenting, “During the financial
crisis of 2008-9, there was never
a moment where we had to reduce the
monthly draw of our retired clients –
mission accomplished!”
670 West End Avenue 14th Floor
New York, NY 10025
Toll-free (800) 994-3766
Local (347) 580-5280
www.HeronFinancialGroup.com
THE SUIT MAGAZINE p.65