First Lose No Money

Is there a financial equivalent to the maxim “first do no harm?”

What if one of the guiding principles of medicine was applied to the world of financial advice?

What would the financial services landscape look like if product manufacturers and advisors were required to play by rules similar to those that exist for physicians?

First, my guess is that the financial corollary to the application of primum non nocere (first do no harm) would be:

  • First do not lose money.

I have had countless conversations over the past year or so with people who cannot believe they are actually paying to hear someone tell them that they are in relatively good shape because their portfolio has outperformed some index by fifty basis points.  Meanwhile, in absolute terms that index and subsequently the portfolio have decreased twenty to thirty percent.

Most people—particularly those approaching or in retirement—rightfully care about preserving their existing wealth in real (inflation adjusted) terms.  Saving money is difficult.  Most people simply want to avoid taking two steps back when it comes to their accumulated assets and the ability to draw a sustainable stream of income from those assets. 

Preservation of principal should be a first order issue.  There are plenty of products that exist—both annuity or insurance-based and derivative-based—that financial advisors can use to create a floor of downside protection that mitigates the “two steps back” scenario.  

Second, I also have a feeling that, similar to physicians, financial advisors would be required to become much more focused and develop deeper knowledge and skills within their areas of specialization.  The notion of a financial services generalist who is all things to all people is unrealistic, even if the advisor is fee-based and refers to specialists for product transactions.

Financial services silos do exist but they are largely premised on the economic realities of the human learning curve as it applies to product distribution.  Consumers would benefit from having a financial advisor equivalent to the AMA list of physician and practice specialties.  

Last is the issue of liability.  Maybe it makes more sense in this regard to think about medicine moving closer to the world of retail investing

How about the notion of dispute resolution and the capping physician liability through a binding arbitration process managed by the American Medical Association?  FINRA arbitration—which is final and binding—is basically the sole recourse for retail investors who feel they have been harmed by an advisor.  No state or federal lawsuits—just binding arbitration mediated by an industry-sponsored mediator…


Not understanding the "human learning curve" reference in the article.

Basically refers to the rate of learning and related levels of productivity.

The sale of complex financial products such as annuities requires detailed knowledge.

It is very difficult for a financial advisor to be expert across many different product types--in the same way that a physician cannot be expert across all specialty types.

Sellers of financial products tend to focus in order to deal with learning requirements and complexity. Thus, you have securities people, insurance people, banking people, and many focused subsets within these and other broader categories.

First, do no harm, First Lose no money. Interesting concept in dealing with other peoples lives and money.

I find it interesting that in the securities world one of the first things that is done is having a potential client reveal what his "Risk tolerance" is. All of these questionaires are testing nothing but there emotional response to loss. It seems far more appropriate to base there risk tolerance on math and the "actual" idea of whether they can afford to lose money in reality not in their minds.

To me it's simply a matter of Assets and Liabilities and asessing if the client has a risk of becoing insolvent if there is a black swan, interest rates fall, long term care is needed, inflation, etc. And I think of assets vs liabilities in terms of income needed as apposed to lump sums.

For example, consider the needs of the following client:
1. Married
2. Both spouses age 65
3. In good health
4. Retirement savings = $500,000
5. Liabilities (Monthly Expenses) = $6,000
6. Monthly income
Social Security = $2,500 (includes both spouses)
Pension = $1,200 (100% survivorship benefit)
No other guaranteed income sources

This couple needs an additional $2,300 per month from their investments which is $27,600 annually and a 5.5% withdrawl rate.

If we as advisors used the maxim "First lose no money" in this situation, what would we do. It seems to me the industry is largle focused on Investment risk and not longevity or the impact that losses could have on the portfolios ability to sustain the income need specified in the beginning.

IF, and it may be a big IF, but IF this client suggests they have a moderate risk tolerance and subsequently invests ALL their savings into an asset allocation portfolio which is followed by some significant losses that reduces their portfolio from $500,000 to $300,000 now their $27,600 annual need represents a 9.2% withdrawl. This leaves them in a position that has a very high probability of running out of money or becoming insolvent, unable to produce the income necessary to cover there obligations. Of course these losses were not forseen by the fancy charts, alphas, betas and probability analysis.

If we were analyzing a business that invested the dollars with similar risk of becoming insolvent we would be livid and yet it seems regular every day people that cannot AFFORD to lose money are investing in products that have the risk of losing principle value.

I, of course, am a big proponent of annuities to ensure guaranteed income that will cover peope for life. I also do believe that the market has a strong place in growing peoples capital that is not needed to fund their retirement needs.

This allows people to be more aggressive with their risk capital and have more choices with where they might invest.

End result, I actually think WE should be telling clients what their risk tolerance is based on math, not them telling us what their emotional response may be to market losses.

This risk problem is exactly what has caused massive problems within our economy. We have corporations holding far to much risk in relation to the obligations they have. They invest in garbage because they are greedy and want massive returns in the short run but neglect to repsonsiblity to the people who gave them the money.

So, First lose no money seems pretty logical to me.