What Does the Client Want to See?

The lesson isn’t the investment, it’s the presentation.

By Ed Mendlowitz
Call Me Before You Do Anything: The Art of Accounting

Here is a story of something that occurred in 1980 and became the reason for my understanding of how bond investments work.

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These rules still apply today, so in some measure, I’ve learned a lifelong message.

There are many things we don’t know but are sometimes thrown into where a diligent, focused look provides a valuable education. It is called experience.

I was engaged to figure out why a client was losing money every month on a sizable five-year laddered Treasury bond portfolio. The bonds had a substantial yield that was reinvested, as was each step of the ladder when they matured. Yet, the portfolio’s value dropped each month, causing the client to become very upset.

I met with the client, his wife and son, and his accountant and stockbroker. Everyone agreed that the client was totally risk-averse and the portfolio was constructed to reflect this, but in a way that would provide a greater yield than shorter-term bonds without sacrificing safety.

What was happening was that market interest rates were increasing, causing the bond values to drop. However because there was no intention or probable need to have to sell the bonds before maturity, the downward-fluctuating values did not reflect reality. The “losses” were illusory, even though that was how every broker would reflect them on monthly statements.

My solution was to have the brokerage firm continue sending the statements, but to the son. I also requested the broker to mail the client each month a listing of every bond showing the face or cost and the balance in the cash account, so now the statements the client received showed the “real” balances to report the actual situation. The result was statements that showed monthly increases equivalent to the interest paid. A few months afterward the client called me and said, “You are a genius!” What I did was have the information presented in the way the client considered it.

There are a couple of takeaways here. 1) You must do the work. 2) You have to understand the reality of the situation and not blindly follow conventional wisdom – which in this case was bunk. 3) You need to look at things the way the client sees them. 4) You should present your results in terms the client understands and can relate to. 5) You need to be confident enough in what you conclude to withstand challenge by so-called experts who will tell you they have been doing this long before you were born.

There is another lesson here and something very current. Some 35 years after this episode in my career, I posted blogs at www.partners-network.com recommending long-term bonds and explaining why the conventional advice to buy short- and/or intermediate-term bonds will pretty much assure that those following that advice will never accomplish their goals. My posts are public, and notwithstanding the criticism from long-established extremely successful investment managers, contain a way the average investor (which is almost all of us) should invest. Check them out. If you want them in a single file, email me at emendlowitz@withum.com and I’ll send it to you.

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