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4 adviser takeaways from 'The Big Short'

Even if you don't get a chance to see the movie, your clients may have some questions for you after they do

Jan 4, 2016 @ 12:33 pm

By Grant Webster

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Most advisers have undoubtedly read — or at least know the basic premise behind — Michael Lewis's “The Big Short.” The recently released movie version of the book follows several teams of Wall Street traders and hedge fund managers throughout the early stages of the 2008-2009 financial crisis, as they attempt to profit from and reveal a meltdown in the U.S. housing market.

The movie does a remarkable (and somewhat comedic) job of explaining complex financial concepts to the audience — while maintaining a dramatic and almost sobering tone. Big name stars like Steve Carrell, Brad Pitt, Ryan Gosling and Christian Bale play underdog characters who are determined to win a bet against the U.S. housing market and the big Wall Street bankers — while putting all their chips on the table in the process. The big losers, unfortunately, were the millions of people who lost their jobs, homes and livelihoods when the economy came to a crashing halt.

Aside from Mr. Carrell and Mr. Bale's Oscar-worthy performances as respective hedge fund managers, there are several key takeaways from the film that financial advisers can use to improve their relationships with clients.

Even seven years later, the financial crisis still feels like yesterday. Investors often have short-term memories and the financial crisis is still glaring at them in the rear-view mirror. It's important to remember that the financial crisis of 2008 has defined how some investors view the economy, perhaps for decades to come. A high level of distrust still lingers for clients who were shaken up many years ago. Helping clients stick to their long-term plan — even in the face of market ups and downs — has never been more important than it is now.

The average investor is lost in a sea of financial jargon. In one of the most entertaining scenes of the movie, Ryan Gosling's character (Jared Vennett, an ego-hungry broker) explains the risks of tranches in collateralized debt obligations (CDOs) to a team of experienced hedge fund managers. He does this brilliantly by using a set of Jenga blocks, each block marked with a bond rating and collapsing from the bottom as the hypothetical mortgages default and crumble.

In another scene, Anthony Bourdain (celebrity chef), makes a cameo and explains that “CDOs are like stews chefs make with seafood they don't sell the day before. “It's not old fish,” he says in his trademark tone, “it's a whole new thing.”

Think about how much jargon you may be using in your daily routine. Should you “dumb” it down a bit so clients feel more comfortable and secure?

Transparency and simplicity trump opaqueness and complexity. One of the struggles the “underdog” traders face in the film occurs when the big banks refuse to appropriately reduce the market value of the CDOs (which would make the traders' short positions profitable). In other words, the true value of the assets were not marked to market appropriately — presumably because the banks didn't want to pay up until they fully hedged their risk.

Do your clients struggle to understand the value of their investments? Ensure that your clients don't experience the frustrations of wondering what they really own by using a client website portal and easy-to-understand statements.

Investing is often a zero-sum game, and the odds are usually against the retail investor. When clients are anxious to explore shorting stocks, derivatives and that next “sexy” investment, it may be worthwhile to have the zero-sum conversation, meaning there is almost always a loser and a winner in every investment. If you try to outsmart the market and win big, you may have a movie made about you, like the traders portrayed in the movie. Otherwise, retail investors will find that there is probably someone who knows something they don't on the other side of that risky option trade, and may be in a better position to profit because of that knowledge.

Although somewhat embellished at times, the film does an admirable job at helping everyday folks understand some of the causes of the financial crisis — while giving the audience a glimpse at the complexity of the financial markets. Even if you don't get a chance or have no interest in seeing the movie, your clients may have some questions for you after they do.

Grant Webster is senior wealth manager at AKT Wealth Advisors.

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