Advisers should embrace goals-based investing, says Tangent Capital's Bob Rice

The firm's chief investment strategist says traditional investing strategies like the 60-40 portfolio are outdated and risky

Nov 15, 2016 @ 11:40 am

By Jeff Benjamin

Traditional investing strategies are outdated, risky and increasingly commoditized, according to Bob Rice, chief investment strategist at Tangent Capital.

During his opening keynote presentation Tuesday in Miami at the InvestmentNews Alternative Investments conference, Mr. Rice drove home the need for looking beyond the advice-industry stalwarts of long-only balanced portfolios and Modern Portfolio Theory.

“You've got to start thinking about goals-based investing; that's the way you're going to fight back against the robos and leave your competitors in the dust,” he said. “Modern Portfolio Theory is a sandbox in the middle of a desert. As human beings, we like simple truths, but all good ideas have a shelf life, and the 60-40 model had a good run.”

Mr. Rice made the case for diversification into alternative strategies by unveiling a bleak picture of the current state of the global economy and financial markets.

“I think we really are at an inflection point, and quality advice is going to matter a helluva lot more in the next five years than it did over the last five years,” he said. “We are seeing massive chunks of global credit markets trade at negative rates, and we're just getting warmed up.”

The increased correlation between stocks and bonds, Mr. Rice detailed, should be a wake-up call for financial advisers and could represent a big negative hit for robo-advice platforms.

“People are going to wake up and realize that bonds are not always safe,” he said. “It's kind of amazing what's going on out there, and this isn't going to stop anytime soon.”

While the U.S. Federal Reserve has dialed down its stimulus spending, and is inching toward a likely minor interest-rate hike next month, Mr. Rice pointed out that the rest of the world is still in full stimulus mode.

“Just because the Fed is backing off doesn't change global banking policy, so you might want to look overseas for your investments because the easy money is still supporting those markets,” he said. “The Fed is making their best guesses, but they really have no idea what to do. Right now the level of uncertainty on this planet is huge. That's why we have to prepare for multiple futures and we have to go to a radically more diversified portfolio approach.”

Tish Gray, wealth planning adviser at Sagemark Consulting, praised Mr. Rice for putting it out there and challenging the industry to embrace the idea of constant change.

“Modern Portfolio Theory is a good skeleton, or core, but you need to look more three dimensional these days,” Ms. Gray said.

Citing the expected annual return rate of 2.2% for a portfolio of 60% stocks and 40% bonds, Mr. Rice said advisers should consider alternatives for enhanced performance even if nothing changes.

But the stronger case he made was for defensive diversification, which he said will not be accomplished by hiding in passively managed index funds.

“The point of passive investing is to be average for cheap, and in this kind of a world averages are for suckers,” he said. “Passive outperforms active when the market is up and (price-to-earnings ratios) are expanding, but it underperforms in every other market scenario.”

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