tag:blogger.com,1999:blog-6167053228142922997.post9205106375775865278..comments2023-10-30T11:57:40.433-04:00Comments on Wade Pfau's Retirement Researcher Blog: Harry Markowitz's "Individual versus Institutional Investing"Anonymoushttp://www.blogger.com/profile/04168922717655562721noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6167053228142922997.post-39195039514152262362012-03-08T22:59:19.367-05:002012-03-08T22:59:19.367-05:00Thank you for sharing Dick. I didn't know abou...Thank you for sharing Dick. I didn't know about this history. I don't really mean to turn this into a discussion of whether Harry Markowitz followed his own advice or not, but I just wished to emphasize that even the creator of Modern Portfolio Theory has suggested there is more to consider when dealing with individual financial planning. I know you've been saying this for years too, and your Portfolio Pathfinder software does a very good job in this regard. It builds the kinds of game-of-life simulations outlined in this 1991 article. <br /><br />Thank you.Anonymoushttps://www.blogger.com/profile/04168922717655562721noreply@blogger.comtag:blogger.com,1999:blog-6167053228142922997.post-83906894209158956702012-03-08T21:34:22.095-05:002012-03-08T21:34:22.095-05:00Wade --
In the early 1990s, a little company name...Wade --<br /><br />In the early 1990s, a little company named Frontier Analytics introduced the first PC application of Harry Markowitz’ modern portfolio theory (MPT). A software product named AllocationMaster, it led investment advisors to take the client through a two-step process:<br /><br />STEP 1. Mislead the client to choose a mix of asset classes for a long-term dollar plan and goals based on comparison of the mixes in percent return rate for the individual year, omitting the dollars and years of her plan and goals and effects of compounding along the way. In that comparison, she could not see which mixes were best or worst for her goals, nor see the terrible long-term effect of high financial industry fees. In that single-year percent-return-rate view, those effects were HIDDEN. <br /><br />STEP 2. Mislead the client to DE-diversify by SWITCHING from investment in those blindly selected asset classes to any of thousands of gambles WITHIN the asset classes such as actively managed funds with higher fees. This was achieved by presenting the stunning notion that any gamble WITHIN an asset class is equivalent to an investment in the whole diversified asset class.<br /><br />That two-step process has been given several names. One of the kinder is HIDE AND SWITCH.<br /><br />For obvious reasons, the financial industry loved this scheme. But what advisor would buy it?<br /><br />Heh heh. On that little company’s website, Harry Markowitz appeared with his Nobel Prize, recently received for his origination of the MPT theory on which the AllocationMaster HIDE AND SWITCH was based. There on that website, he assured advisors that he checked the AllocationMaster assumptions. AllocationMaster sales took off.<br /><br />For two decades now, the Markowitz-endorsed AllocationMaster has been used by tens of thousands of investment advisors “guiding” millions of investors through that two-step process of MPT-based HIDE AND SWITCH. AllocationMaster is now sold by the giant SunGard firm, which currently claims on the Web that AllocationMaster is still used by 20,000 advisors “guiding” millions of investors.<br /><br />Soon after Markowitz’ first endorsement of AllocationMaster, other similar products for MPT-based HIDE AND SWITCH appeared on the market, from sources such as the firm of Yale professor Ibbotson. The College of Financial Planning used AllocationMaster to train future CFPs in its MPT-based process of HIDE AND SWITCH. Over the last decade, Fiduciary360 has built a business selling training and software for the same MPT-based process of HIDE AND SWITCH and awarding “fiduciary” credentials to advisors who take the training and use the software.<br /><br />In my records, remembrances, and views of the last 1½ decades of the financial planning and investment advisor profession, the names cited here are not names of honor.<br /><br />Dick PurcellAnonymousnoreply@blogger.com