How Certified Financial Planners
will Dominate in the Future of Investing
The world of investing is about to change at a fundamental level. The National Association of Online Investors has released a new approach to investing called Dynamic Investment Theory that makes investing simpler, more profitable and less risky. It is the future of investing. The purpose of this Web page is to show how Certified Financial Planners (CFPs) will be one of the greatest beneficiaries of this change by enabling them to offer the total financial / investing solutions that the public wants and needs to become successful investors.
Allow me to introduce myself as Leland Hevner, President of the National Association of Online Investors (NAOI). Founded in 1997 the NAOI's mission is to empower individuals to invest with confidence and success. One component of this empowerment is education. The NAOI has taught thousands of individuals the art and science of personal investing via our online courses, published books and college classes. Our NAOI "Individual Investor Certification Program" is the gold standard of investor education today.
But we have learned based on 20+ years of teaching experience that education is not sufficient to empower individual investors; also needed is innovation. For this purpose the NAOI has a Research and Development Division that creates new investing methods and investment types where today's traditional products are lacking. We have just released a new approach to investing called Dynamic Investment Theory (DIT) that is discussed briefly below. DIT creates "smart" Dynamic Investments (DIs) and this new investment type changes everything.
Following is a short description of how DIT and DIs work, Following this short description I show how CFPs can use them to offer total financial solutions.
Introducing Dynamic Investment Theory and Dynamic Investments
In 2008, after teaching Modern Portfolio Theory (MPT) portfolio design methods for over a decade, the NAOI paused all future investing classes. Why? Because during that year when the stock market crashed, the MPT portfolios we were teaching students how to create crashed right along with it. We realized at that point that MPT methods no longer worked in today's markets and we initiated a study to find a better approach to portfolio design and investing in general. After an extensive, multi-year effort we found this better approach in the form of Dynamic Investment Theory (DIT). DIT sets the logic and defines the rules for the creation of a next-generation investment type called Dynamic Investments (DIs).
Dynamic Investments (DIs) are a derivative investment type created by combining ETFs in a dynamic and intelligent structure. The components of the DI are as follows:
Dynamic ETF Pool
The diagram below shows the passive management process on an ongoing basis. In this example the ETF candidates are a total stock and a total bond ETF and the Review Period is Quarterly. The Trend Detector used is at the discretion of the designer although the NAOI has found one that is optimal. It is shown in "The Amazing Future of Investing" book discussed below on this page. The ETF held at any one time is the ONE ETF that is trending up most strongly when a Review event takes place. The market, not human judgement, decides which one to hold.
You can see that this is a "market-sensitive" portfolio that buys and holds for one period ONLY uptrending ETFs. In other words it strives to hold only winning ETFs. In contrast, MPT portfolios MUST hold both winning and losing ETFs at all times as illustrated next.
An MPT Portfolio
In contrast, a traditional MPT portfolio, using the same ETFs, would hold both ETFs at all times as illustrated below. The asset allocation percentages are determined by an advisor based on the holder's risk profile.
This is a "static", buy-and-hold portfolio with no sensitivity to market dynamics. It is only changed when a portfolio manager / advisor makes a subjective decision to do so. And this adds a massive risk factor to the management process that is not present in the Dynamic Investment.
Sample DI Performance for the 10-Year Period from 2008-2017
The table below shows the performance of the simplest Dynamic Investment designed by the NAOI that rotates only between a stock and a bond ETF based on a quarterly sampling of the price trends of each. We call this the NAOI Core DI. Shown on the top data row are the yearly returns and the average annual return for the 10 year period from 2008-2017. Also shown, in the final column, is the Sharpe Ratio which is a measure of how much return is achieved for each unit of risk taken - the higher the better. For comparison purposes the performance of a traditional 60% Stock / 40% Bond, asset-allocation MPT portfolio is displayed in the bottom row of the table.
Why is the performance of the Dynamic Investment so superior to that of the MPT portfolio? Because the MPT portfolio, by design, held both winning and losing investments at all times during the period. In contrast, the DI is designed to hold ONLY winning investments while selling or avoiding losing investments. And the DI does so automatically based on objective observations of market data, not based on subjective human judgments.
The Productization of Investing
Each DI is a standardized portfolio product. And there are an unlimited number of DIs that can be created for a full range of investing goals. When the world of investing becomes "productized" everything changes for the better. What makes a DI a portfolio product? Here are just a few factors:
DIs have the universal goal of capturing maximum returns with minimum risk in the areas of the market determined by the ETFs in their DEP (see the diagram). This is a universal goal that works for all investors. There is no need to customize DIs to match the risk tolerance of any investor.
DIs are the market's first and only comprehensive investment - specifying not only the ETFs to work with by how they are to be traded and managed on an ongoing basis. As a result investors can buy them off-the-shelf from a variety of vendors and simply hold them for the long-term. These are active investments that are passively managed. Each DI can be seen as a "portfolio product".
DIs automatically signal trades based on objective observations of empirical data, not based on subjective human judgments. This fact removes a massive risk element from the portfolio design and management process and significantly reduces its complexity.
As standardized portfolio products, DIs can be sold by vendors from catalogs. Each DI product will be created by an NAOI-trained DI Designer. In a Product Catalog, performance data can be presented for each DI, enabling an investor to make informed purchase decisions.
The productization of investing is the Holy Grail of the financial world that experts have been seeking for decades. They haven't found it; in DIs the NAOI has. The productization of investing enables Financial Planners to provide clients with the total financial solutions that they want and need. This topic is discussed next.
What the Investing Public Needs
One of the greatest assets owned by the National Association of Online Investors (NAOI) is the knowledge we gain from regular interaction with our students who are average people with money to invest. From over 20 years of teaching personal investing we know that to become effective custodians of their savings, the public needs the following three benefits from an advisor. Together they make up what we call a Total Wealth Management Solution.
1. Financial and Investing Education
2. Financial Planning Advice
3. Investing Assistance
It is virtually impossible today for individuals to find one advisor type that provides two of these components. In the future of investing, the NAOI believes that the Certified Financial Planner is best positioned to offer all three of them in a total solutions package. The key element is the Productization of Investing as discussed above and again below.
Why Financial Planners Are Best Positioned to Meet the Public's Need
Here are the components of the Total Wealth Management Solution that the public is looking for:
Education - An integral part of financial planning is education. Most Financial Planners provide a basic level of education related to the topics of interest to a client, e.g. taxes, estates, insurance, etc. However, those that also offer education course in investing basics will have a distinct competitive advantage, not only among other Financial Planners, but among other advisor types as well. For this purpose the NAOI works with CFPs to provide to their clients an Investing Basics Study Course and an array of online Financial Planning Calculators.
Financial Planning - This, of course, is the component of a Total Solution that CFPs are uniquely qualified to provide. There is no need to elaborate on it here other than to recognize the fact that it is an indispensable component of a Total Wealth Management Solution.
Investing Guidance - Today most CFPs do not offer investing advice as a part of their paid services. Only Certified Investment Advisors are allowed to do that. As a result, CFPs are too often not the first choice of individual investors looking for professional guidance. But in a future of investing that is dominated by Dynamic Investment (DI) products, CFPs will be able to make DI "suggestions" without needing to be certified as an Investment Adviser or Broker. They will become "educators' in this area as explained next.
The role of the CFP in this new environment will be to educate clients on how DIs work and then to show them a Catalog of DIs such as the one presented below. Suggestions related to which DI or DIs that a client should consider from this catalog (which is available from the NAOI) can be made by the CFP as of the education process - this is not personalized investing advice. Then it will be up to the client to either buy and implement them on their own using an online broker or to work with an Investment Advisor/Broker to implement the DIs for them. In other words, the CFP simply points their client's in the right investing direction. No fiduciary or standard of suitability requirements are required for education. Thus, the third component of a Total Financial / Investing Plan is in the control of the CFP and can be closely integrated with the financial planning provided.
In the future of investing, the NAOI sees Certfied Financial Planners as being the advisor type of choice. They will be the ONLY advisor type that is capable of offering to the public the three components of a financial / investing solution discussed above.
An Example Dynamic Investment Catalog
Because DIs are standardized investing "products" they can be purchased via vendor catalogs such as the one shown below. For each DI product information such as past performance can be shown to enable informed decision making by the investor. Note that the Average Return data shown is real for the period specified. Also note that the Chapter references relate to the book "The Amazing Future of Investing" discussed below on this page. The book explains every aspect of how DIs work and the Product Categories shown in the table.
With the introduction of NAOI Dynamic Investments, Financial Planners can now offer Total Financial Planning and Investing Solutions. And the public will finally have ONE advisor type to work with for all of their financial / investing needs.
A Resource for CFP Continuing Education
To offer the total financial solutions discussed above a CFP must understand what Dynamic Investment Theory is and how Dynamic Investments work. All of the information needed is provided in the book entitled The Amazing Future of Investing as pictured and described below.
Title: The Amazing Future of Investing: Introducing Dynamic Investments and Market-Sensitive Portfolios
Author: Leland B. Hevner
Publish Date: April, 2018
Publisher: The National Association of Online Investors (NAOI), Tampa, Florida, USA
Format: 8.5" x 11.0" Comb-Bound Book for lay-flat, easy study
Professional and Volume Discounts Available: Contact LHevner@naoi.org
For More Information and to Purchase the Book: Go to the NAOI Store.
Presented in this book is the information needed to give Certified Financial Planners a massive competitive advantage in the future of investing.