Beyond AUM

Assets Under Management(AUM) is the holy grail of the financial services industry. The quest to accumulate AUM has shaped the products and influenced the sales strategy.

A couple of decades ago the golden age of the stock broker started to fade. Charging high commissions for buying and selling hot stocks was being replaced by charging a percentage of total assets for expertise in managing a diversified portfolio giving the broker come consultant/adviser the freedom to buy and sell as needed.

And now we are in the thick of AUM. A financial services firm’s prosperity hinges on total AUM. The regulators set standards based on AUM. The service level an investor enjoys is depended on AUM. Most investors cannot even get into the game because they don’t have enough AUM. Imagine not being able to see a doctor because you were too unhealthy? Maybe not the best analogy....imagine not being able to see a doctor because your net worth was to low!!? And then for those investors who do have enough or even a lot, you are probably paying more money then someone with less for the same level of service. Say you have $100,000 and your fee is 1%, you will pay $1000 per year. Someone with $200,000 will be paying $2000 for the same product and service. Same goes for the uber-rich. Why do you pay more dollars then someone with a little less uber than you?

This way of doing business makes it easy for all parties physically and psychologically to collect and pay fees. The collection is systematic and un-stressful because the amount and the withdrawal is all but invisible. Many an investor would rather not have to think about it. The aversion to addressing the costs of life is a separate conversation.

This craving for AUM makes it very difficult for financial professionals to give conflict free advice. Faced with the potential for a large account, few would be objective enough to offer a solution that did not entail an ongoing regular fee. Controlling the assets means control of the billing.

We’ve come a long way from the era of stock brokers, stock picking and now even money managers who are trying to differentiate by beating the index are having a harder time justifying their existence. The process of investing in the capital markets is becoming a commodity. It’s more like a way to get a higher compound interest on your savings than a way to build wealth. Companies like Blackrock, Vanguard, and Fidelity have all but reduced the asset based fees to zero on their index funds. And artificial intelligence is proposing portfolios better than people ever have. This does not mean the personal touch is not necessary, it’s in fact more necessary than ever. Money is a deeply emotional experience and should be treated accordingly.

If you have $10 million invested why should you pay more than someone who has $9 million invested....the service level and product is exactly the same. If you have little to no money to invest why should you be left out in the cold. Wouldn’t you pay a few hundred dollars now to know how to have 100s of thousand dollars later?

Think beyond the status quo. Ask what you want to feel now and what you will need in the future. Make sure you are getting what you pay for, rather than just being an asset under someone’s management. Make no mistake there are those of you who have and are great advisers. Advisers who put the mission of helping people improve their future ahead of increasing their AUM.

The only AUM that you should be affected by are the assets under your management!

Mindful Investing

To be mindful when investing is to be aware of the impact of your emotions on the investment decisions and also consider the impact of your investment on the world around you.

If you feel fear, joy, hope, impatience, or obsessed when making an investment decision it’s probably a red flag that is signaling that you have not done your homework. It’s probability best to hold off and keep learning.  You should have a complete understanding of the risk reward by having a deep understanding of the business or person you are investing with. As I wrote this a friend sent me an article that does a much better job then I was doing explaining our emotions around money. A must read for everyone. Money: A Love Story.

It’s hard to argue with the fact that human consumption behavior has shaped the world and is the root cause of most of today’s challenges. Every purchase has an incomprehensible effect on the supply chain. A butterfly effect. Certain things are more destructive then others. The level of destructiveness is determined by the resource needed, it’s recyclability and the mindfulness of the person who makes and moves the product. 

Our consumption has shaped the world as we know it. Only our consumption can change it. 

All business’s respond to demand. The most prosperous ones also create demand. The bad news is we live in a time when the nature of being in business, especially a publicly traded company makes it almost impossible to be socially and environmentally friendly. Every business is dependent on us buying more than we need.  Investors are not likely to buy shares in a company that isn’t consistently trying to grow.  The best we can do is to find the companies that are trying the hardest. 

It can be hard find fund managers that are aligned with ones ethics and values.  If you find yourself in that predicament here are a few things to consider.  Buy an ESG (Environmental and Social Governance) index fund.  We all have a little disassociation in our lives so be ok with any imperfections the ESG fund might have.  Also know that the supple chain is interconnected and somehow a company you hate depends on a company you love and vice versa.  If that’s unbearable then buy individual stocks of those companies you know from personal experience are doing the right thing. And if you don’t have the stomach for that then invest in real estate.

The most impactful investment we can make is to buy less and buy higher quality long lasting goods.  In the long run we will have more money a smaller footprint.

Driving around, flying on planes, buying food at the market, ordering fun stuff online, heating and cooling our houses —- our day to day behaviors and decisions encourage a chain of events that effects the environment and shifts wealth to some and away from others.  The greatest effect we can have is through our consumption. Not only are you effecting demand but are starting a powerful domino effect in this age of social media.

“ When you make something, when you improve something, when you deliver something, when you add some new thing or service to the lives of strangers, making them happier or healthier, or safer, or better, and when you do it all crisply and efficiently, smartly, the way everything should be done but so seldom is — you’re participating more fully in the whole grand human drama. More than simply alive your helping others to live more fully, and if that’s business, all right, call me a businessman.” - Phil Knight (Founder of Nike)

We can hold business people accountable to this kind of business!

Despite the short term feeling of inconvenience and the missing surge of dopamine, spending less - beyond our basic needs - ends up being more prosperous and healthy for us, while improving the well being of the world around us. 

Alpha Dogs

I’m more and more amazed by how much time and how much money is spent and earned on the process of figuring out what people should invest in and how to make the investment. Most of that time is trying to differentiate an investment strategy so that it’s easier to convince people to pay for it.

And to what end? Are these investment strategies successful?  Are they improving the financial well being of the people who are paying for them?

Comparing them against a benchmark is the typical way in the financial services industry.  The most popular benchmark comparison is the S&P 500 which is roughly the 500 largest publicly traded companies in the U.S. So how do the financial professionals stack up against the S&P 500.  Not very well. 

As friend recently pointed out, “there are a few who have beaten the S&P 500, even after fees, but they are few and far between over a long period of time”

A recent study concluded that. “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks, as reported by this recent study

So in the end everything is NOT ok. Over the long term most investors have made about 2-3% per year while the S&P 500 (and other whole market benchmarks) has made more like 8%.

 Why are we all being left out in the cold.  Partly our own doing, and partly the industry’s fault. Two terms sum up the problem. Modern Portfolio Theory and Alpha.  The former is the theory that drives almost all retirement investing today. It’s doesn’t really matter what it means because at this point because it has become a great sales tool for the financial industry to sell their expertise to clients through a nice colorful chart that shows the change of possible returns versus the possible risk taken, so clients keep changing adviser’s and strategies.  I have yet to meet someone who has stuck to their original chosen trajectory or the adviser who presented it to them for long enough to realize the intended goal. I’m sure they are out there but like those managers who have beaten the S&P 500, they few and far between.

And Alpha is the term for how much you can beat the benchmark by driven by the insatiable appetite for more. And the result is Enantiodromia, a psychology term modernized by Carl Jung. He said that if an extreme one sided tendency dominates conscious life, eventually the opposite happens. Whether Jung would agree that his theory has anything to do with personal finance or not he would certainly say there is no such thing as coincidence.  

In our quest for Alpha, or trying to improve our risk/reward we end up selling low and buying high.  

Since the saying goes “In the end everything will be ok”, how do we make it so. 

Put your rainy day fund in a money market account or short term treasury fund. Buy the S&P 500, Vanguard Total Stock Market fund or something like it, hit the “reinvest dividends”button (because doing so makes a big difference in the end) and go back to work. You will increase your Alpha by adding more savings to your investment account and reducing the fees you pay to the financial services industry. 

See for yourself. Use this application to back-test your portfolio or a portfolio being proposed to you.

Your financial adviser, consultant, guru, planner, coach should be helping your understand the benefits of saving and a concierge to financial services. Make sure you are getting what you pay for!

Next article will be a discussion of what do if social and environmental responsibility is Important to you when investing.

The Middle Path to Investing

If you played around with the compound interest calculator in my last article, you’ll know that the “estimated interest rate” is an unknown but has a huge impact on the outcome. Based on today’s interest rates the hope of growing wealth is dreadful. Your Savings Account may not be paying you enough interest to cover the fees that bank charges you. This is why we turn to the stock market, real estate and entrepreneurship - to try and get a higher rate of return for our hard earned savings.

If you own your own business (maybe it’s a side business) and you are reinvesting your profit back into the business can stop reading here....if you are not reinvesting then start tomorrow!

If you are a 9 to 5er or more likely 7 to 7er these days, how do you get a higher rate of return on your savings.

A few options -

1 - Invest in capitalism - if you believe that businesses will continue to produce products and services that we will all continue to purchase, then buy an index fund with the savings you won’t need in the next few years. Despite a bump in the road every now and again the biggest companies will continue to make money. Be a shareholder of all those companies and share their profit. If you don’t believe that goods will continue to be produced and purchased then the value of your money won’t be worth much anyway. Most major banks have good DIY options to help you into a low cost solution and there are plenty of independent and credible robo advisors that make investing easy and accessible.

2 - If you want to be a little more active, you can buy shares of specific companies. Think about all the products you use each day. Your car, cell phone, food, airlines, gas stations, stores, banks, social media etc. Which of those companies offer the best service, the fairest pricing, the highest quality products. After narrowing down the list do some basic reading on the internet about the company’s financial soundness. Are they continually profitable? Buying a basket of companies you believe in is likely to be a sound long term investment strategy.

3 - You can also hire a financial adviser to do this work for you, but make sure you understand what the fees will be. If an adviser quotes you in terms of percentage of assets make sure you convert that into dollars. How many dollars will you pay that adviser for one year and ten years. Seeing the fees in terms of dollars out of your pocket will help you make a more informed decision. And remember, financial advisers are not going to make you rich, we are just going be a concierge to the financial services industry and hopefully a personal finance coach. As for the management of your assets… if history is any indication the best rate of return we might get for you is about 8% per year over the long term

4 - Real Estate can also be a good way to invest but do the research, and consider all the costs and tax benefits. Interest, taxes, HOA fees, general repairs can often eat away your profit or your income if you rent the property.

When making Investment decisions, whether its picking a stock, an adviser or simply deciding whether to invest at all...try to notice where you are on the spectrum between dread and hope. A little dread keeps you on your toes and too much hope may make you complacent. Take the middle path, do your research, know well what or who you are investing in. Try not to invest and hope for the best, and don’t do nothing out of fear. These are your hard earned dollars and your well deserved future at stake!


P.S. “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks, as reported by this recent study

The Best Investment Strategy

No matter what you may think or want today, what you will certainly want down the road...5,10,20 years from now ... is more money!

Each dollar you spend today is reducing your wealth by more than a dollar years down the road. 

Each day we make decisions with our emotions which affect our future financial well being.  Buying things that make us feel good or avoiding dealing with financial matters that are daunting. Whether it’s the $5 latte or new car. Maybe it’s procrastinating on changing your cell phone service plan or finding a bank with a better rate for your savings. Maybe it’s not challenging a bill or a fee. 

Conventional financial planning and budgeting focus’s on numbers. Save $X per month or I need to make $X per year or I can only spend $X per week. 

This is difficult...almost impossible....without recognizing our present and emotional bias. Overriding the desire for instant gratification is not for the faint of heart...unless you stop for a moment to consider future implications.

Put aside the your savings goals and budgets for a moment or forever and prioritize your desires. 

“Would I rather have this now or be able to do that when I’m older”

“Is this really necessary or is it just nice to have”

Take a minute, a day or a year before deciding to spend money on something. Know that spending less now will give you significantly more later. It may not work the first time or the second but keep doing it and things will start to change and your wealth will start to grow.

By aggregating the marginal savings and reinvesting you will be moving the decimal in your future net worth to the right!

To get a feel for the opportunity use this calculator to play with the numbers and see what could happen.

The next article will discuss where to reinvest.


Capitalism has Lost its Way...

But there is still hope.

1776 was the birth of capitalism, not because that’s when the United States of America was born but because that’s when Adam Smith published “An Inquiry into the Nature and Causes of the Wealth of Nations”. 

According to Smith’s theory the most prosperous way forward was a free market accomplished by reducing government intervention specifically reducing trade tariffs…. a sharp contrast to the current approach!

He also wrote that prosperity comes from reinvesting profits rather than hording them and that sustainable profits come from doing business with a long-term perspective. 

The current tariff situation feels like a short-term bump in the road of capitalism.  The current approach to reinvestment and long-term planning however is more concerning.  Modern day capitalism is focusing more and more on individual accumulation of money as soon as possible which the left side of the political aisle would argue has widened the wealth gap unfairly enriching a small number of individuals.  The same group might also argue that this desire to increase wealth quickly increases consumption with the downstream effect of climate change and other forms of environmental degradation.

What anyone on the right or left should be focused on is the lost opportunity.  Rather than executives taking way more than they need and rather than spending money on creative ways to jack up the share price – they should be using that money to pay employees more money, hire more people and build better products as a more effective way to increase and maintain profits.

Could the elusive reason for a slowdown in U.S. productivity growth be because more of the profit is going into executive and shareholder bank accounts rather than to the employees?  Are business’s prioritizing profits ahead of their mission and product quality? Is an unsatisfied work force the reason for the current political turmoil in the U.S. and around the world?

Steering the capitalist ship back to the course Adam Smith directed not only makes good business sense but also social and environmental sense.

What can we each do?  Reinvest in ourselves by reducing unnecessary spending, doing quality work (different than working a lot) and investing in business that are doing the same.

P.S. “It will be found, I believe, in every sort of trade, that the man who works so moderately, as to be able to work constantly, not only preserves his health the longest, but, in the course of the year, executes the greatest quantity of work.” – Adam Smith