A Great Book and a Not So Good Op-Ed Piece

Reading a book can have a lasting impact. It can educate.  It can provide new and vivid perspectives, even to events which have recently occurred.

The outstanding book The Alchemists, by Washington Post writer Neil Irwin is one such book. The Alchemists, Three Central Bankers and A World on Fire provides insight to the challenges that the world's central bankers faced during the financial crisis since 2008 (and still face now). Irwin explains how they dealt with the non-stop issues, how they interacted with each other and how they developed new and innovative approaches to economic challenges.

I read and closely follow financial matters on a daily basis, through many types of print and electronic media. Still, I was amazed by how much I learned by reading this book. Irwin's work reflects how perspective and information can sometimes only be gained through reading a book.

What did I learn from this book?  How will it benefit my clients, as their financial advisor?

Irwin started the book by attributing central bank actions (or inactions) in previous time periods as causal factors to economic depressions and worldwide instability, such as wars. Irwin vividly showed that Bernanke and the other world financial leaders needed to be brave and take actions that were often "wildly unpopular."

Bernanke's academic background as a student of The Great Depression, his ability to build consensus and develop creative responses to unpredictable events helped to prevent further economic catastrophe. While some may disagree with the central bankers' policy decisions, I agree with Irwin's conclusion.

Will this book help me to predict the future of interest rates?  No.

Will this book help me predict who the next Fed chairman will be? No.

Will this book help me to explain economic events more clearly to my clients?  Absolutely yes. And that is one of our roles as their financial advisor, to provide clarity and explanations of complicated topics.(Note: Chapter 20 on the Chinese economy and their banking system are particularly worthwhile, as were sections on regulatory legislation after 2008-09.)

Having just completed this book, I was quite surprised to read the August 20th Op-Ed column in the New York Times titled Wanted: A Boring Leader for the Fed, by Amar Bhide, a professor at Tufts University. He said "we need to return the Fed to dullness and the chairman to obscurity."  Further, the author wants to "scale back what we can expect of" the Fed.

After living through the turbulence since 2007 and reading The Alchemist, I cannot disagree more with Bhide. While one can argue about specific decisions that the Federal Reserve and Bernanke have made, I do not want in the next Fed chairman to be boring. Boring is defined as monotonous, tedious (which implies dull slowness), tiresome, humdrum (commonplace, trivial, or routine) and uninteresting.  

The Fed chairman should be the direct opposite of boring. The chairman needs to be strong, bold, innovative and a leader willing to take risks that he or she feels are necessary for the good of the country and world. While Bhide calls for the Fed "to return to dullness" and the chairman relegated to "obscurity," the opposite is necessary.

The Fed chair has to rapidly deal with unexpected events, such as the collapse of Lehman Brothers and AIG, as well as set monetary policy. The Fed chair needs to effectively interact with world bankers, fellow Federal Reserve governors and staff, politicians and the media. 

The Fed needs to continue to clarify and improve its communication to the financial markets. The financial markets react negatively to uncertainty. The chair needs to act with decisiveness and be willing to speak publicly, as Bernanke has done by adding press conferences after certain Fed announcements. 

The term of Federal Reserve Chairman Ben Bernanke ends in January, 2014. President Obama's naming of Bernanke's replacement is surely one of Obama's most important decisions. I hope it will be an effective and experienced appointment, who can lead with consensus. But not a boring choice. 

What if something happens to your Financial Advisor?

Do you work with a financial advisor or stock broker? Do you work with one person, or do you have a relationship with a team of financial advisors?

What if something unexpectedly happens to him or her, or the team?  Have you planned for this? Has your advisor thought how this would impact you, as his client? We have thought about this and we did something about it.

We have a fiduciary responsibility to plan for our clients as well as ourselves. We want our clients to plan and be prepared. They should expect that we would do the same. And we have.

Our firm uses a team approach, so that my partner and I generally meet with most clients. We are both familiar with our clients and their investment strategy. We work together, as it benefits our clients to have both of our input.

If something happens to both of us simultaneously, as unpleasant as this is to consider, we have made arrangements to provide continuity for our clients. We recently completed an agreement with our back office firm, BAM Advisor Services, for them to immediately take over our practice if this were to occur.

While this scenario is very unlikely, this is an example of the kind of forward thinking and coordination we have with BAM. We want to ensure that our clients are provided for in the future. We have confidence in the long term benefits of our investment strategy. We have confidence in BAM, as our partner, that they would take excellent care of our clients.

We have planned for the unexpected, so that our clients can be confident of their future and sleep well at night. Isn't that what you want from your investment advisor?

What are the key factors in selecting an investment advisor?

When you are deciding to work with an investment advisor or financial planner, what should be the key factors? 

Trust and connection:  Do you trust the advisor and firm? Do you feel a connection and bond with them, so both you and the advisor can be open and honest?

Investment philosophy: Do you understand the firm's investment philosophy? Do they have a good track record? Do they have a "reproducible" methodology that is not based on market forecasting and guesswork?

Fee structure:  Does the firm have an easy to understand and transparent way of being compensated?

• Is the fee structure designed so the advisor is only making recommendations with your best interest in mind? 
• We are fee only advisors. We do not accept commissions or other forms of compensation for the advice that we provide. We have a fiduciary duty to only act in our clients' best interest. 

Other factors:

·         Does the financial planning firm provide advice on other important matters in your life, beyond just investments?

·         Can they assist you to move forward with your estate planning? Do they provide creative ideas and work as a team with your estate planning attorney?

·         Will they provide advice with your retirement planning and college funding?

·         Are they comprehensive planners, so they can function like your family's CFO?

·         Do they really help to minimize your taxes?

These are just some of the factors you should consider when retaining an investment advisor. The experience and credentials of the advisor and firm are also important.

Does it matter where the investments are held? Is that a key factor?

In real estate decisions, location matters. In insurance, if you hire an Allstate Insurance agent, they are going to purchase Allstate Insurance for you. We are different. We make investment decisions based on what is in your best interest and consistent with our investment philosophy, not based on the custodian (where your assets are held). In working with an investment advisor, as long as the custodian of your assets is a well known and reputable firm, the actual “location” (custodian) should be a secondary factor.

As independent investment professionals, we have selected Fidelity Investments or Charles Schwab as the custodian of the assets that we manage. This is the place where your assets are securely held.

When a new client begins to work with us, we generally move their assets to one of these two custodians. We prefer Fidelity, as they provide our clients with the best combination of low costs, efficient service, easy to read monthly statements and a website that is secure and user friendly.

Think of the custodian as the holder of your assets. As we are independent advisors, we can recommend and purchase nearly any mutual fund, bond or CD that would be in your best interest. Because we recommend to custody your investments at Fidelity does not mean we recommend primarily Fidelity mutual funds. Far from it.

Our investment decisions are completely separate from the decision of where to custody (hold) your assets. Doesn't that make sense? 

"August can be a very tricky month. Be Careful."

As I drove to meet my son for lunch on Monday, a Wall Street analyst on CNBC made the above comment, which I heard while listening on Sirius radio.

Is this a realistic comment? Is this the kind of advice you want from your financial advisor? Is it really helpful?

Do you want planning and recommendations for the long term?  Or do you want investment advice focused only on the next month?

Do you want a financial advisor who will advise you with your investments, as well as assist with your estate planning, retirement planning and reducing your taxes?  Or do you want predictions and guesses?

Do you want a financial advisor that utilizes a rational investment philosophy that is understandable and provides you with comfort, peace of mind and security? Or do you want an advisor that tries to time the market with unproven forecasts?

We do not know what August will bring. We don't know what will happen in any future month. Do you?

We do know that we can provide you with comprehensive financial guidance and advice that will be valuable to you and your family. We do know that it will be more valuable years from now than a prediction for the month of August, 2013. 

Honesty

At dinner Friday night at a crowded Bella Piatti restaurant in Birmingham, the most striking part of the evening was the honesty of our server.

When ordering appetizers, our server was very clear which items he recommended and a few to avoid. He provided advice and was helpful. When he returned with the appetizers, they were all wonderful and we were pleased with his guidance.

After a while, it was time to order our entrees. Again, when asked about certain dishes, his verbal and facial responses made it clear what his recommendations were. We had quickly developed trust in him. His clear recommendations were so much more helpful than the usual "everything is good" reply. He guided us in the right direction, as all 5 people at the table enjoyed their main courses.

As the evening continued to desserts, he again advised us which items were very good and which are not his preferences. Being a huge fan of cannoli's, I disregarded his advice against getting the "deconstructed cannoli." When it arrived, we enjoyed it (shared amongst the group), but he was right. It was good, but not great.

During the evening and on the way home, we discussed how much we appreciated his recommendations and advice. One person asked why he was so forthright, much more so than at most restaurant experiences. My thought was that the more we enjoyed our meal, the more likely we are to return. Every business desires repeat business and he was doing his part to ensure this.

As Billy Joel's song "Honesty" says...

     "Honesty is such a lonely word
      Everyone is so untrue
      Honesty is hardly ever heard
      And mostly what I need from you"

As a financial advisor, we are morally and legally obligated to act in our clients' best interest. This is not the standard for all investment advisors and brokers. We are very transparent about how we are paid. We are fee-only financial advisors. We do not get paid commissions from any of the investments that we recommend. Unlike brokers at major financial institutions, where fees may be hidden or not fully disclosed, we are open and honest about our fee schedule.

The server of our delicious meal gave us the best opportunity to have a great experience at the restaurant. Our interests as a wealth management firm are fully aligned with our clients so they have the best opportunity to have a positive long term investment experience.

At our firm, our fees are based on what we manage for a client, not on what fund or product we sell (as we do not sell anything). If your investments increase, we both do better. If your investments decline, we both feel the pain. Doesn't that make sense?

Isn't honesty and clarity the best way to build a relationship and do business?

A Philosophy You Can Stick With

"The important thing about a philosophy is that you have one you can stick with." David Booth, founder and chairman of Dimensional Fund Advisors (DFA).

  

Prior to founding this firm in 2003 after the tech bubble crash, I spent many years researching how best to provide investment advice. How would we be different? How could we provide a better experience for our future clients than they were experiencing with their existing financial advisors or by investing on their own.

I read extensively. I went to conferences. I read more. And more. I attended my second AICPA Personal Financial Planning conference, in Philadelphia. I went from exhibitor to exhibitor and talked to many firms. And then, it happened. I got the book that would change my business life and the lives of my clients. It was my "aha" moment.

On the Friday afternoon train ride after the conference ended, I started reading "The Only Guide to a Winning Investment Strategy You'll Ever Need," by Larry Swedroe of The BAMAlliance . I could not put it down. I didn't want to put it down. And I didn't. I read it that night and throughout the weekend. I had found an investment philosophy that we could stick to. Over a decade later, I believe in it more every day.

Most people view investing and the stock market in some form of trying to make accurate predictions or forecasts. They think:

•      Is Ford a good buy now? Great, then I'll buy it. But what if it isn't a good time? How do you know?
•      Is it safe to invest now, since the economy seems to be recovering? Great, in which case I'm going to move $XXX,XXX from cash into stocks. But what if the market has already made a big move? How do you know the right time?
•      A few years ago everyone thought Apple was a great company and could do no wrong. The stock price was soaring. Onwards to $700 per share, until suddenly things changed and now it trades in the $400s. How? Shouldn't someone have been able to predict this? 

We take a different approach. One that is rational, understandable, consistent and provides our clients with peace of mind.

• We do not have a crystal ball. We don't make forecasts and readily accept that we cannot see the future (just like Warren Buffet). Doesn't this make sense?

• We don't believe that active mutual fund managers can consistently beat their respective benchmarks over a long term period. And even if they could, can they be identified well in advance, and consistently? We don't think so.

• We believe in using mutual funds with very low costs. Focus on what you can control.

• We believe in holding mutual funds that each own a group of stocks (say US small value or International Value) that most of the time will outperform actively managed mutual funds (where the manager is trying to predict which are the best stocks to own). And we have tons of academic data to support this.

• We spend a lot of time talking with our clients. We educate our clients about our philosophy. We want them to be prepared for bad markets, as they occur every 3-5 years, on average.

• We emphasize international investments and owning small company and value company stocks. Why? Because they provide better diversification and greater expected (and historical) returns than just owning US large company stocks (which is what most people own). And we have lots of data to support this too.

Having a philosophy that we believe in passionately enables us to provide our clients with a better investment experience.  It enables us, and them, to be more disciplined and adhere to their financial plan. We are fee- only financial advisors. This enables us to be independent and always act in our clients' best interest.

There is much more to our philosophy, but I will save that for future blog posts or personal conversations.

Sticking with our philosophy has allowed our clients to feel comfortable and secure. It allows them to sleep well...and isn't that what is most important?

And even though we are responsible for millions of dollars of our clients' money, because we have a solid philosophy we believe in and stick to, we also sleep well at night. And that is comforting also.

Learning, Connections and Dinner

I read a lot. I consume information from many sources (newspapers and books, both in print and electronic, as well as via Twitter). I have always been this way, just the sources and methods have changed. Since I was a teenager working at my local public library, I have read the Wall Street Journal every business day.

An essay I read on Monday has stuck in my head. David Butler of  Dimensional Fund Advisors wrote about the "Currents of Success" that flow through great financial advisor firms. He wrote that one aspect of successful financial advisor firms is "intellectual curiosity." He wrote that "building a great firm requires genuine intellectual curiosity and openness to new ideas..."

Which leads me to dinner last night. I attended an event sponsored by Lynne Golodner, of  Your People, LLC  a Southfield Michigan public relations, marketing and business development firm. I joined a group of 10 other business owners and Lynne, to share thoughts and ideas about our businesses and learn from her.

The food was delicious (glad I finally got to go to Cafe Via in Birmingham). The conversation was good. Interesting. Thought provoking. Questions were direct and challenging, but in a respectful manner.

As I drove home, my mind connected the DFA essay and the dinner together. Why had I attended? To learn more, as I always learn more by attending a conference, seminar or hearing a speaker. For the same reason that I traveled to Florida to spend a day with Bob Burg and many other speakers in May, 2012. For the reason I spent 3 days with  Michael Port in 2011 outside of Philadelphia. Why I spent years working with John Bowen and I now participate in the Strategic Coach program. For the same reason I participate in a peer group phone call with my BAMAlliance financial advisor colleagues nationally, every two weeks and attend many BAMAlliance seminars throughout the year.

Attending events or programs like these can be expensive, both in time and money. But if viewed as an investment, as a way to grow, to learn and improve, and possibly to build new relationships, then the investment is almost always worthwhile. There is always more to learn to better serve and advise my clients, as well as to grow intellectually.

Each time I attend an event or conference, there are new ideas to implement, things to change and new people that I've met. The challenge is to implement and develop the personal connections. The challenge is to prioritize to adopt new habits. Lynne challenged us to blog more. Share our ideas. Write in a more personal manner. I know if I blog more there will be benefits.

Will I blog more regularly in the future? If I do, then the evening with Lynne will be even more worthwhile.