Last year, I wrote a brief explanatory as to why there are so many people in my firm write. Why we do what we do explained the motivation behind communicating, educating and pushing back against what is often the dominant, and as is so often the case, incorrect thoughts about so much investing-related noise.
There was a mix of support and pushback, but of all the emails, one response really stood out:
“Longtime reader, first time caller. I get why you do what you do (really, I do), but I must admit I am unsure of what its worth is to me as an investor. Why can’t I do the same thing you do – read, learn, write, invest – as an individual, and save the fees by doing it on my own?”
This simple question is something that everyone in any service industry must be able to answer: What is your Value Proposition?
It is a very fair question. I have addressed parts of it over the years, but I have never collected all aspects of my responses and ideas and turned them into a single post. Today’s discussion will remedy that oversight.
First off, you can do it yourself. If you have read me for any length of time, particularly the Washington Post personal finance columns and TSCM’s Apprenticed Investor posts, I make clear that you absolutely can manage your own investments. It is demanding and requires discipline and hard work and understanding your own psyche. But lots of people have successfully managed their own finances and investments. You can, too.
However — you knew a “however” was coming — it is much more challenging than many realize. Surveys of individuals’ investment performance reveal that most people cannot manage their own investments well. There are thousands of reasons why, many of which I have addressed in the 37,219 posts in these pages. Part of our value as investment advisors and financial planners is addressing these many issues.
I do not pretend to speak for every advisor, nor should I. What I can tell you is how we designed our firm, so as to create a Value Proposition for RWM clients is as follows:
RWM Value Proposition
1. Behavior Management: My colleagues and I have collectively reviewed hundreds of thousands of portfolios over the years; the single biggest problem almost always comes down to the investor’s own bad behavior. About 90% of the investment and portfolio related issues we encounter are due to: a) lack of discipline; b) cognitive error; c) emotional factors; or some combination of these 3 issues.
We have developed an expertise in investor behavioral issues. Many of the things we do are designed to address them. Our tactical portfolio is built to avoid the major disasters that make “Buy & Hold” so difficult to endure. It is by design intended to allow you to leave the bulk of your money fully invested during drawdowns and volatility. Milestone Rewards offers a substantial fee discount for clients dedicated to following a process. There is a substantial behavioral component to much of our work, by design.
2. Communication / Understanding: Investment-related noise can derail even the most disciplined investor. We help clients understand this, and screen out that noise through a program of client-only communications that focuses on process over outcomes.
Each month, we select a new bad idea where the conventional wisdom is wrong or misleading. We debunk nonsense, making it easier to recognize junk market commentary. Bad indicators, poor interpretation of economic data, geopolitics, cognitive errors, bias, myths, and more all come under our withering gaze. Each quarter, we hold a client-only quarterly conference call, where the most important market, economic and portfolio related issues are discussed.
Myself, Josh, Michael, Ben, Tony, and the rest of the team all spend a lot of time making sure our clients can separate fact from “fake news.” It is that much easier to stick with a long-term plan when you are not constantly distracted by nonsensical memes. Getting these lessons presented to you in a variety of formats consistently over time goes a long way towards preventing the random nonsense that tends to derail investors.
3. Financial Plan + Updates: Speaking of which, we integrate portfolio management into financial planning from Step 1. It is not an afterthought, but rather, a key part of how we work with clients. Indeed, we have our team of certified financial planners begin the process with prospective clients before they even become clients. We believe the planning process is that important.
This gives a purpose and focus for what can be accomplished with capital. Money is a tool; when used properly, it can create some wonderful things.
The plan also helps eliminate some of the worst investor behaviors we encounter. Without a plan, what is it you are deviating from? How do you understand if you are on track or not? Having a frame of reference beyond market swings is enormously helpful.
4. Better Portfolios: Similar portfolios typically perform with returns falling within a tight range. I believe our portfolios are better than most. Our investment committee, which I chair, includes Michael Batnick and Ben Carlson — two Chartered Financial Analysts who are both whip smart, incredibly insightful asset managers. Our team for Qualified Retirement Plans, headed by Dan McConlogue, are experts on the legal, compliance and investment aspects of Corporate Retirement Plans,
We have collectively spent over a century thinking about the optimal way to assemble, manage and run portfolios. That, plus access to superior investment products (e.g., Dimensional Funds, our own Goaltender tactical model, and access to specific bond managers), are big pluses.
Our Organizational Alpha comes from knowing how to use all of these tools to clients’ greatest advantage.
5. Cost-effective Implementation: We think hard about how to remove costs from our investments. We begin with the lowest cost funds from Vanguard, DFA and others. When we consider replacing a fund, the change in cost is always a major (but not exclusive) factor in the process, as out taxes and any other expenses. We have continually driven client costs lower, through our holdings, execution of trades, our Milestone Rewards, and our automated investor programs.
6. Constant Monitoring/Updates: We constantly review portfolios to assess that it is doing what it is supposed to. Our Certified Financial Planners (“CFPs”) are perennially verifying that clients’ holdings are meeting the goals of their financial plans. Our objectivity and structure ensure this.
Individuals often find that doing this by themselves to be very challenging. It is time consuming, it is boring, and most of the time, nothing new happens. Separating what is merely noise from genuine issues is very difficult. We have developed specific, rules based parameters for when one of our CFPs will suggest a change in portfolios. It always involves changes in clients’ circumstances, and never comes as a response to market conditions.
7. Professional Network: Our experience in working with clients who have similar needs to yours means we have a deep network to tap into. These are the professionals who can assist you at various points in your financial cycle.
When we find people who have the expertise our clients need, we either develop professional relationships with them — or we hire them to bring that expertise in house. This is true for tax expertise (Bill in NY) insurance (Brian and Jonathan in our Chicago offices), Trust and estates (Gary in Newport Beach), 403B non profit plans (Tony and Dina on Long Island), or sustainable investing (Joey in Portland). And, because we are a Fiduciary, we are never compromised. These professionals have a wealth of experience in these spaces which accrue to the benefits of our clients.
8. Portfolio Rebalancing: Our approach is a simple rules-based process that we have optimized to maximize returns and reduce costs, while taking on no additional risks. This is one of the rare “free lunches” in investing
9. Tax Management / Tax Loss Harvesting: We have a dedicated process focusing on continually managing tax consequences of execution and portfolio management. It is not an afterthought, but built into many different parts of our process, from our fees to regular rebalancing. The net result is lower total cost to the investor.
10. Spending Strategy (withdrawal): This is a widely overlooked aspect of the financial plan: We advise clients on when to take Social Security and when to stop working. We plot out how much they can afford to draw from their account each month.
People spend so much time saving and investing that they can lose touch with the purpose of their portfolio. Managing the withdrawal portion of an investment life cycle is a key aspect of what we do for clients.
This is a partial list of the major ways we provide value to clients. There are many other small details that also create value; these tend to be specific and personal to each investor. It comes from creating value for clients as a key aspect of our corporate culture and philosophy.
For those of you who want to learn more about our obsessive pursuit of the best way to invest money, please contact us. Send an email to Info-at-RitholtzWealth-dot- com; or call 212-625-1200
For everyone who works in a service industry, it should the question you think about as soon as you wake up each day: What is your value proposition?
An earlier version of this post originally ran on May 30, 2017.