client education

Our Exorbitant Privilege

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Financial firm founder Barry Ritholz says that the vast majority of people in the investment business spend most of their time chasing new business. Finding clients or trades consumes most days and a lot of nights—it is their main job.

Dialing the phone, putting on seminars, networking, joining boards, sending spam email…there are a lot of ways to meet people.

That Ritholz Wealth Management needs to do none of these things is what he calls “our exorbitant privilege.” We feel the same way.

My vision when I was forty was to find and retain a circle of clients who, if I took care of them, would take care of me. I did NOT want to wake up at sixty, needing to run up and down the highways to find a deal to pay my bills. The vision became reality.

You know our business objective is to strive to grow your buckets, and have them serve you as you need. The interesting paradox is that we have grown since we stopped looking for new business.

We frequently mention how important you are to the process. You saved the money to begin with, you share our philosophy of investing, you do the right thing even when it is difficult to do so. Clients may not be retaining nearly as much money if they routinely sold out in panic or insisted on buying into fads.

Now we have a better way to express our appreciation for you. It is our exorbitant privilege to serve you as we do.

Clients, if you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The 5 W’s of Carl Braun

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Legendary investor Charlie Munger once spoke of a great business builder, Carl Braun, and the story of the five W’s. His company was a specialized engineering firm. His rule for all communication became known as the five W’s.

You had to tell who was going to do what, where, when and why.

We write about a great many topics. It makes sense to get back to the basics from time to time.

Who: We manage wealth to try to help people live the lives they desire. To do that, we have to understand your life and your objectives. We do arithmetic, we research things that need to be learned, we think about alternatives. Most importantly, we consult with you—we talk.

What: We listen to you about the things on which you are the expert. We explain clearly and simply the things that need explaining. Together we figure out if we might be of service to you. (Our investment approach is not for everyone. Determining suitability in advance is better for you and for us.)

Where: The center of our business universe is at 228 Main Street in beautiful downtown Louisville, Nebraska. The phones and the internet go everywhere, of course, and work can be done from many places.

When: Nearly every business day until I am 92.

Why: The little answer is that we get paid to manage wealth. (The talk and the arithmetic and all the rest is just to get to the place where we might manage wealth, no separate charge.) The big answer is that this work is an obsession of mine.

The five W’s are a useful framework, but there is one more feature that is different than most of our colleagues. We believe the best way to grow our business is to grow your buckets—not look for new buckets. This has worked well for a long time. We do not plan to change.

Clients, if you would like to talk about this or anything else, please email us or call.

Why Not Both?

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We keep reading a curious idea promoted by some in the financial industry. It goes like this: “Managing investor behavior is the key task for advisors, not managing investments.”

That framework assumes there is a choice between one or the other. There are two flaws in the assumption. It does not have to be an either-or deal. And some fraction of people don’t require babysitters for their natural investment behavior, which is effective.

We believe in BOTH of these roles. It may be true that raw human nature is generally counterproductive to sound investing. (Behavioral economists tend to think so.) Our theory and experience says that the attitudes and behavior of individuals can be deliberately shaped to their benefit—and ours.

What may apply as a general principle to all people does not necessarily apply to you as an individual. You have free will. And we believe people can learn.

So we spend a great deal of time and effort talking to you, and communicating about the mindsets and strategies and tactics we believe are effective. But that is only part of the job.

Legendary investor Charlie Munger said, “We wouldn’t be so rich if other people weren’t wrong so often.” By avoiding stampedes in the market, we may sidestep a poor situation that others are getting into. And by seeking the best bargains, we are looking for holdings that others may be wrong about.

In other words, two of our fundamental principles about investment management are founded in a belief that investment selection matters because people are often wrong. We see investor behavior as a creator of opportunities for our clients—not a problem to be managed. Clients, we keep saying you are special: this is why. We believe your investment behavior is exemplary.

Knowing what you own and why you own it, operating in accordance with sound principles and strategy, makes it easier to behave effectively. These things reinforce each other.

Manage behavior, or manage investments? It isn’t either-or—we need to pay attention to both. Clients, if you would like to discuss this at greater length, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Aligning Principles and Economics

Clients, we recently wrote about our quest to align our pricing with our values. The advisors of Leibman Financial Services service $50 million in advisory assets through LPL Financial. The fees charged could better reflect your contribution to investment results through effective investing attitudes and behavior. We are going forward with changes by year-end.

We believe that people can learn to frame things more effectively, to see the long term, to find out a temporary drop is NOT a loss. New clients usually require more intensive communication (and hand-holding, in some cases). It makes sense to charge them a little more, and reduce costs for you longer term clients.

For the vast majority of you, “heads you win, tails you don’t lose.” Generally, if the new schedule indicates a fee reduction, that will go into effect as soon as possible. If it shows an increase, we will leave the pricing the same. Current pricing is a hash, depending on when accounts were originally opened. So we will be communicating with each of you.

The new table rewards your persistence three ways.

1. A fee reduction after two years, shown in the table below.

2. Additional reductions after eight and sixteen years, about 3% to 6% depending on household account value.

3. The potential for assets to grow over time tends to put longer-term clients into higher value brackets, with lower fees.

pricing

In a few cases (particularly for newer clients), the table may indicate a higher fee than what we currently charge. Please do not be alarmed—we are not going to try to jack up our rates on anyone we are doing business with. Consider yourself grandfathered in.

Clients, with this project we have attempted to align our economics more closely with our values. We will be in touch about your specific situation. If you would like to discuss this or any other issue at greater length, please write or call.

Additional reading:

About learning to live with volatility: They Say You Can’t Handle the Truth

About discretion to act on your behalf: Freedom to Decide vs. Freedom to Debate

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Have We Mentioned How Wonderful You Are?

© Can Stock Photo / mikdam

The foundational theory here at 228 Main is people can gain effective perspectives and productive attitudes about investing. It doesn’t matter if you were born that way or were capable of learning, you as a group are special. We believe your behavior is one of the keys to long term investment results.

Consequently, while some colleagues live with frustration as untrained customers fall prey to counterproductive behavior—selling out low, chasing performance, jumping on fads—you and we are appreciated for our mutual faith in each other. No wonder some advisors are looking for an exit strategy, and I’m planning to work to age 92!

You do the difficult things, like going against the crowd, listening to people at the salon or barbershop or café or water cooler, and yet still stay the course. A benefit of my long commute is time to think about the business. I spent a day recently pondering this: how might we make things better for you?

If we change our pricing philosophy to reflect total household assets under our management, including results through the years, we honor your role in creating those results. And if we price new clients a little higher for an initial period, we can offer small discounts for longevity to you longer-term clients. This would better reflect our values.

This presents two issues. One, we tinkered with the schedule over the years, and sometimes failed to update existing clients to the new schedule. Two, our general philosophy has been to use a volume discount based on net invested capital, excluding changes due to investment results. We need to figure out how to implement changes in a way that makes sense to you. We have no intention of chasing anyone down and asking them for more money. Our growth allows us to offer breaks where they have been earned (after all, it is ultimately you to whom we owe that growth!) without needing to claw back money from any clients.

Clients, you have heard us express admiration for the very special group to which you belong. We talk about the mutual benefits of our shared perspectives on investing. We have said in as many ways as we know how that your behavior is large factor in investment outcomes. The one thing we have not done is align the economics of our shop with those noble sentiments.

We are committed to doing so. We will be communicating the results of our work in the near future. If you have any questions about this or any other pertinent topic, email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

What We Learned from You

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One of the privileges of working with you is the opportunity to get to know your life stories. Over the decades, we’ve met a lot of people and heard many stories. We learned a lot about about productive financial habits and instincts from you, our clients.

We have noticed that people who are successful in retirement have some habits that helped them get there. These factors do not guarantee success, of course, but there seems to be a strong correlation. Here are three habits that seem to be key:

1. For all or most of their working careers, they invested regularly—every month, every payday. 401(k) plans, automatic deposits to Roth or other accounts…these put wealth-building on autopilot.

2. They spent less than they made. One client told us, it isn’t how much you make, it is how much you keep. We all know people who make good money and spend all of it–and others who manage to save on modest incomes.

3. They adapted to unexpected surprises without impairing their long term financial planning. Having an emergency fund, realizing that life has uncertainties…these are key to getting back on track through all kinds of times.

The three habits go a long way towards building financial security. In addition to those, some clients were apparently born with helpful investment instincts:

A. A native sense of confidence that the country works through its problems, that economic slowdowns give way to recovery sooner or later. Those who believe that seem to have an easier time waiting for markets to rebound.

B. An aversion to needing to do what everybody else is doing. Fads (or stampedes, as we call them) can be a dangerous way to invest.

We got done at the university a very long time ago. Thanks to you, however, we are always learning. One of the gratifying aspects of our work is the opportunity to pay it forward—to deliver the good news to the next generation. Clients, please email us or call if you would like to discuss this or any other topic.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

It Really Is All About You

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Time is finite, limited, for everyone. We have diligently restructured how we take care of business for you over the past few years to create more time for our key activities. One of those key activities is talking to you, one on one.

Two years ago we were preparing a total makeover of our communications program. In the 21st century, thoughts can emerge from our fingertips and travel at the speed of light to the screens of your computer, tablet or smart phone. The instantaneous aspect of new media is nicely complemented by the permanent archive of our philosophies, methods and views at 228Main.com—available anytime, anywhere.

If we get the same question twice or need to tell the same story twice, we figure a lot more people have the same question or should hear the same story. So we put it out there for everyone.

We also write about case studies, retirement concepts, financial planning issues, the economy, investment strategy and tactics. Topics in the news also get our attention, particularly when there is context we would like to add.

Bottom line, if we think of something that has a chance to improve your financial position, we are going to write about it. It might be a story or a parable or a bit of history or biography.

Each one of you is unique. Some pay attention to our daily comments and features on our Facebook page, Twitter, or LinkedIn. Others ignore all that, but read our blog posts. At least one client already knows how we think, and doesn’t need any more. And a few read everything in every venue.

We get a lot of feedback from our colleagues—but we are writing for you, not them. What would you like to tell us about our blog or social media activity? Are there topics we aren’t covering, but should? Are you getting anything out of it? Do you feel like any time you spend reading our stuff is well spent—or wasted?

Email us or call if you would like to let us know how we are doing.

Meanwhile, if you aren’t connected to daily commentary but wish to, you can bookmark https://twitter.com/MarkLeibman even if you are not registered at Twitter. Or ‘like’ our Facebook page at https://www.facebook.com/LFNEWS. Or connect on LinkedIn at https://www.linkedin.com/in/lfnews/. We look forward to hearing from you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.