win-win

Generating Positive Externalities

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People or companies may confer benefits on third parties without cost, as a side effect or byproduct of their actions. Planting a tree improves the neighborhood and provides shade to a neighbor. Keeping bees results in the pollination of nearby crops. Providing first-aid training to workers may save lives outside of work. A video or blog post created for clients might contain an idea that helps people who are not clients.

These are examples of what economists call positive externalities. These things are all good: they make the world a better place.

I believe the concept applies in our interactions with others, as well. Have you ever had your day brightened by the smile of a stranger? Opened a door for someone with an armload of packages? Been thanked for doing an otherwise thankless task? Let someone with whom you do business know how much you appreciate what they do?

All of these things are benefits without costs attached. They are positive externalities, on the small scale of daily life. They are also free to the giver.

But just as planting a tree improves our home as well as the neighborhood, generating positive externalities in daily life also helps us. Friends and family members respond to the empathy, kindness and thoughtfulness embedded in them. If employed, our colleagues and superiors are likely to value the intangibles we add to the workplace environment. In business, our clients and teammates enjoy our interactions more.

Generating positive externalities is not charity. There are no costs involved, only benefits to both giver and recipient. Win-win.

The general concept has been around for a long time, and is often expressed more simply: be kind. Fill up the buckets of others. Do unto others.

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

Win, Win, Win

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Remember ‘win-win thinking?’ This phrase became popular in business a long time ago to describe interactions in which everybody comes out better. Our favorite example is as familiar as the grocery store. The grocer wants your money more than he wants the can of beans. You want the beans more than you want the money. A trade is made; everybody wins.

“Win-Win” is a fair description of how our business works. In our investment advisory accounts offered through LPL Financial, we are compensated by a percentage fee on account value. Our best path to growing revenues is growing account values. When you do better, we do better.

In the old brokerage model, products are sold to investors for a one-time commission. We think of this as the Good Luck plan, because the salesmen get paid up front and can wish you good luck, as they head down the road to find another prospect. They have no skin in the game, so to speak.

This does make sense in some situations. If you know what you want and do not plan on trading it, the one-time commission model probably works well for you. In a brokerage account, after you pay the sales charge you can hold on to your investment without paying ongoing management fees as you would in an advisory account.

However, we are in the business of trying to figure out how to grow your bucket, which often involves many trades over the course of a year. This creates a conflict for us: the more we trade in a brokerage account, the more commission charges add up, which is great for us but not for you. But our advisory accounts do not pay us on commission. When we switched to focus on advisory business, your interests and ours became much more closely aligned: we were free to make trades we believed would help you without worrying about commission costs. Life got simpler for us and better for you, we believe.

Win-win thinking also led us to introduce longevity discounts to our fee schedule. The longer we are in business with you, the better we understand each other. Longer time horizons and longer relationships are good for you and good for us. Another win-win deal.

It runs deep. From time to time we find that a client is paying for advice which they do not care to follow. This is win-lose, not win-win. We endeavor to get out of these situations as soon as we figure them out.

The biggest advantage of win-win thinking is that all of our energy can be devoted to striving to improve your situation. Relief from worrying about our position is quite liberating. 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.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs.