Transparency, Simplicity and Peace of Mind

Is This What Clients Really Value ?

When I founded Fiduciary Wealth Partners with Jamie, we trademarked, Transparency Simplicity and Peace of Mind. Our partners hire us to manage investments, but after working with us, they often tell us that what they value the most is the transparency, simplicity and peace of mind we bring to them.

Our approach and philosophy are centered around our belief that keep-it-simple strategies often win. Reflecting on this, and on the evidence that continues to show that index strategies often outperform complex strategies, prompted me to re-post a blog I wrote last year on the SJM Fiduciary Advisors website.

We hope you enjoy it.  If you have different thoughts, let us know.  We learn a great deal from those who take the opposite side of an idea.

Are We Spending Too Much Time Selling Alpha? SJM Blog  (April 2014)

A recent article in the NY Times titled “The Oracle of Omaha, Lately Looking a Bit Ordinary”, has prompted me to write a new blog.

The NY Times piece, by Jeff Sommer, highlights research by Salil Mehta, on his blog Statistical Ideas, about the virtues of index investing.  It is yet another piece that discusses how hard it is to find managers that can consistently outperform index funds.

At SJM Fiduciary, we use active managers for some asset classes such as emerging market equities and ESG / SRI mandates and, prior to starting my own firm, I spent the better part of 25 years successfully selling active management (I was a Managing Director at firms that largely promoted active strategies).

In addition, I previously posted my thoughts on how investors might find a manager who adds alpha using Active Share screens titled, “A Way to Outperform Over Time?”.

Across the vast majority of equity asset classes, however, I actively encourage and implement investment plans with index funds.

Beyond consistently outperforming many active funds (some research suggests the majority), having low fees, being transparent (easy for clients to understand what they are investing in), completely liquid and tax efficient, I think index strategies add value in other ways.

I have come to feel that the wealth and investing business spends too much time and money promising and selling the ability to pick a manager or strategy that can outperform an index.  Considering how hard it is to deliver on these promises and how many resources (firm time and client fees) are spent in pursuit of something that research indicates is very elusive, I feel we should be focusing more on other things.

Versus trying so hard to find and sell alpha, maybe the industry should be spending more time trying to understanding clients’ feelings about risk and reward (not presenting output from questionnaires or Monte Carlo simulations), giving full transparency (openly discussing both sides of a trade, fully disclosing all terms, potential biases and conflicts), and, importantly, making investors comfortable with their investments, so they have a greater likelihood of sticking to their plans.

Investing should not be a competition, it should be a tool that allows an investor to reach specific goals (a means to an end).

If more advisors used index funds, it might reduce what could be relatively unproductive competitions to find and sell alpha.

Even Warren Buffet seems to have feelings that tilt this way.  The NY Times article I mentioned above reports that Buffet has given instructions for a family trust to, “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.”

Humans are inherently competitive, and index funds are not for everyone (some want to pursue the “New New Thing”), but I find that the aggressive pursuit of alpha at the potential expense of greater simplicity, transparency and, in many cases, better performance, should be more openly discussed.

Rather than simply selling alpha, relative performance and relative risk metrics (Sharpe ratio comparisons, etc.), let’s spend more time openly discussing both sides of topics, such as active vs. index funds, listening to what clients want to achieve and implementing strategies that increase comfort and peace of mind.

If we spent more time offering transparency and peace of mind, I think it would increase trust in our industry as a whole and help us form more lasting partnerships with clients.

Preston D. McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor forming fiduciary wealth partnerships with clients, professional colleagues, and the community.  To see more of his posts and follow him on Linked In and Twitter please visit the following:

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