15 Minutes of Fame

The competition for popularity, attention, and eyeballs is a way of life in the public sphere and always has been. The advent of personal branding has only put the “look at me” phenomenon on steroids. It has never been easier for a meteoric rise to take place in pop culture, politics, or business considering how quickly we can adopt the next big thing over social media. Andy Warhol may have been right about 15 minutes of fame, but he may not have expected it to take 10 minutes to get there.

This is the first of two notes about popularity and how it applies to high profile fields: Politics and Investing.  Today, I will start with a comment on the biggest popularity contest that is taking shape now: the 2020 Presidential Election. Recently, 20 candidates took the stage for the Democratic primary debates and we are all trying to predict what this means for the election 16 months from now. Popularity can be fickle, we should be cautious in drawing conclusions too soon.

One of the best popularity barometers in the last several decades is, of course, Saturday Night Live.  One of my favorite political skits ever on the show is from November of 1991 entitled, Campaign ’92: The Race to Avoid Being the Guy Who Loses to Bush.  The bit was such a unique snapshot in time because it was both funny and way-off in its reading of the political future. It features a debate between five potential Democratic presidential nominees trying not to be the “chump” who would lose to a very popular George H.W. Bush in 1992. The incumbent was riding a wave of popularity in the aftermath of the Persian Gulf War and was seen as an inevitable two-term president.  Not to be.  Here are some interesting points from the skit:

  • The joke is that no one wants to be the one to lose, so they won’t run. Best quote: “I have mob ties” -Mario Cuomo (Played by Phil Hartman).
  • It was filmed only 12 months from the general election and no one had clarity on who any of the front runner(s) were.
  • The issue that would decide the election, the economy, did not come up.
  • The eventual winner, one of the most significant political figures of the next 30 years (Bill Clinton) was not on the stage or mentioned at all.

It is hard to predict election outcomes, as we were all reminded in 2016 with both the U.S presidential election and Brexit.  This is even harder when the candidate pool is as large as it is early in the game. The real epiphany is that sometimes, like in 1992, we can’t even predict the issues that will end up being decisive in the near term.  Can’t pick the candidates. Can’t pick the issues. Can’t pick the winner. The only thing we know for sure is who is popular in the moment. That’s pretty shaky ground.

Investing based on which party or candidate will win is challenging because the conditions on inauguration day often dictate more of a President’s agenda than campaign speeches.  For example, when Barack Obama declared his candidacy in 2007, the U.S. economy was still 7 months away from the Great Recession that would define many of the early policy decisions of his administration. The market results for a President will come from a combination of their policies and the cards that they are dealt.

In elections, the vote only counts once, unlike the markets where the voting system operates each day.  We can buy today and sell tomorrow if we like.  This makes political outcomes hard to predict because voting is akin to a popularity snapshot.  It is important to stay informed of the candidates’ issues and attributes, but be mindful that popular opinion can sometimes overwhelm the fundamentals. More on fundamentals and popularity when we talk investing next week….

The Zeal of a Convert: My Origin Story

Earlier this year, in his weekend “Intelligent Investor” column in the Wall Street Journal, Jason Zweig wrote a memorial tribute to Jack Bogle, founder of the Vanguard Group, that compared him to St. Paul, the early Christian missionary. When Zweig wrote that Bogle “blazed with the zeal of the convert” the words jumped off of the page. I stopped reading, set down my coffee and let a rush of memories flow through my head.

I had always felt a certain kinship to people like Bogle who held high conviction beliefs about investing, but I had not put much thought into his role as an evangelist or how he came to his beliefs. As it turns out, this champion of low-cost investing started out on the Dark Side, advocating for active management mutual funds and higher fees. It was only after being fired as Chief Executive of a mutual fund that he had his great epiphany: Investors could benefit from a firm like Vanguard being run with their interests at the forefront. An investing revolution ensued, and Bogle embraced his role as a zealot.

Anyone who knows me professionally could attest that I have strong beliefs about the business of financial advice. I believe that the only standard of care for Advisors should be the Fiduciary Standard. I believe that the brokerage business works against the interests of investors by using confusion and conflict of interest. I believe that good advisors are stuck in bad business models because their clients are “owned” by their parent company. I believe that wise counsel is the true value of any financial professional.

What many don’t know about me is the rocky path that I have followed to my current role as a leader of a Registered Investment Advisor (RIA) firm. The truth is, I was fired.  Cast off by the Wall Street firm that brought me into this business. I was left to rebuild my career as an advisor, as a professional, and as an advocate for a profession that could and should be better. On a different scale, Jack Bogle and I both had conversions on the Road to Damascus that changed the course of our careers.  Here is my story.

In 2005 I told my wife that I wanted to change my career path to embrace what I thought I had learned through my study of history and business in college and through my leadership experience as an Army officer. Specifically, I wanted to provide advice, leadership, and perspective to clients as a financial advisor. That meant leaving a corporate job, finding a firm to hire me, train me, and support me as I built a client base. What I didn’t tell my wife, who was pregnant with our first child at the time, was that it would help to know people in our community (which I didn’t) and know how to sell (which I didn’t). My first sale was to convince an established Wall Street firm to hire me. They admittedly took a chance in giving me a job after I failed whatever personality test that they included in the interview process. It probably told them I couldn’t sell lemonade in the Sahara.

I remember at one of the interviews they asked me to present my business plan. The only part I remember about the plan is that I titled it “Morton Advisory”. The branch manager took one look and reminded me that I worked for this big Wall Street firm, not “Morton Advisory.” My response was to say that the only way I will succeed is to frame it that way, as my own.

After passing my licensing exams, they sent me to three weeks of training to teach me how to sell investments to my clients. There were two ways to go about growing your book of business, the trainers told us. You can be a traditional broker and sell stocks, funds, and annuities to earn commissions and eventually become a top “producer.” Really? Producer not Advisor? The second option was described as what the forward-thinking brokers were starting to do. “What you want to do is build a sustainable, fee-based practice where you earn your flat percentage fee over time and it aligns your interests with clients.” That’s it! This makes sense. I don’t have to sell, so much as consult. I will do that.

I returned home and thought about business model #2. This is long-term, sustainable, and something I could be proud of. But there are trade-offs. I explained to my wife, who had just given birth and was planning to stay at home, that commissions would pay us more up front. It would ease the financial burden of this career transition. Flat fees would take a long time to develop into an income stream for us but would position me to be a true advisor, focused on the long-term. Are you ok with that? Yes, she said in an unflinching vote of confidence.

Then there were the details about how my success would be measured by the firm. In my fee-based business model, success would be defined by growing the number of households that I advise and my assets under management. Success for Wall Street, though, was and is measured on the amount of commission generated each month. If I earned enough in commissions, I would get to attend a second training session. If I sell even more product, I can attend a third training session. There was one more important detail. If, after 18 months I didn’t generate enough commission business, regardless of how many families I was serving and the amount of assets they had entrusted to me, I could be fired and my clients distributed out among the branch.

I understood. It was going to be hard. I couldn’t turn to old neighbors or community friends. Every day I had a sheet with the numbers 1-200 written on it. Every time I dialed a phone number, I crossed off a digit on my sheet, until I reached 200. Every day for 18 months. If I was going to do this, I had to be the best cold-caller in the branch. Within six months I was training new hires on how to build relationships over the phone. But I also saw my peers racing ahead. While I was talking about investing for the long-term, they were selling annuities and pitching the stock of the day. I didn’t qualify for the second training round and I don’t think they even told me about the third. The best training that I could get was by picking the brains of the people in the office who I respected the most. I was looking for anyone to tell me that yes, with a little blind faith, my model could work out.

A few small wins and lucky breaks started to go my way at the one-year mark. People who I had been calling for a year started to ask if I could look at all of their statements. I began working with my first clients with substantial planning needs. I started to gain confidence that there was demand for this role that I had imagined. Some other brokers in the office handed off small clients and I was able to build them into meaningful, holistic relationships. I no longer had to believe without seeing; It was starting to take shape. I convinced myself that my employer would see value in what I was doing.

That was my mistake. In late August of 2007, I was called into the branch manager’s office where he showed me a memo that I had signed when I joined the firm. “Do you remember signing this?” Yes, vaguely. The memo had the exact date for my last day if I didn’t earn enough in commissions. The date was in two weeks. The manager would go to bat for me. New York told him that the firm had to be consistent in evaluating all 16,000 of their advisors. If I did not sell enough high commission products, it didn’t matter how many great, long-term clients I had. He wanted me to stay, but he might need to fire me.

I went home that night and caught my wife just as she was heading out the door to an evening meeting.  I broke the news and she did not bat an eye. “Have you done this the right way?” Yes. “Is this a career that you love?” Yes.  “Then we will figure this out.” Says the confident wife to her broken husband, the family’s sole breadwinner. Only two weeks earlier, she had given her final notice to her former employer and closed the door on going back to her old job. We had burned the ships. We were committed.

Phone calls were made, letters were written. At the end of September, I received the verdict. While New York appreciated my efforts and it was obvious that the local team wanted to keep me, they had to toe the firm line. I was fired. Immediately.

The next morning, before I could begin making calls to other investment firms, my former colleagues were already reaching out. They offered to make introductions, they offered encouragement, they expressed disbelief. I couldn’t help but notice that I was fired while all of the other trainees a few classes ahead and a few classes behind me were quitting. The only ones surviving the cuts were the product salespeople.

Within a week, the old firm had reached out with a path forward. “We think we have a way to bring you back in, as if you never left. You will just have a different title.” That is what we did, and I continued there for another six months, before leaving to join an independent advisory firm. Upon my resignation, the branch manager asked me, “How will you attract clients without the strength of a large brokerage house?” Ironically, the question was asked in a month (March, 2008) when the firm’s stock was 60% lower than it had been 9 months prior.

I left behind the Wall Street model forever, but the lessons learned were many. No one who knew me at the firm had any influence over the true decision makers in New York. The best interests of my clients were never a consideration throughout my entire employment process. The incentives of the brokerage world were and are warped and short term. I knew right then what the advisory business should not be, but had yet to discern what it could be.

The next 10 years of my life were devoted to that journey, culminating in the founding of Morton Brown Family Wealth in 2018. In a very positive way, I am proud of what we stand for as fiduciaries, professionals, and advisors. Based on my early experience, though, I also have strong feelings about what we stand against. The financial industry is still fighting against the Fiduciary Standard. It is still not training and developing the talented people needed to serve clients. And it is still, if you read the fine print, protecting the conflicts of interest that serve the company first, all others second. In reflecting on my growth in the last several years, my passion for delivering this better model was kindled in the tortuous experience of losing my job.

I had never thought of myself as having the “zeal of a convert” like Jack Bogle. Zealot is a strong word, because it implies an uncompromising spirit. But maybe the shoe fits. I have seen behind the curtain and observed the sorry state of the brokerage business. I have seen what is possible in the form of visionary advisory firms around the country who are changing the profession of financial advice. If a zealot is someone who keeps a “Motivation” folder in his desk containing the letter firing him from Wall Street as a reminder, then maybe I should own that identity.  It is my story of Independence.

We all have a moment in our lives, personal or professional, when we found our purpose. Click here to share when your Origin Story began; I would love to hear it.

Don’t Just Stand There! Do Something! (Women’s World Cup Edition)

Yesterday the USWNT advanced to the finals of the World Cup after the heroics of Goalie Alyssa Naeher in saving a penalty kick late in the match against England.  Imagine being inside the head of a goalkeeper facing a penalty kick.  Your job is to be the last one, standing alone, against an uncontested opponent.  Now imagine your best bet, according to science, is to do nothing.  Don’t move. From a goalie’s perspective, the odds are that by standing still in the middle of the goal they have the greatest chance of blocking a shot.  This is because even when they guess correctly on which way to dive, they still only block less than 30% of the shots.

Why does the goalie not stand still all of the time? Expectations play a large part. Place yourself in the position of the raving soccer fan who watches that goalie stand still while the ball is artfully smashed into the corner of the net by the shooter.  You wouldn’t care about odds, you would look for effort from the Goalie, right? This is action bias at play. In the pivotal moment, just do something because even if it is the wrong thing, at least you tried.  Goalies try to take the information available and make informed decisions, knowing that they have to balance expectations of the crowd and team with outcomes.

This brings us to the investing parallels.  Much like a goalie having to justify action, a stock picker or market timer is constantly trying to justify their role by creating a perception of activity.  There is urge for someone to do something, anything, when we see a bit of news, or the markets are at a high (or a low).  We might be convinced that some action by ourselves or an all-knowing guru will give us the advantage and we will make more money than we would have otherwise. It just isn’t true, and that is why passive indexing has flourished, coincidentally, as science has shown us that buy and holding at a low cost (doing nothing) can improve our odds of success over trying to actively time the market. It is the investing equivalent of not diving for the sake of diving.

An important distinction here: This approach does not mean we win every time.  We can guess right, and still not have a perfect outcome.  It means we place the odds in our favor over the long term.  That’s the key to investing success.  Admittedly, staring down a penalty kick takes place in a singular moment.  The wrong choice on the world stage could be catastrophic, hence the need to make bold moves.  We don’t need to make bold moves as investors. Since we can take the long view, we are free to make good, incremental decisions that sometimes amount to doing nothing. We have the luxury of standing still, not guessing, not diving, and letting the ball come to us.

Social Security: Apparently, We’re All Doing It Wrong

A study was released last week that found that 96% of Americans choose the wrong time to start their Social Security benefits. With the option to begin guaranteed payments as early as 62, more retirees are electing this premature option than should, according to the study.  If someone elects to wait until age 70, for example, they would receive an annual benefit increase of 8% and that gain would be locked in as a guaranteed stream of income for the rest of their life.

The key takeaway from the study (that there is an optimal time for Social Security and most people do not choose it) is a worthy point to make, but I am always leery of financial decisions viewed in the aggregate.  This particular study looked at 2,000 households and ran over 1 billion scenarios to calculate the right time to make the Social Security decision.  The problem is that the math of retirement income is only part of the story when making these kinds of financial calls. It is a very personal decision that can have a lot of subjective factors, too.

Before we ever get to ideas about maximizing income here are a few ways to frame conversations around Social Security in your family:

  • Know what your income gap is and how best to fill it. Make sure you know what your expenses are in retirement before you think about drawing income. That way, if you do opt to delay Social Security you know how much you will have to draw from other savings to meet your expense needs.
  • Be mindful of how your other savings might be needed throughout the course of retirement. Social Security provides an income stream, but it does not provide lump sums that help with larger expenses like home improvements, car purchases, or the potential for larger health related bills at the end of life.  Be careful in spending down too much of your outside savings just for the purpose of maximizing Social Security.  There should be a balance between the right amount in savings and the right amount of income.
  • Consider the balance between other streams of income and Social Security. A couple with pensions, a single person with substantial retirement accounts, or a business owner who just sold the family business might be living similar lifestyles but their decisions about Social Security timing can be totally different because of how they will generate income in retirement.  Take the time to learn how income can be created from all of your assets and then approach the Social Security conversation from your unique position.

The reason people often lack confidence around their Social Security decisions is because of what they hear from friends or because of what they read in an article. I can’t count how many times I have heard, “my friend told me I need to do ______ for Social Security because that is what they did.” This is one of many financial decisions that you can’t make based on what someone else has done.  The exact right thing for your friend to do with their retirement income could be the exact wrong thing for you to do and the reasons are not always rooted in dollars and cents. If you feel ill-equipped to figure all of this out on your own, schedule an appointment with your local Social Security office and then meet with a Certified Financial PlannerÔ.  Our team takes a comprehensive view of your income AND expense situation, make sure someone does so for you. The financial industry does not do a great job of educating investors about these kinds of decisions, but if you do have a trusted advisor, he or she should make Social Security part of your meeting rhythm.