November 22, 2010 | Wall Street Journal/Financial Adviser Section
I practice KISS investment management. KISS stands for ‘Keep it simple, stupid.’ Too many advisers make their investment strategy the heart of their business, when it’s just one facet of a complete financial plan. Complex investment schemes might be seductive to unwary clients, but in my opinion they are a waste of time and energy.
First of all, the industry has known since 1926 that the vast majority of investors aren’t going to beat the market in the long run. We also know that funds that performed well in the past are actually more likely to do worse in the future, which makes it hard to be in that top percent for very long. When you pile on the cost of active investing and commissions that are generated from high turnover rates, it becomes even less likely that a given portfolio will outperform the market.
I use a passive approach to investing so I can spend more time focusing on other aspects of my clients’ financial plans which we have more control over — cash flow, savings, estate planning and debt. Without these pieces in place, advisers shouldn’t even think about coming up with an investment plan for their client.
As an extension of my belief that advisers shouldn’t just focus on achieving alpha, I don’t charge an AUM fee. Instead, I charge a retainer based on clients’ annual income and net worth. AUM fees only incentivize increasing investment returns and the amount of assets a client invests — regardless of the financial context. Charging a retainer incentivizes me to improve my clients’ overall financial wellbeing, and as a fiduciary, that’s my primary responsibility.
For instance, I recently had a couple come to me who wanted to pay off the adjustable-rate mortgage on their vacation home as soon as possible. They were paying way ahead every month. After reviewing their mortgage, I was able to point out that if they refinanced to a 30-year fixed-rate they could pay less every month and use the extra cash flow to finance their investments, whose average rate of return was higher than the interest on their new mortgage. This would allow them to pay less every month and still pay off their mortgage sooner.
In general, I am shocked by how many new clients come to me to me with their assets invested in loaded funds with 2% expense ratios and high turnover rates, when they still haven’t sorted out the basics, like whether or not to refinance their mortgage.