Is This What You Thought It Would Be?
If you’re enjoying summer fun and don’t want to read the whole thing, here is the tl;dr version:
Actionable steps to help you regain control over your wealth. These steps may become even more impactful as your wealth grows:
Consolidate Accounts: Simplify your financial life by merging multiple accounts into a single, manageable portfolio for each of the legal entities in your estate.
Understand Your Fees: Review your investments to understand all the fees (both direct and indirect) you are paying. Evaluate if they are justified, especially for alternative strategies and other “diversifiers.”
Seek Transparency: Work with an advisor who provides clear, transparent communication about your investments and their performance.
Is This What You Thought It Would Be?
I heard the following story in the mid-2000s from someone once removed from the events, so I cannot vouch for its accuracy. To be safe, let’s treat the whole thing as fiction, though I suspect it may ring true to many of you.
Here it goes.
A handful of very smart finance professors get together with sophisticated Wall Street types in the early 1990s to create one of the most advanced hedge funds in the world. Think “Superband.”
The Superband is super successful, and every partner — from nerdy professor to slick Wall Streeter — finds themselves wildly richer than they had been a few years prior. In fact, they become so much richer that they figure they could use outside help managing their own personal wealth, even though their day job is to manage portfolios for large institutional investors.
Enter a well-known bank with a lot of buildings in Midtown Manhattan and people in suits and ties getting on commuter trains at Grand Central to visit our story’s heroes in Greenwich, CT. The presentation is smart and well-oiled: separate accounts, private investments, global risk diversification, tax-loss harvesting, you name it.
After the meeting, one of the partners calls his long-time professor friend back in Boston and says: “You would not believe the nerve on these guys, pitching us a high-fee mess of a portfolio with no structure to speak of and the thin veneer of ‘sophistication.’”
When you’ve been an investments person your entire career like our phone-a-friend professor turned hedge fund guy, you see through the theater very quickly. That’s what someone like me — a Ph.D. financial economist who’s spent years working for billion-dollar family offices and global asset managers — gets for our trouble, after years of studying investments and even more years spent in the trenches.
But if the practice and theory of investing isn’t your daily bread, you (understandably) think to yourself: “I don’t know… It seems like a whole bunch of busy work, layers of expenses, and empty stories, but what do I know?” I get it. It’s hard to know what’s real and what’s not. It’s even harder to know what’s worth it to you and what’s in it for them.
It all starts naturally enough. You take the meeting because you want to preserve and grow the wealth that you (or those who have come before you) have created. They call you a “high-net-worth investor.” But that’s their label for you, not your identity.
You’re thinking, “Preserve and grow.” You have an instinct for the tension between risk and returns. You have a clear sense of the challenges you face (like high taxes, inflation over decades, or kids growing up very differently from the way you did). And you have a decent sense of some of the goals you want to pursue (planning for this lifetime, getting the next generation ready for whatever their lifetime looks like, and supporting what matters to you most when everyone gives you a minute and you get to go for a walk in nature alone).
But before you know it, you have:
Ten separate accounts, hundreds (maybe thousands) of positions, and statements that consume full reams of paper,
Private placements that have so-called liquidity windows (and liquidation fees),
And no clear sense of what any of this adds up to.
I’m not saying you’re not sophisticated enough to “get it.” I am saying that strategic obfuscation is a thing in the business of wealth management, where complexity is designed as a suffocating trap that may not serve your agenda.
Are They Diversifying Your Portfolio or Their Fee Revenue?
Sorry, here comes the jargon. Diversification is the one word that you can’t escape in this space. There are good reasons for it. You should worry if everything in your portfolio is a perfect replica of everything else. It means that the whole operation is being pulled by a single horse, and you will live or die (metaphorically) based on how your one horse runs its race.
Some of it is obvious. Being 100% in the S&P 500 means you’re all-in on what large US companies do as a cohort. But some of it is not as obvious. For example, maybe you have a “Separate Account” managed by a “Third Party” that focuses on “Growth at a Reasonable Price.” (Have you had enough of the quotes yet? It’s getting to be a lot, I know… Almost as much as the layers of fees involved). And then, when you look at it under a statistical microscope, you may well find out that it mostly moves like the S&P 500 with a little bit of noise on top.
We could talk about private equity, private credit, or commodity investing even, but this may be testing the patience of most. Please reach out if you would like to discuss. A lot of this lives in the gray. But whatever you’re looking at, you should ask yourself at least two questions:
“What makes this thing fundamentally different from the other things in my portfolio?”
“Is this thing diversifying my portfolio or is it diversifying their fee revenue?”
No Tax Magic Here
Serious wealth management means being seriously tax-aware. Some of it involves paying attention to things like tax lots and knowing when losses are on the cusp of going from short-term to long-term status. Some of it involves having the decency to accept that losses do happen, even across a whole asset class – like bonds or preferred stocks – over the last couple of years and telling your client that selling may be sensible (even if “Hey, you know, those bonds we bought ‘for safety’ have lost a good amount of money” isn’t a crowd-pleaser).
And then there are so-called “tax-smart investments,” from municipal bonds to direct indexing. Neither are bad; in fact, both are highly sensible at first glance. But watch out for any suggestion that these are magic fixes. There is no magic.
Municipal bonds are issued by local governments, and the deal is that they don’t get taxed at the federal level (and at the state level if you’re from that specific state). That can be highly attractive if you are in a high-tax bracket. But, at the risk of an overly colorful and imperfect analogy, you can think of the whole thing as rather “medieval.” You’re a local rich person (like the landed nobility of medieval Europe) and you finance local public projects, in return for which you get to skip the line to pay your Salt Tax (or La Gabelle in old-timey France). That’s nice, but don’t kid yourself: you are doubling down on exposure to your local economy. You live here, you work here, and now your money works here too. That’s a lot of “here” and may be too much for some.
Direct indexing is a way to invest in an index like the S&P 500 while being able to harvest more losses (thus potentially reducing your tax bill). It completely makes sense as a device for tax-aware investing, but… it can easily raise the complexity of your portfolio by hundreds of holdings, and the tax savings may be meaningfully eroded if special fees are levied on the account year over year, irrespective of the trading activity. Again, no magic, and the devil’s in the details.
Getting to What Matters
Once you’ve regained your sanity by working through the above with someone you’re aligned with and you have once again both understanding and agency over your own wealth, I find that other mission-critical decisions become a lot easier to frame and to make. Things like actual portfolio composition given the world we live in, or wonkier issues like risk management. Or more fundamentally, ensuring that your portfolio is geared as well as possible to move resources through time and space to support your goals and nobody else’s.
You know… things like “preserve and grow.”
Thanks for reading; I know we pack a lot in. What are your biggest challenges when it comes to managing your investments? I'd love to hear your thoughts and questions. And please feel free to share this with friends and colleagues so they can join the over 1,250 readers who receive these insights directly in their inbox. They can subscribe here: www.treussard.com/subscribe
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