Evolution

I began my career in finance in the mid-‘80’s.? What I do has evolved over time, as have the titles that describe it.

This evolution isn’t unique to me. I believe that it reflects general industry trends; many of my colleagues have experienced similar changes to their roles and responsibilities through the years.

I was initially a stockbroker, a title that made sense at the time. I acted as a middleman to enable people to buy or sell mostly stocks but also bonds.

Some of my peers simply took orders; someone would tell them to buy 100 shares of a stock and they’d take care of it.

Others, like me, fancied themselves as stock pickers. I got clients by calling people up, more or less randomly, and trying to find someone to take a chance on my recommendations. They might buy 100 shares of my favorite blue-chip stock, [LM1]? if I were persuasive enough. Then I just hoped that the stock would go up quickly enough for them to give me a second chance.

It was a fairly precarious existence.

I got lucky. While many of my peers chose either sexier companies to tout or lower priced stocks, thinking they’d be easier to get people on board, I went with those that I truly believed in based on my research. I say lucky, because even the highest quality companies at great valuations can often see their stocks underperform for shockingly long periods of time. But I had serendipitously entered the business near the beginning of a historic bull market in the kind of high quality, large-cap stocks toward which I naturally gravitated. If the big winners were small companies or more speculative stocks, I would have been in trouble.

My focus then, as it still is today, was on those businesses that aren’t highly cyclical, stable enough to fare at least reasonably well regardless of the economic environment, and able to sustain steady earnings growth over long periods. Think food or pharmaceuticals.

Sometimes stocks in those sectors do great and sometimes they do poorly, not always with any apparent rhyme or reason. A truly diversified equity portfolio needs to comprise many different industries and sectors.

At a certain point, as my client relationships evolved from one or two stocks to a portfolio of stocks, I had to evolve, from stock picker to portfolio manager. This involved more than I realized. I initially assumed it just meant picking a bunch of winners. But it also meant constructing a portfolio in a thoughtful manner, diversifying among industries and other factors to ensure a more robust outcome.

I soon realized that even that was insufficient. What about smaller company stocks? Global diversification? My expertise, whatever it was, was limited primarily to U.S. blue-chip stocks. I had to find experts in the other important areas. This entailed researching mutual funds, which were pretty much the only game in town at that point for diversification that relied on professional money management.

Of course, for most people, a complete portfolio isn’t just equities. I had to learn about bonds too. Fairly early on, I was constructing portfolios of stocks, bonds and cash, using mutual funds to further diversify. That may have been enough to earn me the title of portfolio manager for my clients.

But there was still more to optimal investing, as I became aware.

In the late ‘90’s, the tech bubble dominated the market, and stocks in general levitated to what I considered unsustainable valuations. I began to research investments that had little or no correlation to stocks and bonds, adding hedge funds, managed futures, and other alternatives to my toolkit.

By this time, I called myself a financial advisor, as did most of my peers. Rather than charge a commission when I bought or sold a security, I preferred to charge an annual fee as a percentage of assets under management. If a client’s portfolio appreciated, I participated; if it declined, I earned less. Today, I charge no commissions, placement fees, or transaction-based compensation. All of my compensation is via a fee as a percentage of the assets that I manage. In essence, I’m paid on long-term performance.

When it came to investment performance, I was confident that I was providing superior advice to my clients. The nice thing about financial performance is that it is quantifiable via objective data.

You might think that I had reached the pinnacle of evolution, and I could spend the rest of my financial career resting on laurels. ?I certainly did.

The problem was that, as my clients grew wealthier and older, their needs evolved. Quality investment advice was important, but it needed to be delivered within the context of the larger picture. Asset allocation is of course very important, but so is asset location. Should an asset be placed in a personal account, a retirement account, a trust? What is the most tax-efficient withdrawal strategy? It turns out that simply taking money from taxable accounts first, then retirement accounts isn’t always optimal.

Tax-loss harvesting is just the start. There are so many relatively complex tax planning strategies that can substantially improve a client’s net return after taxes. Then, there’s also the issue of wealth transfer planning, ensuring that my clients’ net worth finds its way to future generations without giving away any more of it than necessary to the Government.

These are not areas in which I have expertise. One of the reasons that I recently changed firms is so that I have access to those experts who can help my clients invest in a more holistic and integrative fashion, keeping more of their wealth after taxes.

Those of us who engage in this more comprehensive and integrative approach are generally known as wealth managers, which is my current title.

One of the greatest things about this profession is that there’s always something new to learn, always room for further growth and improvement. Hopefully, my evolution is far from over.

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