Friends and clients of our firm know that we’ve been singing the same evidence-based refrain for many years, so it is a pleasure to see when the major financial media joins in our song. In the Sunday, August 22nd issue of The Wall Street Journal, Jason Zweig concludes that the old-fashioned, active fund manager is dead. Anyone with that job description is best served looking for new employment.

Jason bases his piece on a recent submission by Charles Ellis to the Financial Analysts Journal, The Rise and Fall of Performance Investing (subscription required). Here’s an excerpt from the summary of Ellis’ article:

As acceptance of indexing grows, clients and managers have an opportunity to stop focusing on price discovery (which has made our markets so efficient) and refocus on values discovery, whereby investment professionals can help investors achieve good performance by structuring an appropriate, long-term investment program and staying with it.

So where will the active managers land next? Today, there are only a few hundred thousand financial advisors for tens of millions of investors. Ellis asks, “Who better to fill the insatiable demand for financial advisers than former portfolio managers who know firsthand how hard it is to beat the market?”

Click here to read Jason Zweig’s WSJ piece (subscription required).

Recall from last month that Hill Investment Group has a defined process to introduce prospective clients to our firm and take them through the first 45 days as a new client. We call it The LongView Process. Last month I discussed Stage 1: Discovery, and now I’ll dig into Stage 2: Planning.

PLANNING
The Planning meeting begins with a review of everything that we captured in Discovery. Since then, we’ve translated your life into a Family Profile Map that categorizes everything with specific topic areas: goals, family, financials, etc. Once we’ve agreed that we have an accurate understanding of your family and finances, our team then walks through an outline of the transition, new allocation, and other improvements to be made.

One of the key topics you’ll understand clearly after the Planning meeting is what makes our philosophy on investing so different. We strive for after-tax, risk-adjusted, global market returns that few people actually get. Let’s pick that last sentence apart.

• “After-tax” returns are most important because we all pay taxes. No one can pay tuition or retire on pre-tax income. Our approach is highly sensitive to taxes.
• “Risk adjusted” means that we design a portfolio that reflects your willingness, ability, and need to take investment risk. We will do this by coupling your intangible desire to meet your goals with detailed modeling to paint a picture of potential outcomes…not just a single number.
• “Global” means that the typical equity portion of our portfolios reaches worldwide with approximately 12,000 underlying equities in the United States, Europe, Asia, and Emerging Markets.
• “Market Returns” means that your portfolio is designed to reflect the market with a tilt to value and small securities. We are not trying to beat the market. Rather, we are trying to build a portfolio that emphasizes those persistent and robust factors as identified in academic journals—those that have shown to outperform a typical market index like the S&P 500 over long periods of time (10, 20, 30+ years).
• “That few people actually get” means working with Hill will help you close The Behavior Gap. Simply put, individual investors tend to significantly underperform the market over time because of poor behavior. Driven by fear, they sell at market bottoms and subsequently (driven by greed) buy back into the market at its high—the exact opposite of what defines long-term investment success.

The takeaways are 1.) a clear understanding of your before & after, 2.) a well-documented summary of your personal and financial circumstances, and 3.) a deeper understanding of what makes our approach different. With these in hand, you are well situated to decide whether we’re the perfect fit.

Click here to read a detailed summary of the entire process.

With our investing philosophy, by and large, we recommend a set it and forget it mindset as it relates to your investment plan, which generally doesn’t benefit from excess activity. Tax planning, on the other hand, offers more frequent opportunities to actively add value (even above and beyond the extreme tax-efficiency of the investments themselves).

Here are three examples:

1. Guiding the sequence of additions to your various accounts during your career and, likewise, ensuring that withdrawals are taken in proper order from those accounts in retirement

2. Matching the right type of asset (equity, fixed income, real estate) with the appropriate account registration (be it taxable, tax-deferred, or tax-exempt)

3. Making creative suggestions based on our understanding of your situation and goals (i.e. IRA contributions, Roth conversions, charitable giving)

As the CPA on the team, I can assure you that we all work together to minimize the impact of taxes on your portfolio and maximize opportunities to leverage tax planning. Tax sensitivity is one of the things that helps us support you in your goals.

Watch in future newsletters for detailed discussions on each of the items listed above.