Unspoken secrets in the money management business

The past few weeks have been dominated by storms, literal and figurative:  the election, the fiscal cliff, Sandy, the nor-Easter and now infidelities. It was enough to give me a brain cramp and writer’s block. Rather than talk more about that which has been discussed too much already, I thought today I’d share with you some of the unspoken secrets in the investment management business because they have potentially serious implications for your money. And that is, after all, what I’m supposed to be writing about.

Professionals in the investment business, whether they’re called stockbrokers, investment advisors, financial advisors, money managers, or something else entirely, are often described as “playing with other people’s money (OPM)”. That phrase alone should give you pause as it suggests a carefree attitude to investing by the pros because it isn’t their money. The idea is that a client gives you money, and you employ some method to decide how to deploy those funds, then you sit back and collect your commission or your fee. One of the unspoken truths in the industry is that few of these professionals are the ones that actually invest the money that they are paid to manage. Indeed, they usually farm that responsibility out to someone else.

Oftentimes, once the advisor has your money, he will usually either hire someone else entirely to manage the money, or rely on his research department pick the investments for you, or put your cash into pre-determined “model portfolios”, or simply dump the money into a bunch of mutual funds according to the asset allocation tenets of “modern portfolio theory”. More often than not, advisors are simply cash aggregators; accumulating as much money as possible, thereby generating the largest fees possible. How that cash is actually invested, and by who, becomes secondary. And to compound the problem, since it’s just “other people’s money” he has no personal stake in how your money is ultimately invested because it’s your money, not his, that’s at risk. And that’s where I’m different.

I make 100% of the decisions as to how my clients’ money is invested. The buck clearly stops with me. And as importantly, I have 100% of my own money, and that of my children and other family members, invested in exactly the same securities as my clients. Indeed, I personally own 29 of the largest 30 positions owned by my clients. I am clearly talking the talk AND walking the walk. My general rule is that if it’s good enough for my clients, it’s good enough for me and my family. I wouldn’t buy anything for my clients that I wouldn’t buy for my own children.

So what does this mean for my clients? It means I have my skin in the game, right alongside theirs. That I will not take any risks with their money that I wouldn’t take with my own. And it also means I am DIRECTLY accountable for the money that I’m managing on their behalf. Can your advisor say the same thing? Have you ever asked your advisor who is actually managing your money and where his own money is invested? Maybe it’s time you did.