As a whisky (whiskey here in the States) matures, it loses about 2% of its volume to evaporation each year. Distilleries call this The Angels’ Share. They fill oak casks with a precious liquid knowing that each year part of their hard work will simply disappear. I can’t help but think of the angels’ share when I look at expense ratios. An investor sets aside a certain amount of money, let’s say $100,000. They pay a money manager to invest that money – I’ll use the S&P 500 as an example When the investor looks at their statement, they should see that their investment returned the same amount as the index, less whatever the expense was, right? Looking at the annualized returns, yes, that’s approximately right. Looking at actual dollars, we see something different. A portion of the returns evaporates, escaping the pockets of both investor and money manager.
The 2016 Harvard Management Company Annual Endowment Report is out. What was once a great write-up about the cutting edge of investment management now serves as a warning that every investor can learn from. The endowment’s fixation on keeping up with the Joneses (Yale and Stanford, especially) has led to management turnover, investment collection, and poor returns.
The endowment lost 2% over the twelve months ending on June 30, 2016. The S&P 500 was up 4% over that time while a 60% S&P 500 / 40% Barclays Aggregate Bond Index portfolio would have been up 5%. The report blames the poor performance on everything from low interest rates to market volatility, but it looks more and more like the problem stems from trying to keep up with the Joneses. Peer returns are even listed as one of Harvard Management Company’s three investment objectives alongside real returns and relative returns.
What do you remember most about the markets over the last 12 months or so? Was it the big drawdown in the first quarter? Brexit? Maybe the flash crash from a year ago? How did you feel during each of these supposedly world-ending crises and how do you feel now that they are in the rear-view mirror?
What is the most important action an investor can take? Sometimes it is taking no action at all. We were recently pitched a hot new hedge fund. It is run by an eclectic genius (aren’t they all?), has good performance, and the client base is of such a pedigree that they’re part of the marketing material. We passed. Why? There were several glaring red flags, but it also failed the most important question: would this investment be additive to a diversified portfolio? In other words, would adding this investment get our clients to their financial goals faster or with less risk?
This reminds me of an old story:
It’s been over a year since the S&P hit its all-time high. The market has been going sideways. From February 16th, 2015 through May 31st, 2016, the S&P 500 has returned 0%. Investors have earned nothing. Or have they?
While the market returned “0%” from point to point, savvy investors took advantage of two 10%+ dips by the S&P 500, one in August of 2015 and the other in February of 2016. There was no need to pick individual stocks or sectors. There was no need to count oil rigs, follow dry bulk rates, or parse the latest Federal Reserve meeting minutes. Investors only needed to stick with their plan. Those who contributed to their 401(k)s or rebalanced during the dips ended up buying low. Investors who harvested losses banked an asset that gives them more control of their taxes in the future.
Here’s the background story leading up to our recent recapitalization.
In 1992 I wrote a business plan (as an MBA class assignment) for a fictional Fairway Financial Group. Explaining the A- grade, the professor wrote: “a comprehensive, if not completely believable plan. The market(ing) assumptions stretch credibility.”
In 1997 at Deloitte, Mark Weiskind approached me asking to transfer from the audit staff into the Private Client Advisers department. He did, increasing our department’s size by 100%. Later that year, we hired C.J. Avarello. Around that same time, we got to know Terry Waye because he worked at a competing firm and served as investment adviser for a tax-only client of ours.
In 2001 Bob Kushman, a Tax Director at Deloitte, suggested meeting his friend Michael Benson. He thought Mike, a strong marketer and bona-fide entrepreneur, might be a good networking contact for us. Mike was well known nationally as an adviser to high-net-worth families on their philanthropic estate plans.
I met with Mike shortly after 9/11. He was courteous but uninterested in sending his clients to Deloitte. He called me the next day saying “You should leave Deloitte and start a wealth management firm. I’ll be your silent partner and I’ll fill your dance card.” Nice idea, but what about those nagging market(ing) assumptions that stretched credibility? Could Mike be the missing link? I walked down the hall and confided in Mark. He was in! We took the leap, partnered with Mike, and started Fairway in June 2002.
Now we needed clients. Most of the families we were serving were kind enough to follow us to Fairway. We couldn’t have done it without them. But otherwise, we were heavily relying on Mike. He invested his time, opened his Rolodex, and led us on many road trips to Florida, Maryland, Michigan, and Utah; not to mention all the meetings we had in Ohio. We had some memorable strike-outs; but we got hired more often than not.
But our succession plan was the potential problem. How would we ever buy-out Mike if he wanted to cash-in? Would we have to sell; merge; take on bank debt; or otherwise compromise our future? Mark and I became convinced that Fairway should be wholly-owned by the working principals, and that we needed to seed the future with a steady-stream of new partners rising through the ranks. We wanted to get this right.
In November 2013 we held a two-day strategic planning retreat in Naples for our entire firm. The theme was Fairway 20/20. We focused on our future, guided by how best to serve our three constituencies: 1) Clients, 2) Employees, 3) Owners. It was there that Mark and I first pressed Mike on the buy-out issue. We needed succession plan clarity and we needed it soon. Thirty months later…we have it!
On May 16, 2016 Mike’s interest in Fairway was completely redeemed. Mark and I added to our commitment and increased our investments in the firm. And, C.J. Avarello and Terry Waye bought-in and became new partners.
Fairway now serves 170 families, manages over $1.1 Billion in portfolio assets, and employs 13 professionals. We have 4 “young” Senior Wealth Managers (Dan 51; Terry 49; Mark 44; C.J. 43) all capable of delivering our entire suite of services and committed to growing the firm and training our successors. We have 3 Associate Wealth Managers (Dina, Kristen, and Chris) to provide continuity into the future. Our Family Office team (Korby and Laura) is second-to-none. Matt is becoming well-known in the research world. Maria and her operations team (Kim and Erica) exude courtesy and helpfulness while taking care of the all-important trades and account details. We are selectively seeking experienced advisers to bring onboard; and we are more likely to grow by doing acquisitions than by being acquired.
The future looks very bright indeed!
INDEPENDENCE, OHIO (May 16, 2016) – Fairway Wealth Management LLC has completed the buy-out of its silent equity partner, Michael D. Benson of Naples, Florida. Founding partners Daniel R. Gaugler and Mark S. Weiskind increased their capital investment in the firm and admitted Charles J. Avarello and Terry J. Waye, two of the firm’s employees and senior wealth managers, as new equity partners.
“While we considered outside funding and were gratified by the interest shown by some of the industry’s top M&A players; we concluded that the best answer for our clients, employees, and owners is to remain independent; and to stay as focused, flexible, and client-centric as only a boutique-sized, employee-owned firm can be,” said Dan Gaugler, CEO and President. “We want to thank Mike Benson for his contributions over the past 14 years. He has been a valuable partner, but we are excited to expand the ownership base internally and move forward with a structure that promotes our growth plans, provides opportunity for our employees, and secures continuity for our clients,” said Mark Weiskind, COO and Vice President.
Fairway Wealth Management LLC (fairwaywealth.com) employs 13 professionals and provides investment advisory, wealth management, and family office services for approximately 170 private client families in Ohio, Florida, and 20 other states. The firm is an SEC-registered investment adviser (RIA) and manages portfolio assets in excess of $1.1 billion. Fairway was founded in 2002 when Messrs. Gaugler and Weiskind departed Deloitte’s private client unit to launch their own firm.
For more information, contact:
Daniel R. Gaugler
6055 Rockside Woods Boulevard, #330
Independence, OH 44131
Sometimes I wish we had a complex, proprietary, super-secret investment method. I would fit in much better with my peers at investment conferences. I could give vague responses to questions, “Well I don’t want to give too much away, but…” as if our competitors have the room bugged just waiting for me to spill the beans. Maybe our strategy would push the limits of modern technology. Perhaps our proprietary algorithmic trading would rely on artificial intelligence to parse trends on social media and I could hint that our greatest fear is not a bear market, but our AI gaining self-consciousness.
The first quarter of 2016 must have been inspired by March, roaring in like a lion and going out like a lamb. The year started off terribly with an immediate market correction of 10.3% for the S&P 500. About halfway through the quarter, the market turned around and appropriately turned green for St. Patrick’s Day. For all that movement (down 10% then up 12%), the market was only up 1.35%. An investor who only checked their portfolio at the end of the quarter could be forgiven for not thinking anything much had happened at all.
Berkshire Hathaway recently released Warren Buffett’s annual letter to shareholders and it is required reading if you have any interest in investing, stocks, money, folksy wisdom, talking lizards, or deeply discounted furniture. Really, just do yourself a favor and read the letter.
This month’s Tip From the Pro on our Scorecard is from the letter: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.” The timing of his pro-America statement is intentional as we get deeper into an election year where the candidates are all working to convince us how awful things are and the only solution is to elect them.
Here are a few other quotes from recent letters that are especially relevant to those who take investing seriously. Continue Reading