The investment industry over the past 40 years has evolved in ways that are very beneficial to investors, while also devolving in ways that exploit the uninformed and overly trusting. I believe a firm’s culture defines whether evolution or devolution has prevailed and determines how investors working with a firm and its people will be treated.
The best way to present my views on firm culture— and why it should matter to you—is to take you through my personal history in the industry. I’ve been part of four very different cultures. All still exist in various forms. You be the judge as to what culture makes the most sense in protecting your interests.
The Order-Taking Culture
The first investment firm I joined in 1981 was a classic “broker/dealer.” As brokers, we had customers, not clients, for whom we executed stock and bond trades. We were officially registered representatives of the firm, and our duty was to produce as much revenue in the form of commissions as we could. We took orders and executed them. So we were always looking for stock and bond traders— the larger and more active the better. The firm also “made the market” in local bank stocks and economic development bonds (the “dealer” part).
Simple, transparent, and ethical (at least in the way a bartender pours you a drink). It was mostly an order-taking culture, and customers knew that going in. That culture has died a slow death since the deregulation of brokerage commissions in 1975.
The Fake “Advice” (Product) Culture
In 1983, I moved to a large national firm that was aggressively moving away from dependence on stock/ bond trading (due to the decline in commission rates) by creating a plethora of investment products with large upfront, back-end, and trailing commission streams. These included mutual funds, variable annuities, limited partnerships, and insurance products with commissions ranging from 5% to 10%. Usually, the commissions and internal expenses of these products were buried in the small print of prospectuses written in confusing legalese.
This was a sales culture on steroids. Unlike stock and bond trades, which were most often initiated by a customer, these products had to be sold aggressively with slick marketing brochures and less-than-honest representations of potential risks and returns.
To sell these questionable “investments,” brokers changed their titles from “Registered Representative” to “Financial Consultant.” We were now advising “clients” from a “portfolio” perspective. Of course, there was no portfolio management training or science involved, no credentials that needed to be earned, no formal educational requirements beyond a high school diploma, no portfolio reports or performance reviews. Just lipstick on a pig. And it worked. This is the worst culture for investors, and it’s still the most prevalent one in the industry.
It was all smoke and mirrors, with so many layers of fees and so many people dipping into the cookie jar that there was little left for the investor. Brokers jumped from firm to firm for big upfront bonuses or forgivable loans. It was, and still is, all about broker income, not client investment returns or risk management.
Evolving From Within
By late 1984 or so, I made a personal decision to transition (dare I say, evolve) out of that shady broker culture toward a more professional approach to portfolio management. But even with my college degree in finance and my longtime interest in investment theory, I wasn’t qualified to construct and manage individual portfolios. Besides, there was a glaring conflict of interest with clients in doing so: I would control, through my buy/sell decisions, the flow of commissions from trades.
Furthermore, the temptation to use the firm’s proprietary mutual funds (with special financial incentives) or those of other prominent fund managers like Fidelity or American Funds, with large front-end and trailing commissions and high internal expenses, was too easy to rationalize.
So instead I opted to hire independent, fee-based fiduciary advisors with varying investment specialties to build diversified, balanced portfolios for my clients. I did not control the flow of trading commissions, and the management fees charged by these advisors typically started at 1% per year of assets managed and declined based on the size of the account. I also personally bought the new Apple Macintosh computer and spreadsheet software to calculate each client’s total portfolio rate of return and report to them on a quarterly basis.
Very few brokers around the country at that time evolved their business and their ethics this way. But many of us who had risen to the top of our firms’ revenue rankings served as examples for others stuck in a slow-dying commission-based culture. Eventually, this emphasis on “managed money” became the biggest trend in the brokerage industry.
It’s interesting to note that 1985 also saw the birth of an organization that would become the Certified Financial Planner Board of Standards to oversee the CFP® designation. The fee-based, fiduciary, financial planning side of the industry was launched.
The Guru-Based Advice Culture
In 1988, I had the opportunity to join my favorite independent, fee-based advisor out of Cincinnati, Ohio. This was a huge cultural shift. The firm was registered with the SEC as a legal fiduciary for its clients (unlike brokers) and derived all of its revenues from a 1% investment advisory fee. The conflicts of interest of the broker-centric culture were eliminated. I moved my family to San Francisco to help open a new office for the firm.
My decision was influenced in no small degree by the firm’s outstanding past performance. From its founding in 1977 through 1988, the firm’s “black box” tactical allocation investment style had outperformed the overall stock market by a wide margin.
Then the bottom fell out. The firm’s investment committee (as I came to realize years later) overrode its computer-based model for the next two years and performed very poorly. They lost about a third of their assets and closed the San Francisco office, and I was out of a job.
My best option financially at that point was to move back to my hometown, Fort Wayne, Indiana, and rejoin my old brokerage firm. But I had learned (evolved?) too much by then and wouldn’t do it. So I developed a new business built on the Morningstar model that published concise summaries on investment advisors (rather than mutual funds).
What I found very early on was that most of the performance presented by these advisors was very questionable (the nicest way to put it). It would have required many paragraphs of small-print footnotes to publish the performance with accurate disclosure. My new business, Money Manager Profiles, died quickly, and my investment career was basically over.
I then decided to build a contact management software app using a back-end Apple Macintosh program. When it became apparent that the firm on which my program was built was failing, I had to abandon that business as well.
The Science-Based Advice Culture
At the lowest point in my career—after selling our house and asking my wife, Kathy, to restart her career as a nurse—fate stepped in. I randomly met the person who would introduce me to the investment culture Equius inhabits today. In October 1992, I started TAM Asset Management—the cultural foundation of today’s Equius Partners.
All the right boxes were checked:
- No old-school broker/dealer conflicts of interest.
- No expensive active management that eventually blows up.
- A collaborative, education-based approach, with emphasis on complete transparency and respect.
- Broadly and optimally diversified, tax-efficient asset class strategy.
- Full legal fiduciary—client-first focus.
- More predictable—and superior—investment outcomes over time.
- Superior asset class and portfolio risk structure and management.
- Strategy based on the highest levels of academic research, financial and behavioral science, and published evidence.
- Comprehensive financial planning for clients where needed (with CFP®-certified advisors).
- Fully sustainable, multigenerational, stable, and consistent investment principles and strategy.
This is the culture we’ve cultivated and deliberately protected at Equius through the transition from founders to a next generation of dedicated professionals. Unlike so many other firms, we have never compromised our core principles for business (read: money) reasons. We only change when the evidence suggests a net gain to clients.
If we didn’t recognize the importance of culture and the ethics and principles that define it, we could easily rationalize decisions that would enrich us at the expense of our clients. I did that when I moved— naively—from the classic broker model to the modern broker model in 1983. But I learned fast and changed course quickly.
The average investor, understandably, is slower to recognize the instability, uncertainty, and false promises that define and fuel the broker-centric culture.
Being introduced to a client-first culture that rejects commissions and the clear failures of active management, and which limits investment decisions to those grounded in the science of modern financial economics, results in a clear win-win outcome for advisor and client. Once exposed to this better model, investors rarely regress back to the old way.
Equius Partners, Inc. is a Registered Investment Advisor.
Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.
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