Call Me

After a tumultuous week our misguided instinct is to call everyone and explain what happen and how we have a plan to fix it.  Our clients and co-workers don’t expect perfection, they just need to know we care and are thinking about them.


Fiduciary Family

When things go wrong in our personal life we seek refuge in our family.  A good family will provide us with unconditional support and help us get back on our feet.  When things go wrong in our financial life a fiduciary family is a good refuge.  A fiduciary family has committed to providing advice that is in their client’s best interest.   Unfortunately, other firms can seem like “Tiger Firms” that focus on results that oftentimes can be too self interested and can be at the expense of their clients. They have a definite answer to everything that often involves “working through it and toughening up.”


No definitive answer

We and our short news cycle often seek short and sweet explanations to complex problems.  While last week’s volatility can easily be blamed on the inverse Volatility ETNs,there is more that needs to be examined to insure we don’t repeat Monday and Tuesday’s debacle.  Let’s start with a better vetting mechanism for new products that, much like an IPO’s prospectus, details the risks.  We should also work with Fiduciary advisors who will examine these products before recommending investment.  Another important factor is the liquidity of the markets for these esoteric products.   Hindsight is 20/20, but we must learn from catastrophic events and advisors and their clients need to examine how last week made them feel.


What’s next?

Swift market declines get attention and reinforce the fact that there is no free lunch.  There were several warning signals about the short VIX ETN’s, but they were conveniently ignored.  Clients and Advisors should not expect perfection and a photographic memory.  A more realistic goal is to have factual conversations about the pros and cons of each investment strategy before we pull the trigger.  These conversations won’t prevent mistakes, but they will serve as a point of reference if things go wrong.


People don’t expect perfection.  They just need to know you care. Have you called your clients today?  And while you are making calls you might want to call your parents too

Some Prose (and Cons) on Bonds

An advisor recently asked me to explain the logic of owning bonds in a rising rate environment.  It’s a great and timely question.  As I write this, the yield on 10-year Treasury notes has hit 2.84%, a level not seen in the last four years.  And with synchronized global economic growth and record low unemployment, conditions seem ripe for further rate increases.

Let’s take the hypothetical, best-case scenario for utilizing fixed income.  Suppose an investor with a very defined liability asks for help with a portfolio.  The advisor finds a bond that matches the client’s cash flow needs.  Assuming one is comfortable with the credit risk of the issuer, the ideal solution has been found – a perfect asset-liability match.

This sort of thing rarely happens in the real world.  Since we don’t know when our clients will metaphorically “hit the box,” finding an ideal solution to a client’s cash flow needs is a much tougher problem to solve.  Still, if one is comfortable with the cash flow and credit worthiness of a bond and its ability to mature at par, credit instruments certainly deserve a place in client portfolios regardless of the interest rate environment.

Let’s crank up the complexity a bit and include bond funds in the mix.  Unlike clients, these instruments don’t have an expiration date, so their sensitivity to rate changes can’t be offset by a maturity event.  Since bond prices move in the opposite direction of rates (when one goes up, the other goes down, and vice versa), the idea of exposing client assets to interest rate risk via a pooled product when rates are heading higher can be a source of heartburn.

Still…there’s some logic to support a bond fund holding in a rising rate environment.  Since fixed income is senior in the capital structure of a firm (bondholders get paid first and equity holders get paid last), having some fixed income may be a good potential hedge if stocks tumble significantly.  Shaky logic, but a valid idea nonetheless.

Are there better hedges than bond funds in a rising rate environment? Certainly.  A more direct long- volatility holding such as an options program would likely add more value during a market collapse than fixed income.  This type of protection can be delivered as an overlay, which allows existing positions to remain in a client’s portfolio while the options are executed using margin.

Considering the record low volatility from last year, it makes sense to think about ways to shield investors from adverse market events.  And it is also a good hedge against advisor heartburn!


Ben Warwick, the CIO of Fort Point Capital Partners, writes our blog today.  Ben is a published author who will improve the content of our Third System Blog significantly.  Today Ben examines why  Looking Back is Sometimes Better Than Looking Ahead.

One of the easiest things to do in the investment business is write a forecast for the coming year.  This annual rite of passage for Wall Street firms is typically touted as a scientifically based look at the next twelve months but is often nothing more than a re-hash of consensus thinking.  Nonetheless, these reports are often greeted warmly by clients, who perceive them as evidence that someone is steering their financial ship in the right direction.


But what really makes investment forecasts a no-lose scenario is a lack of follow-up by the readers.  Since few check last year’s report’s accuracy, it’s a high-reward, low-risk activity.


It is rarer, and I believe more valuable, for an investment professional to look backwards.  At Fort Point, we believe than an honest evaluation of past performance can benefit the practitioner and client.  Now that the rose-colored glasses have been removed, let’s discuss the logic behind looking in the rear-view mirror.


Mistakes, I’ve Made a Few

One of the main reasons it is atypical to see backward-looking investment analysis is that they often force advisors to discuss their mistakes.  There is no doubt that the investment industry is rife with bad ideas, lousy execution, questionable conclusions, and just about every type of bad thinking one can imagine (of course, this trait is one that all businesses share).  But unlike many endeavors, bad decisions don’t necessarily mean that a portfolio has failed in its mission.


What separates the good investor is not the lack of missteps, but in most cases the magnitude of the mistake.  Advisors that let their losers pile up merely because they can’t admit their thinking was flawed will fare far worse than one who can quickly acknowledge and correct the problem.


Proper sizing is another crucial element to success in investing management.  Considering the mandate of most advisors is to get clients with ample assets to fund a comfortable retirement, portfolio concentration based on any investment outlook seems foolish at best, and a breach of the fiduciary standard when carried to the extreme.


A final common mistake is excess activity in client accounts.  Advisors should avoid unnecessary buying and selling, as it creates commissions, taxes, and other “financial frictions” that only serves to slow down the return generation process.   It is important to note that long-term wealth is mostly generated through compounding.  Generating return on an asset’s reinvested earnings was once described by Albert Einstein as the eighth wonder of the world.  “He that understands it, earns it…he who doesn’t…pays it,” he is famously quoted as saying.  Portfolio transactions are a necessary part of the investment process, but they need to be executed deliberately and with an eye toward achieving client objectives.


Owning One’s Actions

Mistakes are an inevitable part of the investment process.  I have never met a client who expected their advisor to be perfect in their recommendations.  These twin realities should encourage practitioners to share the mistakes and successes openly with the clients.  I believe that the ability to learn from the past is a crucial component to improving performance in the future.

Death Taxes and Fees

In 1789, Ben Franklin stated that, “In this world nothing can be said to be certain, except death and taxes.”  Ben’s wisdom lives on but with the impending Spotify direct offering and the breakaway broker movement, I began to think that we might need to add a third item to the list – fees.  Our financial culture seems to be fixated on the fees that firms charge, and makes the erroneous assumption that Wall Street advisors make too much money.  We will break down why this phobia isn’t that different than our fear of death and taxes.



The New Year starts with resolutions to improve our health, so we join a gym for the next five months.  Fitness is believed to extend our life, but unfortunately it only works if we adopt a long- term plan.  After three months we stop working out, which results in no long-term benefit.  But the long-term contract works for the gym! Likewise, wealth management strategies need to be long term to be successful.



When you live alone it doesn’t matter if your squeeze the toothpaste from the middle or the end.  The same can be said about taxes.  When you are young and aren’t making money taxes don’t concern you and the political fixation with taxes doesn’t compute either.  However, as you start to cohabitate and begin to make some money your priorities and responsibilities change.  You begin to squeeze the toothpaste from the bottom and you start to pay attention to the tax code.



The 5 – 7% fees that are charged to list a new company have been a source of conflict as larger firms are going public and the fee becomes eye-poppingly large.  Google was the first firm to take control of this and hired WR Hambrecht to float the new stock at a fraction of the cost of Wall Street.  Did it work?  The auction mechanism and pricing worked for the company, but not for the salespeople and the investment bankers.  Google sold itself and salesmen and their firms knew it.  All fees are not a bad deal for the client, but a thorough analysis and some self-awareness is required.  Self-aware service providers know when there is a mismatch and if that mismatch is caused by their firms.  If their firm are to blame then advisors need to find a more client friendly business or their career longevity will be at risk..  Fees alone should not drive the client’s or advisors decision.  Robo advisors are touting their low fees and our founding partner poses a provocative question to answer this siren song.  He asks how much should you pay for a basic asset allocation implemented with standard ETFs?


I don’t want to die, I hate paying taxes and I wish I could compel advisors and their clients to consider their fees and decide if they are equitable.  If they are not they should solve the problem, work out more and pay their taxes.

Parental Challenge

Every parent remembers hearing those frightening words after your first child was born – “you can take your baby home now”!  My wife and I were scared to death that we would do something stupid and kill the baby when we left the hospital.  Thankfully we didn’t, but how can we as parents go from scared and clueless to people who position themselves as experts and make decisions that our adult children will spend countless hours in therapy trying to reverse?  Being a parent is difficult.  Being a good financial advisor is difficult too with many striking similarities to being a good parent.


No playbook

An Amazon search for parenting books yields 360 books. A search for investing yields 540 books.  Will you read any of them or will you just defer to your spouse or financial advisor?  Upon further review of the efficacy of the strategies in these books we come to an overwhelming conclusion that they don’t work but we continue to search for the formula that will produce great kids and superior investment returns.  What should we do?  Ask our adult children what we could have done differently and share their thoughts with young parents.  Identify the investor that you believe has cracked the code and ask her what advice she would give you.  I believe you will be surprised by the simplicity and humility of both of their responses.


Legacy Mistakes

There are no guarantees in life and the SEC and FINRA prohibit their member firms from even using the word in advertisements or correspondence.  Our mistakes as parents can often times be tracked to doing the same things our parents did even though we know the emotional impact they had on us.  The best line my wife can use to end an argument is to say “you sound exactly like your Mom” Busted!  Advisors mistakenly attribute a tactical market call that worked as skill rather than luck.  What can we do?  Stop watching movies where the complexities of life and their happy solutions need to be shoehorned into 1 hour and 45 minute segments.  Stop watching CNBC.  There isn’t a CNBC show that covers how the recommendations of “The Talking Heads” turned out 12 months later and asks the experts to apply some 20/20 hindsight into the mistakes that were made.



If you forgive our parents what else is left to bitch about?  I’ve been thinking about firing my financial advisor for years but haven’t. 

Forgiveness is essential to moving forward but it needs to be a two way street.  One party must summon the courage and talk about the pain or the unmet goals in the relationship.  We have found that both sides will be surprised by the answers and relieved by the frank discussion. Have the discussion in person or at worst on the phone.   Don’t text, email or ACAT your final decision.

Maybe we would all be better off if we didn’t expect our parents and financial advisors to be infallible.  Turns out the best solution is just spending time with each other and listening. I recommend we also change the stock title of advisors from Financial Advisor to Relationship Manager and the title of parents from Superhero to Human Being.