It was 25 Years Ago Today

Friday, October 19, 2012 at 10am
By John Friedman

I was 11 when Sgt. Peppers came out. I had mumps. I also had my first good stereo (a passion which continues to this day). I listened to the album many, many times. I have vivid recollections.

These days I listen to Sgt. Peppers only very rarely (partially because many Beatles CDs sound terrible, with the remastering meister putting all the vocals in one channel and everything else in the other) (why dey do dat?).

In any event, whenever I hear about an anniversary that has a twenty in it, I cannot help but sing to myself, It was twenty years ago today, or, in today’s case, It was twenty-five years ago today.

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It was 25 years ago today . . . that I was at 721 Lighthouse Ave. in Pacific Grove, working upstairs with the inimitable Edward downstairs, when some sort of ruckus brought me downstairs, and the almost-equally-inimitable Shelley said, Have you heard? The market’s crashing!

Indeed it was. Without looking it up, the numbers that live on in my memory and in infamy were 500 points down on the Dow, and down 25% for the day [note from later on: after writing this piece I looked up the numbs, and this is ballpark correct: it was 508 points and 23%].

On today’s Dow that same 25% drop would be about 3500 points.

So picture, if you will, that, today, around noon on the West Coast (3 pm on the East Coast) you hear that the Dow has dropped 3500 points. Yikes!, right?

Even people who are not market-oriented people (e.g. people who do not know what the Dow is, or who, when they hear the phrase, the market, don’t necessarily hear the word stock as the implicit modifier of the word market) might even stop and stare, take notice, and think, Gee, that sounds like a lot.

It was.

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I leave it to the market historians to talk about the significance of what we now know as Black Monday. There will surely be articles galore everywhere today.

Instead, let’s talk about the time frame of it all, and about being a smart consumer of financial services in the money manager realm, shall we?

And let’s do that by, first, comparing how to be a smart consumer of financial services in the money manager realm to how to be a smart consumer of financial services in the estate planning realm. You’ll see why in a moment . . .

*  *  *

When I help clients get their estate planning done (it’s way-hard for people to contemplate their own demise, so it’s way-hard to get wills and trusts and such done!) my advice to them is that the ideal estate planning lawyer they’re looking for is someone (a) with whom the client can stand being in the same room for some hours’ worth of time (note to estate planning lawyers: this is a major filter), (b) who does nothing but estate planning (estate planning, if other than very basic estate planning, is not a good place for half-timers and general practitioners to ply their generalism), (c) who has been doing estate planning for at least, say, a decade or two (because inexperienced lawyers are dangerous), and (d) who is at least, say, a decade or two younger than the client (because, to use the word that most people first experience when looking for the first time at a binder full of estate planning documents, the client wants to predecease the client’s estate planning lawyer, so that their lawyer can put into effect the client’s estate plan that the lawyer wrote).

So you want someone who is experienced, but not going away any time soon. You want them to be in that just right happy medium.

My advice for people seeking money managers is somewhat similar, but with one important distinction relating to price, driven by the different pricing models estate planning lawyers and money managers use.

Most estate planning lawyers base their bill on hourly fees; the more experienced the lawyer, the higher the fee (and, maybe, but maybe not, the more efficient the lawyer can crank out your documents).

With money managers this is seldom the case. Most money managers (MMs from here on) charge AUM fees (Assets Under Management fees) rather than hourly fees. Likewise, most MMs require that you have your money someplace where they can have some control over your account, so that they can buy and sell investments on your behalf and, also, so that they can pay themselves out of the accounts they are managing.

This they will do. They’ll typically go in there and snag about a quarter of a percent of your account each quarter, and thereby pay themselves annual AUM fees of about 1% of your investments.

Yup, that’s right: the MM industry has one of the most beautiful business models around, given that it (a) uses a very standardized, no-two-ways-about-it, mathematically-calculated fee, which (b) their clients never have to actively pay to them because the MM sets up the account to auto-ding the fee from their client’s accounts into the MM’s own account. Think about it: most MM clients never have to pull out their checkbook and write a check to their MM to pay the MM his or her compensation. Nice eh?

*  *  *

There is precious little price competition on AUM fees. So when I see a skilled MM who actually appears to be price competing, I congratulate the MM and keep that MM in mind as someone I’d like to get to know more.

Instead, the main variable MMs use to discriminate among potential customers is account minimums (minima?), i.e., very good MMs might have account minima of, say, $5 to $10 million, while a lot of everyday, run-of-the-mill MMs are pretty thrilled to see accounts above $250k.

Yes, many, many people cannot have an MM in their lives because the MM industry does not, by and large, work with normal people with normal asset bases.

Even then, though, if you look at their pricing schedules, you’ll see something that pays homage to a 1% center of gravity in the AUM fee universe.

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These days it’s very easy to see any MM’s pricing schedule. You need only go to the IAPD, which is the Investment Adviser Public Disclosure website. Once you get to the site, the gossipy/how-big-is-that-fish-you-caught parts you probably want to go to right away are what I call The Item Fives: i.e., Item 5.F of the main form, which shows the amount of assets the MM has under management, and, a bit harder to get at, Item 5 of the MM’s Brochure, which shows the MM’s published price schedule as part of a pdf file that’ll pop up once you start clicking your way through the Part 2 Brochure click-trail.

This’ll all make sense when you look at the nav bar on the left once you have selected an MM to research.

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By the way, I am not an MM. I don’t manage money for people directly. Instead, I either (a) help them do their own money management (just about everyone is surprised how easy, simple and low maintenance doing so can be . . . and how terrifically empowering it feels to do it), or (b) help them be smart about hiring, managing and, if need be, firing their own MM.

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Since most MMs charge fees that are, mostly, in the same ballpark, you owe it to yourself to get someone who is very experienced. Why pay roughly the same price for someone who is inexperienced?

The same can be said of most real estate agents. They all charge roughly the same thing, more (commissions for commercial leases in SF) or less (residential sales commissions in SF have seen some variability over the past five years)

*  *  *

So today my advice for everyone with an MM in their lives has a historical wrinkle to it: ask your MMs what they were doing on Black Monday.

If they have good stories to tell — what it taught them, where they were, how they and/or their supervisors handled it, etc. — that’s good. And if they don’t? Well, you have someone who wasn’t in the industry twenty-five years ago.

That might or might not be a bad thing; I leave it to you to decide.

So, yes, I admit it. I’m an agist to a certain extent — especially when the battle-tested folks can cost roughly the same amount as the people just getting started, who weren’t even around for the minuscule-by-comparison Flash Crash on May 6, 2010.

1,280 words (about a fifteen minute read sans links)

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