Firm update and some industry observations

I'm going to take a late-summer's break from my regular and occasionally useful pontifications on finance to talk a bit about where our firm is now and relay some general observations.

We have 91 clients and are a bit under $50 million in assets under management. Our clients reside in 8 states. 15% of them, arguably a fortunate group, we have never met in person, a percentage which will steadily grow over time. It's not a formal definition, but this puts us in the mid-tier of firms in the State of Vermont, based on size. We are growing at a rate that is roughly 700% of the industry average. Three of us here work at or close to full time and there are two part time people as well. 

It's clear to me that enough Americans are frustrated by the existing financial business that they are ready for a change. 

In my previous career, I started several businesses that reached "hockey-stick" growth (so named because growth accelerates in the shape of a hockey stick. Yes, viewed from the side). It was good experience, because I am comfortable with the operations side of running a business, which is different from the investing side. I know what is coming, and with decades of experience behind me in the problems of growth, I'm able to invest ahead of the issues and stay away from reactionary mode. My target at One Day In July is to achieve steady, straight-line growth. When I was younger I was more interested in hockey-sticks. Now I just want sticks. 

As a firm, behind the scenes, we are investing money in our compliance systems this year. We are custom-writing the software (internally, not outsourced), so that the system matches the business exactly and gets us to optimal efficiency. Optimal efficiency is important because it keeps our costs, and hence yours, down. These systems will underpin our culture of being organized, frugal, responsive, and professional.

In addition, Hans and I are having lots of fun. Every client brings a slightly different puzzle to the table, which makes the initial startup phase engaging.


Here are some things we've learned from the industry in the past year.

1. The industry fee machine and underperformance of funds is significantly worse than we expected, and it is almost all hidden (most fees are hidden, and the real "losses" are opportunity costs that are hard to see). You can decipher it, but be prepared to give up Monday Night Football for a rendezvous with financial fine print. You might still be there when Tuesday morning cartoons arrive. 

2. We can discern where the enormous profits are in the industry by watching how hard other firms push back when a client switches. The biggest four that I see: 401k / 403b plans (the fees generally are so high, and so well hidden, that these are the "perfect" product for the industry). 2. Individuals with over $500k invested in active mutual funds 3. Whole Life plans 4. Annuities. Mistakenly I have been cc'ed by some financial firms in their "save the client" process - it's a strange cocktail of interesting, nauseating, and amusing to see the internal reaction we trigger. 

3. Inertia is most investors' worst enemy. The financial industry tries hard to make the switching process agonizing, complicated, time-consuming, and expensive. They know that many people will give up in the process. Inertia = huge profits if you are a financial company. There are psychological tricks they use to create inertia, such as client guilt over severing relationships, paperwork, and surrender charges.

During college I worked for Microsoft in the days when companies were afraid of its monopoly. When a competitor would spring up, Bill Gates would hurriedly make an announcement that Microsoft had a project in that space, the "project" sometimes little more than a press release. Investors and customers would run away. We called it the "FUD" strategy internally - we knew Bill would spread Fear, Uncertainty, and Doubt, and Microsoft would win by being the default player. This is the same strategy used in finance - if an individual or business can be made uncertain of their decision, inertia will take over, they'll stay put, and the profits will keep flowing to the industry at the investor's expense. 

4. There is no way financial companies could sell most of what is being sold to investors if the client had a clear comparison against the *correct* baseline. I'm aware of this and in 2018-2019 we are going to release a tool to potential clients that shows them their historical opportunity cost. I am a bit concerned about the emotional reaction this will trigger. 

5. I thought we were going to have a larger problem addressing capital gains taxes in new taxable client accounts than we're having. I assumed after 8 years of a strong U.S. bull market that this would a top-tier issue. It exists, but less than I thought. I'm studying this, but two factors are clear: active mutual funds generally have done poorly vs the indexes so investors just don't have the gains, and advisors and brokers are trading accounts, switching between funds to generate fees. When they do so, the tax basis rises. Unfortunately this generates tax bills for the client.

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