I recently ran into a friend I hadn’t seen since her father’s funeral ten years ago. At one point, we got on the subject of her father’s trust and how she was appointed trustee and hired Merrill Lynch (now part of Bank of America) to manage the trust asset investment. She then told me how her four siblings were unhappy with Merrill Lynch’s handling of investments and were directing all their anger at her for choosing Merrill Lynch. They were all demanding liquidation of the trust so they could invest their inheritance themselves.
It turns out my friend’s siblings had a point. In the ten years in which Merrill was handling investments, the $1M trust balance had stayed exactly THE SAME, which screamed to me that they were churning the account. In 10 years in which the S&P 500 averaged an annual return of around 12%, there is no excuse for Merrill’s ZERO return on investments in the trust. It highlighted one of the biggest silent portfolio killers in America. I’ll get to that in a second.
Much of your energy is devoted to the important things in your life: your family, business, and career. Yet, one of the most important aspects of your well-being is left to work itself out – your portfolio. Like my friend, we often rely on someone else to manage our portfolio. The problem is far too many people don’t tend to their own hen house. They hire outside help, but it turns out this outside help is foxes disguised as financial advisors and wealth managers whose only interest is to line their own pockets.
So what is the big portfolio killer I alluded to earlier? NEGLECT
Letting our portfolios die of neglect is ultimately our own fault. If we let the fox in the hen house and then forget to keep a watch over the fox, we have nobody to blame but ourselves.
According to Jim Rohn:
“Neglect is like an infection. Left unchecked, it will spread throughout our entire system of disciplines, eventually leading to a complete breakdown of a potentially joy-filled and prosperous human life. Not doing what we know we should do causes us to feel guilty, and guilt leads to an erosion of self-confidence. As our self-confidence diminishes, so does the level of our activity. And as our activity diminishes, our results inevitably decline. And as our results suffer, our attitude begins to weaken. And as our attitude begins the slow shift from positive to negative, our self-confidence diminishes even more – and on and on it goes.” www.getmotivation.com/jimrohn
If you neglect the changing financial markets and the new economy, you’re neglecting to stay up to date and how to invest to protect your wealth.
Ironically, suppose you’re vigilant and have a finger on the pulse of the markets and uncertainty. In that case, you’ll inevitably be led back to the same assets for insulating your portfolio from danger in bad times as you would for growing wealth during good times.
Aren’t we told that the key to wealth is passive income? We’re told to leverage the expertise of others to free up our time to do the things we want. We’re told that hands-free investments are the key to generating passive income streams – multiple streams of passive income. But how do you avoid the fox in the hen house situation? The answer is incentives.
Smart investors gravitate towards private company investments (i.e., private equity) because of the transparency of the companies raising money and access to the decision-makers. This transparency and access are important because they reveal the incentives of management.
In my friend’s case, where Merrill was making all investment decisions, Merrill’s compensation was solely tied to the per-transaction fees. In other words, the more buy and sell transactions they executed at their discretion, the more they generated in fees and the more money they made. It was perfect for a trust where the trustee didn’t ever check in, like in my friend’s case. The fox got fat. With private companies, smart investors can avoid this situation without having to keep constant watch.
One of the built-in stopgap measures of private investments that prevent the fox in the hen house scenario is the compensation structure of management and the principals.
Most private investments incorporate a waterfall compensation structure where investors are paid first. In this case, management is only paid if their investors are paid. With compensation tied to performance, the managers of private companies are incentivized to be successful. In other words, they watch over themselves. But, because of private company transparency, investors can check in on their investment performance from time to time if they choose.
Another way to protect your portfolio with private investments and prevent losses from neglect is to choose the right partners. One of the most important factors that go into the private company investment decision is the experience, competency, knowledge, expertise, and track record of the decision-makers.
Investors can take advantage of the transparency of small private companies to screen their potential investment partners to know their money is in good hands.
You don’t have to let your portfolio be a victim of neglect, but you don’t have to keep a 24-hour watch on your hen house either to protect your portfolio.
There’s a balance that can be achieved by taking your portfolio out of the hands of Wall Street foxes who are only interested in getting fat off your hens and putting it in the hands of private company managers who only go home with hens if they’ve given you a return on your investment.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.
