Capital markets can be intimidating and trusting your hard-earned nest egg to someone can be frightening. Our hope is we developed a more transparent and conflict-free business model versus the opaque structure that is so ubiquitous to the financial services industry. And in doing so, we hope we provide our clients with a greater sense of comfort in engaging us. The following are some salient points regarding how we work with our clients and how it may translate into a better service model for you.
Fee-only Advisery: Every day since August of 2005, we have served our clients as a fiduciary and in a fee-only manner, adopting the business model long before most financial advisors even adopted a fee-based model (there is a critical difference between the two, read more here). Most importantly, we feel this model eliminates many of the conflicts of interest that are inherent to the financial services industry. Ultimately, the better our clients do, the better we do.
We do not have any hard or soft dollar compensation arrangements with any brokerage firm, custodian, or fund manager. Our sole source of compensation is our clients and thus our loyalty remains solely with them.
Discretionary Trading Authority: We will obtain the authority to trade your account at our discretion which provides us with the necessary efficiency to run our active models. We nearly always use block trades which means all our clients and all our personal accounts receive identical pricing. This is a critical piece to our risk management process as it allows us to execute stop/loss trades for all our client accounts in an efficient way.
Conflict of Interest (or lack thereof): The financial services industry is unfortunately wrought with conflicts. Our fee-only status eliminates many but not all conflicts that can arise between the financial advisor and the client. Given that we are granted trading authority, there are two significant ways in which the adviser/client relationship can be compromised and we have taken deliberate measures to mitigate these conflicts.
1) Front-running: We have developed a concise set of rules set out in our ADV, Part 2 which prevents us from front-running our client accounts.
2) Free-riding: When our block trades are executed at Interactive Brokers, all allocations are done in real-time and thus making it impossible for us to free-ride our client accounts. You can click here to learn more about these all-too-important issues.
We do have a rather considerable conflict of interest in that we allow accredited clients to enter into an incentive fee arrangement while we are only permitted to execute a flat-fee arrangement for non-accredited individuals. This provides us an incentive to favor the accredited client over non-accredited clients. To alleviate this issue, we strive to always trade accounts under both fee arrangements in block trades offering them the exact same pricing and execution. Our goal is to serve all clients equally regardless of net worth (Matthew 25:40) however there are industry limitations that we must abide by.
Separately Managed Accounts: The majority of our client assets are managed in separately managed accounts that are entirely owned and completely controlled by the client. We are simply provided limited power of attorney authorizing us to trade your account at our discretion. You retain all control and access to your account (i.e. your money).
Transparency: From fees to trades to performance reporting, everything we do is fully transparent.
Termination fee: There is no fee or penalty to terminate our program account. Simply contact us or the custodian to terminate the agreement. (Or you can set up an account at another custodian and instruct them to liquidate your account with us.)
Custodian: We require our clients to open an account at Interactive Brokers, LLC (IB). IB is one of the largest brokers by trading volume in the world and has best-in-class execution. IB's core business is institutional accounts such as hedge funds, pension plans, etc, but they offer us the ability to implement our strategy in retail accounts with the same trading permissions as large institutions. Our due diligence process included researching firms such as Fidelity Investments, Charles Schwab, TD Ameritrade, Pershing, and LPL Financial and found IB to be the best solution for our clients. To learn more about IB, simply click here.
Account minimum: Our account minimum is $110,000 (Our custodian, Interactive Brokers, only grants our client accounts full access to their tools and trading platform at this minimum).
Securities: We focus almost exclusively on individual stock holdings, mostly domestic but some international, rarely using mutual funds or ETFs (Exchange-Traded Funds) . The only parties you are paying to invest your money is our firm and IB. There are no hidden costs. We occasionally use closed-end funds which can be subject to management fees and other expenses, but we typically only buy them when they are trading at a significant discount to their Net Asset Value (NAV).
Management Fee: We have two fee schedules. Any client can opt for our flat-fee management schedule which is 2.0% of AUM annually, billed on a pro-rata basis daily. For accredited investors, we also offer an incentive fee of "1 plus 2". In this fee arrangement, the client account is billed 1% of contributions to the account and 2% of growth. This schedule ideally aligns the firm's interest with the client's.
Our research shows that most financial platforms have an all-in expense burden between 2 - 2.5%, and in return, the client often receives little to no added value (i.e. alpha). Our objective is to provide significant alpha while keeping all-in costs at the low end of other platforms. Being that we are transparent, it is impossible for us to bury our fees inside of funds or other products and services.
Taxable Activity: We are far more active than most investment advisors engaging in 150+ round trip trades annually, and thus, your account will likely endure a greater frequency of taxable activity. This ought to be taken into consideration before investing with our firm. The majority of our clients are either investing qualified assets, in the distribution phase of their investment lifecycle and paying taxes anyway or they have a heightened concern about the risk in the stock market. If tax-friendly investing is your primary objective, our investment strategy would not be a fit for you.