Whether or not you’re the resolution type, the arrival of a fresh new year offers as good an excuse as any to revisit life goals. What does “success” mean to you and yours? Allow me to share how my wife Sarka and I defined it for ourselves when we founded Posey Capital Management.
Before Posey Capital I started life as an accountant/CFO, became a corporate tax lawyer and launched my investment advisor career from within the insurance industry. These weren’t bad ways to earn a good living, and the years of experience gained during that time certainly helped us shape our firm into an effective and multifaceted service provider.
During my days as a lawyer, I discovered, you’re always in contention with someone. That’s because there’s always another side to every negotiation, and your job is to ensure that your side prevails. As an advisor, there isn’t – or at least shouldn’t be – “another side.” You can advocate for your client, conflict-free. I like that a lot, and so that’s one important way I have defined “success” for my firm.
There are a couple of ingredients I’ve found key to fulfilling my role as client advocate, helping clients define and pursue their own definitions for success. These are:
1. Delivering our services in a fee-only pricing structure
2. Applying the principles of passive investing to your investment portfolio
The Importance of Fee-Only
With fee-only pricing, we are compensated for the advice we provide. As your portfolio grows, so does our compensation, which means our incentives are generally aligned with your own: to seek portfolio growth. In contrast, if we were to receive commissions for trades completed or products provided, we would be paid whether your portfolio shrunk, grew or remained the same. It’s also possible to be a fee-based advisor, primarily compensated through fees, but also paid commissions under certain circumstances.
When Sarka and I were filling out the regulatory paperwork for establishing Posey Capital, we got to Section 13 of the Form ADV, Part II, where it asked us to disclose whether we received additional compensation from non-clients while dispensing advice to our clients. In other words, were we receiving any commissions along with our fees?
“Hold the phone,” we said to each other. If we’re going to do what’s best for our clients, how can we check “Yes” to having outside interests? Shouldn’t our only source of compensation be from the clients we serve; i.e., fee-only? On the other hand, checking “No” meant that several promising opportunities from my existing book of business would have to be abandoned.
As a new firm, passing up likely business isn’t a decision made lightly. But it’s what we did … and do. Let’s not bring over any commission-based business, we agreed. We checked the “No,” box and we’ve never looked back. We’ve lived fee-only happily ever after. In my next blog, I’ll describe how adopting a passive investment strategy represents another key to my personal definition for success. In the meantime, I hope you and your family enjoy a happy, healthy 2010.