At some point over the past few weeks, my 10-year work anniversary came and went. It’s no surprise I missed it, as moving across firms excludes you from the somehow still existent glass corporate memento you can showcase on your desk or, more commonly, stuff in the nearest drawer. Nevertheless, I have much to be thankful for and look back fondly on my time spent across New York City, Dallas, Atlanta, and, what I plan to be my final landing spot, here in Nashville with Constellation Wealth Advisors.

Each phase of my journey has brought unique challenges and rewards – in the words of Rudyard Kipling, both “triumph and disaster.” Through these experiences, I’ve learned many valuable lessons, not least of all to “treat those two imposters just the same.” Acknowledging there is still much to learn, I felt compelled to share ten observations I hope will be useful, or at least thought provoking, to my tens of connections. An effort has been made to make these observations as wide-ranging as possible, although it’s worth noting they were all learned from working with high-net-worth individuals and families.

Lastly, and most importantly per the regulators, the below commentary should not be treated as investment advice. These are merely observations from a person in the early innings of his career. Like with most things, exceptions can, and often will, occur. If you agree, disagree, or are simply interested in learning more about any of the below points, I would love to hear from you.

1. Every dollar you own involves an investment decision.

If you have a dollar to your name, you are an investor. Whether your investment decision is holding cash in your wallet, maintaining a checking account at your local bank, trying to keep up with inflation via an online savings account, reaching for yield through bonds, seeking potentially higher returns in the public equity market, or leaning into the universe of alternative investments, it’s a decision you make. Many people fail to realize this and leave their money as they tend to receive it – in cash. While there’s nothing wrong with cash, the key is to not hold too much nor, even worse, too little. Thoughtful investment discussions – and decisions – should be made as early as possible. If you don’t believe me, Google a chart on compound interest.

2. You can learn most of what you need to know about investing in a 1-hour meeting.

Many important concepts, philosophies, and strategies of investing are quite simple. You wouldn’t know it by watching the news or reading financial papers, but I’ve found most of the confusion stems from industry jargon or, much worse, clickbait. Further confusion can be created by professional advisors like me, who when asked a question about the markets will expound for five minutes to prove our depth of knowledge is far superior to the mere “retail investor.” Make no mistake, a lot of complex theories, technical nuances, sophisticated investment vehicles, advanced data analyses, etc. do exist. But, those rabbit holes are rarely worth going down. Think of it this way, not understanding how a carburetor works shouldn’t distract you from safely driving a car. Learn the basics and leave the technical issues to the mechanic.

3. No person, committee, or firm can consistently predict the future.

With no slight to my prior firms (I view both as industry leaders), I’ve learned there is no such thing as a crystal ball. As explained in this recent New York Times article (sorry, Dad), near term predictions across Wall Street tend to be almost humorously inaccurate. From my personal experience alone, I remember being told that Brexit wouldn’t happen, the equity market recovery from COVID would be slow and painful, heightened inflation in 2021 was a transitory event, and just a few months ago, we would currently be in a Federal Reserve induced recession. Please don’t misunderstand. I’m claiming no intellectual superiority to the people making these calls as they are, almost undoubtedly, smarter than I. However, I am stating that near-term forecasts – and thus investment decisions based on those forecasts – should be viewed with a skeptical eye. Sometimes the best route is simply staying the course.

4. In public market investing, passive usually trumps active investments.

Before my career started, I would have viewed this as a bold statement and perhaps even controversial. Today, the only argument I would expect to receive is from someone employed by an active manager. While exceptions can apply, specifically pertaining to niche markets like small-cap and emerging, the data is clear on the largest and most widely held securities. Realizing you could replace your summer reading list with all the research written on this topic, I’ll attempt to simplify it here: passive investment vehicles buy and hold stocks (or bonds) that mirror the holdings of a specific index (i.e., S&P 500). The potential benefits include low fees, tax efficiency, and transparency of holdings. Active investment vehicles are run by portfolio managers who research, analyze, and then seek to buy and sell specific stocks (or bonds) to beat an index. The potential benefits include: customization, risk management, and tax loss harvesting capabilities. With my crude definitions established, here’s the takeaway: over the past 10 years (as of 12/31/22) and based on absolute returns, 91.4% of US Large-Cap Equity Funds underperformed their benchmark (S&P 500). Similarly, 86.5% of International Equity Funds underperformed their benchmark (S&P International 700). Further details can be found by looking up the SPIVA U.S. Scorecard Year-End 2022.

5. Be wary of proprietary publicly-traded investment vehicles.

As mentioned above, actively managed public equity funds have fallen out of favor with some investors. Therefore, it’s surprising that many banks and wirehouses (who openly acknowledge the shortcomings of active vehicles) pitch their own version of these products. A case can be made that gaining access to proprietary funds, and thus a firm’s “best thinking,” is a great benefit to clients. While true in theory, the question needs to be asked if these funds are accomplishing the goal they’ve been created to achieve. Interestingly, I’ve come across a range of proprietary funds with extremely short track-records – the explanation being that it’s a new, never before thought of concept. That, conveniently, allows them to be pitched without the ability to study a meaningful period of past performance. Furthermore, and perhaps the most cynical of my statements, while proprietary funds may or may not provide alpha, what they do for certain is create sticky assets. When a fund can only be held by a single firm’s clients, it creates more friction – most notably a potential capital gains tax – if/when a client chooses to leave that advisory firm. This is not a blanket rebuke on propriety products, but buyers beware.

6. Without a thoughtful strategy, taxes can become a major headwind.

I’ve had the privilege of working with close to 100 families and have yet to meet a single one interested in increasing their tax bill. With the acknowledgement that no one is looking to give the government more than is due (regardless of their political leaning), the question becomes how to, legally, address this issue. Unfortunately, a detailed explanation would require hundreds of words and the blessing of an attorney and/or CPA. With that said, I’ll keep it simple – A) commit the time and effort into building a sound trust and estate plan, B) minimize unnecessary capital gains, and C) consistently harvest losses where available.

7. Private capital is the biggest contributor to outsized returns (or losses).

Investing in private capital (i.e., private equity, venture capital, private credit, and real assets) is usually viewed as a home run swing. As those who follow baseball know, it’s ill-advised to swing for the fences every time you’re at the plate but, when appropriate, it sure can be rewarding. I believe a systematic approach to address when and how to “swing” is vital. With the wide dispersion of outcomes, manager selection and access are of critical importance when committing to private investments. Furthermore, right-sizing those investments is crucial as the illiquidity (or lock-up) of your money can extend a decade or more. Lastly, and what has been my newest learning, is the opportunity to participate in potentially greater returns by accessing smaller capitalized and niche private capital opportunities. It’s a theme very evident in lower middle market private equity strategies – it’s a lot easier to take a company from $5mm to $15mm than from $1bn to $3bn. Even so, each offers a return of 3x.

8. Take time to understand the fees you’re paying.

It’s a mistake to select a wealth manager based on fees alone as, in my opinion, you generally get what you pay for. With that said, and despite significant fee compression over the past ~15 years, I believe many clients are still overpaying and even more don’t understand how they’re being charged. While I can’t help with how much you’re paying at another firm, I can shed some light on how fees are typically charged. Back in the 80s, 90s, and even 00s (at least from what I’ve read) trading commissions were the money maker. You bought or sold a security at the advice of your advisor and a small fee (commission) was paid to that advisor – or more appropriately titled, broker. With the emergence of mutual funds and ETFs, and the correlated decline in stock picking, commissions no longer drive the industry. Today, the lion’s share of fees tend to be generated in two combined ways: 1) investment advisory fees and 2) fund/manager expenses. Investment advisory fees are typically generated by charging a percentage of your total assets managed by an advisor. This is how advisors get paid. The second part of the equation – fund or manager expenses – is the embedded costs of the actual vehicles selected by your advisor. For example, ETFs, mutual funds, and separately managed accounts are never free to hold. That cost, paid by you the client, flows through to the person/team/firm who is running that specific fund (importantly, not the advisor – although it may be his/her firm). Adding these two layers of fees together contributes to your all-in cost of a wealth management relationship.

9. Like in life, relationships rule the day.

Your wealth management experience will be as strong as the relationship you have with your advisor. Perhaps that’s a bit vain coming from an advisor, but I doubt you could convince me otherwise. Find a person you like, trust, and know will walk through fire for you. When done right, the relationship can become a trusted partnership that transcends financial advice. Obviously, these relationships don’t happen overnight and a rushed decision in this arena is often a regretted decision. If contemplating working with a new firm or advisor, don’t be afraid to ask pointed questions. Issues to uncover could include: A) turnover amongst advisors at firm, B) advisor’s compensation model and performance metrics, C) advisor’s motives for working in this profession, D) type and number of clients, and E) long-term aspirations of advisor. While it may feel intrusive, remember this person will be responsible for helping safeguard, and ideally grow, the financial fruits of your life’s work.

AND LASTLY FOR THE STUDENTS OUT THERE…

10. Resumes matter. Communication skills matter more.

For better or worse, resumes matter. A combination of your GPA, school, area of study, community involvement, and work experience is the first hurdle every aspiring financial professional must clear. The issue is when perfecting a resume becomes a student’s sole focus. I’ve had the privilege/misfortune of reading hundreds, perhaps thousands, of resumes. It’s very easy to whittle down a pile from 50 to 10. If you’ve read this far, your intellectual curiosity leads me to believe you would probably be in that 10. However, once you’re in that pile, the resume tends to be put aside. To land the job, it comes down to your ability to tell your story and sell your potential. Strong communication skills – which can be developed though public speaking courses, mock interviews, class presentations, campus tours, sales programs, etc. – are, in my experience, the most effective way to stand out amongst your peers.

It’s been a worthwhile exercise for me to pause and reflect on the past 10 years. In this fast-paced world, it’s imperative to regularly check-in with yourself to ensure you’re on the right path. While time flying by is unavoidable, living life on cruise control is not. I hope to be more present over these next 10 years and, despite the excitement and anticipation of what lies ahead, take each day as it comes. If nothing else in this note has resonated, perhaps these words from my old friend, Ferris, will: “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”

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The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in the U.S.

The S&P International 700® Index measures the non-U.S. component of the global equity market. The index covers all regions included in the S&P Global 1200® Index which captures approximately 70% of global market capitalization (excluding the U.S., which is represented by the S&P 500®).

For informational and educational purposes only. Not intended as legal, tax or investment advice or a recommendation of any particular security or strategy. The views and opinions expressed herein, specifically expressions of “I”, “my”, “we” or “we feel”, are those of the author(s) and do not necessarily reflect the views of Constellation Wealth Advisors, Quadrant Capital Group LLC, or its affiliates, or its other employees. Past performance is not indicative of future results. Constellation Wealth Advisors, LLC (“Constellation”) is a registered investment adviser. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments based on conditions at the time of writing and are subject to change without notice. For more information about Constellation Wealth Advisors, including the firm’s Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513.871.5500.

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