#FASuccess Ep 407: Building Retirement Portfolios With A Liability-Driven-Investing Approach To Manage Sequence Of Return Risk, With Mark Asaro

Resources Featured In This Episode:

• Mark Asaro: Website | LinkedIn
• The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone
• Die With Zero: Getting All You Can from Your Money and Your Life by Bill Perkins
• YCharts
• Federal Reserve Economic Data
• CEF Connect
• CEFData
• CIMA Certification
• Mastering The Market Cycle: Getting the Odds on Your Side by Howard Marks
• Principles: Life and Work by Ray Dalio
• The Psychology of Money: Timeless lessons on wealth, greed, and Happiness by Morgan Housel

Looking for sample client service calendars, marketing plans, and more? Check out our FAS resource page!

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Full Transcript:

Michael: Welcome, Mark Asaro, to the "Financial Advisor Success" podcast.

Mark: Thanks for having me.

Michael: I really appreciate you joining us today. I'm looking forward to the conversation and, dare I say, getting the nerd out a little bit on building retirement portfolios, one of my favorite topics, having done some research in this area myself, and particularly getting to drill into the area of liability-driven investing, which I know has been the institutional answer to how you invest retirement portfolios since forever.

Any institution that's got to invest a pension that pays out retirement distributions, basically indefinitely, this is the standard investment approach. And it hasn't really fully translated to advisors, at least not as a mainstay. And I know this is something you guys have been doing in your firm for a very long time now. I'm just excited to talk about, very practically, what is liability-driven investing, how does it show up when you do this for individual clients, and just how have you implemented this in practice, doing this with ongoing clients over time. So appreciate you just joining us to get to talk LDI.

Mark: Yeah, I'm excited too. It's a topic that I've long been attracted to as a means for clients who are at or near retirement for managing their portfolios, because what I saw over the course of the decades that I've been doing this is a lot of people retiring at just the wrong time. I can remember one of your podcasts, this was a few years ago now, where you guys talked about how you can't pick the year you were born as a means of making sure that you have a successful retirement, right?

And so we had the dot-com bubble in the early 2000s, then, of course, we had the financial crisis in '08, and then again in early 2020, we had the COVID crisis where we saw returns or the markets fall by 30, 40, even 50-plus percent. And for a client who, I can recall pretty clearly one client literally retiring August of 2008. And then all of a sudden, boom, the markets fall out from under them and almost immediately 30% of their money is gone. And the feeling they had, the panic and just the sheer fear they had about their retirement being in jeopardy troubled me. And so that was on my mind for a long time.

The Basics Of Liability-Driven Investing [06:04]

Michael: So as we dive into this subject, I think to start just for folks who aren't familiar, can you bring us up to speed a little bit about what liability-driven investing is in the first place? Not necessarily for retirees, just kind of the general investment thesis of what this is and how it works.

Mark: So liability-driven investing, a lot of people know it as ALM or Asset-Liability Matching. And that's simply in the insurance industry or the pension industry where you're forecasting out liability in the future in specific years. So X dollars in 2026, Y dollars in 2027, and Z dollars in 2028, and making sure that in those specific years, your portfolio is producing that same amount of income. In other words, you're never having to sell an asset in order to meet a liability that's coming up in the future. And so liability-driven investing is just simply matching that income with the liability.

Michael: So in a pension context, my liability, this isn't a debt mortgage, like meet my credit card and mortgage liabilities. This is I'm a pension fund. I need to pay out, I guess whatever is the scale, $117 million to all of my pensioners in 2026, and I have to pay out another $118 million in 2028. And obviously, when you get pension funds and the like where you have lots of people involved and you can predict mortality with law of large numbers, you can get pretty darn accurate of exactly how much money you're going to need to write in retirement distributions in any particular year. And so you're just basically buying things that will produce the cash flow in the required year.

Mark: That's exactly right. And really what we're trying to solve though, and I always try to think of things and what problem are we solving? Primarily, when we're thinking about asset-liability matching or liability-driven investing, we are solving for a sequence of returns risk, right? Which is a topic I know you've covered many, many times. And if you are not withdrawing from the portfolio, then you don't really have the same issue as you do when you are withdrawing from the portfolio. Because the person who's not withdrawing is not selling down, right? So the market falls 30%. If you're not withdrawing, all that money is there for the eventual recovery.

But a portfolio where there is a component of some kind of withdrawal or distribution coming from it is potentially in a position where they're going to have to sell down. And selling down means that money is not in there for the eventual recovery. And that's how you get opened up to sequence of returns risk. But if the portfolio is producing income in the same amount as the liability or the withdrawal, then you're never having to sell down, right? And so that mitigates a lot of that sequence of returns risk.

Michael: But I guess with the caveat in pension land and ostensibly in retiree land that we'll get to as well, our distribution requirements may be high enough that I can't literally just buy bonds, spend the coupon yield to cover the income. I guess the challenge to all of this is my income, at least as traditionally defined, my interest and dividends might not be enough to make this math, particularly for most of the past 15 years.

Mark: Right. And that's exactly what I was going to say. For most of the post-financial crisis period, you're absolutely right. The bond sleeves would not produce enough to, especially if they were individual-investment grade corporate bonds, not produce enough to cover the spending requirement, right? And so then you're in a position where you're either maybe buying an annuity or complementing it in some other fashion.

Obviously, post really just the last 2 years where interest rates have come markedly higher, we have been able to just do it with individual bonds. But in my past life, I got exposed to an area of the securities world called the closed-end fund, which slightly differs from an open-end mutual fund in that the fund is literally closed. They trade on a stock exchange. So they're liquid where you can buy and sell them every day, just like you would a stock or ETF. And those tend to have pretty significantly higher yields. So for most of the post-'08 period, we were primarily using closed-end bond funds to kind of let's call it "juice" the yield a little bit to produce more income, to get more in line with where the spending requirement was.

Michael: So how does this work with individual clients? How do you translate this over to individual households where I'm not just paying X dollars of pension for life or for an indefinite time period? Like I've got different cash flow needs that go up and down as the client has their retirement goals and circumstances shift. And I don't even exactly know what the time horizon is because mortality is easy to predict in the aggregate, not so much for any individual one human being that I'm sitting across from. So how does this start to work when you try to translate to individual client households?

Mark: So there's some things that make it easier when you're transferring it to a client household and some things are obviously more difficult. You kind of highlighted a few of the more difficult aspects of just the mortality piece, right? Most of the clients that we are working with are baby boomers. Our firm is a baby boomer clientele, even though none of the partners and principals at the firm are baby boomers. Almost all of our clients are. And so we have a clear specialty in that area. But what we've learned from working with these people for 2 decades now is you can't predict what's going to happen, right?

Any given year, you could have some kind of health issue, you could have a car that needs to be replaced, a roof that needs to be replaced. So just like you can't predict the mortality, you also can't predict the spending. So there has to be this kind of "cone of possibility," let's call it, in terms of a need from the client. The other thing is what we found is a lot of these clients that have come to us who are former business owners are far more risk averse than I would say the average client of their same age. I don't know what that is. If it's something about, "Oh, well, I worked so hard to build this business and monetize it that I don't want to lose any of that money."

How Liability-Driven Investing Works For Individual Clients [13:01]

Michael: So I get it. So you're attracting maybe a more risk-averse clientele who like the story that you can set up with asset liability, matching liability, your own investing framework. I'm still trying to understand just how you do this when, A, we don't necessarily know what the time horizon is that we're building out this bond portfolio, bond ladder, however you do it, because we don't know what mortality is. And then there's the point you made like, "Oh, it's not just we don't know mortality. We're not even sure how much they need every year." So I just hear that. If I'm going to get very literal about liability-driven investing, so basically we're building liability-driven portfolios when we don't actually know what the liabilities are. We don't know how much you're going to need or how many years you're going to need it.

Mark: Exactly.

Michael: So how does this work?

Mark: So one of the things that I was struck by many, many years ago was a chart that actually you put out on your blog where you showed equity allocation by age. And you showed it being the lowest percentage in equities right at about 60 or 65 years old when they retired. And as you progressed beyond that 70, 72 age, the equity allocation started to rise. The theory being that your time horizon is shortening, right? And so it actually becomes the time horizon of the legacy, let's call it the beneficiary of those assets, which is going to be much, much longer. And so that you can then take on more risk. And so it gets back to that sequence of return piece that we talked about earlier. And so we're really looking to safeguard or LDI the portfolio really in that red zone of danger that we call it in terms of between call it 55 and 75, right?

Michael: Okay. Yeah, I guess I used to frame this approach as we're building a bond tent for you...

Mark: A bond tent.

Michael: ...a little tent you can take some safety, take some shelter in because if you graph the allocation to bonds in that scenario, it kind of looks like a tent, like a little teepee.

Mark: Exactly.

Michael: It builds down on the other end. So it sounds like, so you guys are framing it in that kind of approach. I'm not necessarily trying to build a lifetime bond ladder kind of thing the way I might for a pension fund where I can just literally match the maturity of every bonds to every cash flow for the next couple of decades. You're building more like a transition window...

Mark: Exactly.

Michael: ...which when they're 20 years from your mid-50s to your mid-70s, specifically during your peak sequence risk where you build up a reserve of bonds and then you spend it down as you get through the danger zone.

Mark: Exactly. So we use eMoney as our financial planning software. And really, what we see out there is a lot of advisors create the portfolio based on a risk assessment questionnaire, right? And then basically if the questionnaire comes back and says, "Oh, well, Bob Smith can tolerate a 70/30 portfolio," well, then boom, that advisor puts him in a 70/30 portfolio. It's not all advisors, but that's what I would say the majority of the industry that we come across is doing with clients that are in that 55 to 75 range.

And so when we're doing it, we're looking at the...we're doing the eMoney piece first. So we're building the plan first. And we get pretty granular with the data. We want to know all the information, get all the Social Security statements, all their expenses, make sure they have an idea what their expenses actually are. I would say one out of every 3 prospects that come along really has no idea what they spend on a monthly or annual basis. And so getting that in order is kind of numero uno in terms of formulating the portfolio.

And once that eMoney plan has been built and gone through with the client, then we can go about and figuring out, okay, so what is the portfolio that's going to get the outcome that we need based on the plan? And that's when we start creating that income stream. I have a few Excel models and other tools that I use, like YCharts is another thing we use, to figure out, okay, so what kind of asset allocation are we looking at here? How much are we putting in individual bonds? How much are we putting in in closed-end funds? And figuring out, okay, how much income are we going to conceivably produce from, let's say, 60 or 70% being in bonds, as opposed to 30% or 40% being in bonds?

Michael: So help me one step further just understand how do you actually get from eMoney projection to portfolio allocation, bond allocation, how much to buy for which bonds. How does this actually work?

Mark: So this is a good question. So we actually have no models. And I know it's probably strange from a lot of people listening, probably going to say, "How do you not have a model?" Well, we have what we call baselines or guidelines, but there is no model where we, "Okay, well, this guy fits into this 50-50 model," we hit a button, it buys everything that's in that model. That's not the way we do our business.

From the eMoney plan to the portfolio, it takes a little bit of legwork. It's several hours over a course of a few days that I'm piling into an Excel spreadsheet to figure out, okay, looking at the plan in eMoney, how much do they need in year 2 through 5? And then how much income are they going to need annually from year 5 to 10? And then looking to see, okay, what kind of assets am I dealing with here? Am I needing to produce $100,000 of annual income with $1 million or $10 million, right? Because that would obviously change things pretty dramatically.

And so from there, I can slowly back into what we think are the best securities. So if their objective says, hey, we can get you to your objective with a 30/70 portfolio, we're happy putting them in a 30/70 portfolio so long as the client is okay with that as well.

Michael: So as you're building out these, I guess, projections, right, what do they need in years 2 to 5, what do they need in years 5 to 10, do you then come back to, I guess I'm just thinking about like an LDI style, okay, now I'm going to make a bond ladder to generate these checks in years 2, 3, 4, 5 maturing the right amounts in the right year? Is it that kind of implementation or what do you actually do to translate this to the portfolio?

Mark: So for most of our clients, we don't use a bond ladder. And that's simply because for most clients, the withdrawal rate from the portfolio is actually pretty low. And that's more of a function of the clients that we just seem to attract. And so I went through a bunch of eMoney plans and I would say our average withdrawal rate was actually sub-2%, which is I think extremely low.

And one of the things I do for our clients is I write memos, I write these client memos every month or I try to do 2 a month. And one of them was titled "Overcoming Frugality." And I highlight the book "Die with Zero," which has become pretty popular in our circles. Because I said in the memo, one of the things I'm seeing is a chronic underspending by our clients.

Well, how does that translate to the portfolios? I don't need to build a bond ladder for 90-plus percent of our clients. I can just have a mixture of different bonds of varying maturities, plus a complement of those closed-end bond funds that we talked about earlier. And that's going to produce enough of the income that the client needs, especially when you add in Social Security and any other sources of income they may have to cover their spending and any taxes. And so for the most part, we're not using a bond ladder at all. In fact, I would rather use a diversified portfolio of closed-end funds over a bond ladder any day. And we can go into that if you'd like to.

Holding A Stock Allocation To Combat Inflation [21:55]

Michael: I want to come back to more about the closed-end funds, but I'm still just trying to visualize all of this, I guess relative to how our industry traditionally teaches us to build portfolios. So I'm hearing a framework of a lot of clients, the actual withdrawal from the portfolio isn't necessarily all that high in part because they've got Social Security and some other resources. And so when you get down to withdrawal rates that may be 2% or sub-2%, I might actually be able to buy enough bonds to yield this. I might even be able to buy enough bonds to yield this without putting 100% of the money in the bonds in order to do it. So I get it on that end. But then my brain immediately goes to, okay, but what about impact of inflation on purchasing power on bonds if we're doing this for 10, 15, 20 years?

Mark: So that's probably the number one, I would say risk or caveat to the strategy, is you're taking a period of time where you're basically earning, let's call it 4.5% to 5.5% net of advisor fees and any other fees, but pre-tax and taking that income and using it as your spending tool. But during that time, you're not compounding or building the wealth, right, to combat inflation.

So for a lot of clients, I would rather have a 30/70 or 20/80 portfolio where there's 20 or 30% in stocks that are just sitting there building and growing over the next decade or 2 decades, never touching them and more so cannibalizing the fixed income portion. So say the fixed income portion covers 75% of their spending needs, which is probably, if the client is...if it's a situation where the bond piece is not covering the expenses portion, it's usually at least 70, 75% of their spending. So it's not like we have a huge shortfall. And our average client asset allocation is now about 30/70, okay?

So in that 30, that 30 is really there as the inflation hedge, right? It's compounding over 10 or 20 years. We're not touching it. And any deficit from the income versus what they need to spend on is really coming from the bond side. And so then you think, "Okay, well, then you're drawing down some of your bonds." Well, yes, that's true. And over a longer period of time, you're slowly shifting the asset allocation as well, right? And that goes back to your chart about how past 70, 75, that equity allocation starts growing again. And so that's a natural way to get the equity allocation growing again, right, because you're slowly drawing down some of the fixed income. But really that's less than a quarter of our clients. Because like I said, the yield today on our fixed income sleeve is probably north of 7.5%. So unless the client is...and if you got 70% in fixed income, 70% being fixed income and 7.5% yield on that 70%, for most of clients, you're covering that spending.

Michael: Right. And relative to aggregate portfolio, you're yielding almost 5 [percent] relative to the total portfolio. And if they're spending 2 or 3 [percent], because the rest comes from Social Security, even after taxes and after fees, there's just literally enough money from that portion alone.

Mark: That's exactly right. So to answer your question, it's that 20 or 30% that's in the stocks that is really to overcome inflation. And we haven't really had to deal with it for a long time, right? It's only been the last couple of years where we've actually had inflation as a bigger risk.

Michael: And so is this functionally how it gets implemented? Like literally the distributions get funded by yield from the bond from the fixed income side. If they need a little more, you may do a liquidation on the fixed-income side. And the equities are just kind of in a sleeve off to the side that just sits there and grows for...

Mark: That's exactly right.

Michael: ...5, 10, 15, 20 years, however long until they have to take it off.

Mark: Hopefully, right? And we have some caveats and some one-offs in that, but for the vast majority of our clients, that's the way it is. And we have things that sit on top. We have what we call overlays, one of them being a reallocation plan. And that's simply, okay, your 20/80 portfolio or your 30/70 portfolio, you're getting your income from the bond side of the equation. But say the stock market falls 40 or 50%. Well, we're going to take advantage of that regardless of doing the LDI, and we're going to shift 10, 20, even 30% from the bond side to the equity side to take advantage of that. And then down the road, we can go back to it if need be. But for the most part, clients are okay with being let's call it "underallocated" to equities because they have that peace of mind, that sleep-well-at-night factor during retirement, that they're still collecting the paycheck.

And one of the things we talk about with prospects is, for 30 years, call it post-college or post-high school, you're taught to work hard, save a portion of your paycheck, build up your nest egg, create wealth. And then suddenly on your, call it your 65th birthday, you retire. And all of a sudden you're supposed to flip a switch and be okay with spending down your savings. Well, even though you've been taught for 30 years not to do that. And it's one of those psychological barriers that I think is hard to overcome for clients.

And I think this is also a mechanism from a behavioral finance perspective that helps the client overcome that. Because I can say to them, "We're generating the income, just thinking of it just like your paycheck, right? It's coming to you on a monthly basis, just like your paycheck did. You spend it down just like your paycheck did on your bills and other liabilities." And I think it helps the client just be a little more at ease with having no real paycheck coming in and being kind of like we talked about earlier with the business owner, relinquishing the control that you had prior when you were working and relinquishing that control to Wall Street basically.

Michael: So this helps for context that functionally you really are trying to draw all of the distributions from the fixed income side. And so equity stocks in this context is, I guess, does the multiple duty. It's the growth engine for having enough assets to deal with higher inflation-adjusted expenses in the future. It's compartmentalized so you can go to clients and say, "If the markets are down, we won't have to touch any of your stocks. We're literally getting all of your cash from the fixed-income portion right now. Oh, and in fact, if stocks really go down, we're going to implement a reallocation plan and buy more of them when they're down from our excess bonds so you don't need to worry about stock market volatility for a long, long time to come. Now we're good with stocks."

Mark: Exactly. And you summed it up pretty nicely.

Implementing A Reallocation Plan Rather Than Systematic Rebalancing [29:52]

Michael: So I noticed you called it a reallocation plan. Is that different in your mind than calling this rebalancing?

Mark: I think so because rebalancing to me has a connotation where you're systematically keeping the portfolio at the given targets. So if the client is a 60/40 and let's say bonds have a terrible year and stocks have a really good year and all of a sudden you're 68/32, then you're just simply rebalancing back to that 60/40 target. Whereas the reallocation plan is really a formulaic-based strategy that only kicks in at certain triggers. And so we have a nice chart where we show if the S&P falls 20%, we move 10% from bonds to equities. If it falls another 10%, so now we're down 30 from the peak, we move another 10%. And so aggregate of 20% over. And then again, another 10%, so peak to draw off of 40%, we've now moved 30% over from bonds over to stocks.

Michael: Very interesting.

Mark: So we take the emotional piece from the advisor out of it. So they're not forced to say, "Okay, well, I think this is the bottom," or, "I think this is a good time to buy." They don't know any better than the client knows, right? And so by making it systematic and formulaic, we take that emotional component out of it.

Michael: And is that literally how you would implement if this was playing out? Like the market's down 20%, so we're going to fire a 10% allocation. If it moves down another 10%, so now we're down 30 cumulatively, we fire another 10% trades.

Mark: Exactly right.

Michael: You would be buying 10% tranches as the market keeps going down.

Mark: Exactly right.

Michael: Because you don't know it's going to be peak to draw 40 until after it goes down...

Mark: Actually, you don't know, right?

Michael: So you would just keep pulling these triggers as the portfolio goes down.

Mark: Correct. And like I said, with the technology today, you have at your fingertips, it makes it so easy to do these things. But sometimes having these easy pieces of technology to help us scale our businesses can also be a negative because it could force you to do things when you really shouldn't be doing anything. Because sometimes the best plan is doing nothing. And I think a lot of advisors and I think a lot of clients always feel the need to want to do something. But like I said, by making this formulaic, we can easily implement this across the portfolios that have agreed to it and we can do it with relative ease with everybody at the exact same time. And so it's been one of those things. And really, how many times do we get a 20% bear market? We've really only had a few of them in the last 10 years. So it's not like this is something that we're doing 2 or 3 times a year, right?

Michael: And I guess because you're firing when "The Market," capital T, capital M, like the S&P falls 20%, if the market has a 20% drawdown, essentially at this point, you're firing every client at the same time on a reallocation plan because they're all succumbing to the same, the market is off 20% from the peak.

Mark: That's correct. And not all clients are in this kind of reallocation plan, but the ones who are, we've segmented and we have those clients ready to go, right?

Michael: Who would not be in the reallocation plan?

Mark: There's no rhyme or reason to which clients want to and which clients don't. There's just a handful of clients that just say, "Hey, we're okay with the current allocation. We don't need to shift any more to equities." If there's a sea of red on your screen because the markets are in freefall like we had in early August, you can hesitate or you can be very hesitant to want to go into bonds...or excuse me, stocks. And so, what is it Rothschild who said when there's blood on the streets, you want to buy. But when the time comes and the opportunity comes, many people don't want to do that. In fact, they want to go the opposite way and we try to steer them away from that.

Michael: So if clients have reallocation plans that trigger and you're moving 10% tranches like someone who started out 30/70 could actually get back something closer to 60/40 if the market really fell 40%-plus and you pulled the trigger 3 times, so is there a reallocation trade back the other way? Are there exit points when this unwinds or if the market throws you in more, you're in, we bought you cheap, but you're in now?

Mark: Absolutely. So, the only difference though is the reallocation plan back is not formulaic. So, one of the things we tend to look at is, okay, what's the client's overall risk tolerance here? What's their income needs? What's going on in the bond market at the time? How much has the reallocation plan made them? A lot of people like to see it in dollar terms. Well, by moving over 30% from bonds to stocks, that extra capital has gone up X%, has netted us $200,000. We're good with that. Let's realize those and move it over to bonds and lock that in. So, that's more on a case-by-case basis. We have some that will never, they just never want to reallocate back. And that's fine too.

Michael: Because they do it, like, "Congratulations. You were bond-heavy in the decline. You did buy stocks when they fell." The market presumably has recovered if it generally does what it does. And so, at some point, clients might say, "Okay. Well, apparently I dodged the bullet. I'm up more now. I've got more money than I needed and we're already several further years in retirement. I guess I'm just going to chill here because it turned out okay."

Mark: Yeah. We have people who've borrowed from life insurance to put into the stock market when the stock market's fallen. That's their reallocation plan. So, it's really client-dependent, but a lot of it comes down to just talking with them and feeling them out and seeing how comfortable they are with this new allocation. And usually, I can get a sense from that meeting, even if they say, "Oh, I'm comfortable," whether they really are or not. And then I can say, "Oh, okay, I know you said you were comfortable, but I think we should maybe toggle back the equity risk a little bit. And here's why." And most of the time, they'll take my advice.

Michael: So, in scenarios where it's not awful out of the gate, we have the decline and the reallocation plan fires, you get the "good scenario," or the client who retires right after the COVID meltdown and just powers forward in their recovery, or the client who retires in 2010, 2011, and then gets a rip-roaring bull market for almost a decade. In theory, as I would think, if you're always drawing against the fixed income portion and letting the stocks run, if you get a good enough bull market, you could also just get clients that have a materially rising equity exposure over time just because stocks are doing well. You started 30/70, but we're 7 years in and you're already back to 50/50. So, are there reallocation plans or rebalancing triggers in those scenarios? Or is that, again, back in the "It kind of depends on where the client is and how they feel about the way this path is unfolding for them?"

Mark: Yeah. In those scenarios, we're typically going to rebalance back if they're really out of whack. And honestly, we're looking at that stuff on a monthly basis anyways. And so, mostly for tax loss harvesting purposes, but if we see something that's kind of getting out of whack, we definitely have to make sure that we're in compliance with our asset allocations. And so, we either then have to send the client an asset allocation change form, because they've gotten so far ahead of deviation from their original allocation, or we need to rebalance. And typically, we're going to just rebalance back, because then we've done what we set out to do, which was make money on the equity side and we've done that. So let's harvest some of those gains and make sure that the risk portion of the portfolio is where the client really wants it.

Michael: So is there a threshold or a target of how far you're comfortable to allow portfolios to drift before you feel like you need to rebalance the equities back down without setting a new asset policy allocation, investment policy statement out?

Mark: Yeah, we typically look at any account that has a deviation of 10% or more. And then from even there, we may not rebalance.

Michael: So, meaning like I'm supposed to be at 30 and I'm up at 40?

Mark: Correct.

Michael: Or I'm supposed to be at 30 and I'm at like 33, because that's 10%?

Mark: 10% total allocation. So, at 40.

Michael: Correct. Okay.

Mark: Like I said, we don't have a model. So, it's not like I can go hit a button, everybody's rebalanced back to the target. So, we're doing this account by account. And I'm typically going through each account at least a few times per month, just going through the holdings, looking and seeing what's happening. But especially at the end of a month, Nate and I are looking at exposure and seeing which accounts have drifted a lot from their original targets. And 10%, meaning 33, is definitely not enough for us to want to rebalance. But 10% equity movement, meaning 30 to 40, would definitely be starting to raise a flag and get us to start at least moving back towards it, if not 100% back to 30.

Michael: So, I guess I'm trying to play this on my head though. So, if they drift from 30 to 40, right, we may pull a rebalancing trigger trade. But if they get from 30 to 40 in a reallocation plan, because markets are down, we handle that differently because we're buying because markets are down, not because we just drifted there. Is that the functional inference?

Mark: That's correct. Because the target in Black Diamond would be shifted to 40, and so they wouldn't show up on that rebalancing report.

Michael: So if a reallocation event has to move, you're essentially changing the "target allocation" that you use to generate the drift report to figure out whether rebalancing trades need to occur in the first place.

Mark: That's correct.

Michael: Because Black Diamond is your monitoring platform. Okay.

Mark: That's correct. Yeah.

How The Investment Approach Changes After Clients Exit The "Retirement Red Zone" [41:28]

Michael: So, then as you follow this path, it sounds like just a lot of this is built around, well, I guess as you said, the so-called retirement red zone, right, or like 5 to 10 years before until 5 to 10 years after where sequence return risk does really bad things if you get the wrong sequence at the wrong time. So, is there something that shifts or changes once you get out of that red zone window? Like if clients, God bless, make it to 75, and in theory, we're out of the zone, does the process or the implementation shift at this point?

Mark: So, typically what we're doing is we're looking, obviously meeting with the client, and most of our clients we're meeting with probably semi-annually at this point to gauge kind of what they want to do. A lot of it comes down to their willingness or how risk-tolerant they've become, because a lot of times by the time you're 75 or even 75 to 80, somewhere in that zone or older, you have a lot of flexibility. And so, you could either be 80% stocks or you could be 0% stocks depending on what's your comfort level.

And usually the 3 partners, we can figure out pretty quickly kind of where the client's head's at in terms of what kind of asset allocation, how much risk they're willing to take.

Michael: I'm just envisioning more and more clients kind of get more and more, I was going to say out of sync, maybe that's not really quite the right label, but everybody's going to be in a little bit of a different spot, either because they've drifted a little differently depending on when they got in or when they've had rebalancing triggers or not outside of a 10% band or because some get to the band and you rebalance and others gets the band and say, "No, no, no, I'm actually feeling pretty good. You can hang out here." So, just can you talk through what, I don't know, internal process looks like? Just how do you make sure you're up to date on all these clients and where they're supposed to be? How do you handle all of it?

Mark: So, that's actually a good question. That could be the cumbersome part of this. And so, when we talk with other advisors, they're really kind of, let's call it put off by the way we manage money because they don't think it's scalable at all. And they want to be able to push a button and everything's done and they can move on to the next thing.

Obviously, the way we do it, we can't do that or we choose not to do that. And so, it comes down to just knowing a lot of it is in our dictations that we write after we meet with the client. And I literally have notes in an Excel spreadsheet that I keep with these very factors. So, you talk about the reallocation plan or rebalancing or the client just doesn't want to...wants to keep the portfolio as is now that he's 77. Those types of things, I just kind of have little notes jotted on my spreadsheet where I keep just other notes about the portfolio as well.

I can't put a restriction in Black Diamond or Schwab and say, "If I'm trying to buy a tobacco stock or a tobacco bond, flag it for me." That technology isn't out yet. There's notes and things like that in Black Diamond, which I use a lot, but there's nothing to prevent you from actually trading on it, which I find very fascinating.

Michael: So, does every client have a spreadsheet that you track what's going on and how their reallocation plans are playing out?

Mark: No. I just have one master spreadsheet with all our clients on it. And it's a lot less sophisticated than you're probably thinking. It literally just says, reallocated 10% from bonds to stocks on this date. I have the basic information like the target models and things like that, but nothing too fancy. But it's actually a lot easier than I think I'm conveying it because there really isn't that many times we've done a reallocation.

Michael: This market's only moved that extreme so often. You do it...

Mark: Right. Last time was...

Michael: ...once or twice a decade, give or take if at all.

Mark: We barely got to the 20% in late '22, right, in October 2022. And even then, I hadn't even really started implementing the reallocation plan when it recovered back above the 20% threshold. And I can remember in late '18, when the Fed was raising rates and causing a little mini bear market, it was there for a fleeting second and recovered a good portion of it right after Christmas. So some of these times, it's hard to implement it on a moment's notice, but it just doesn't happen all that often. So it's not something that we're doing on a day-to-day, month-to-month, or even year-to-year basis.

How Mark Builds And Adjusts Client Equity Allocations [46:58]

Michael: So now help us understand a little bit more how you implement this, like what you buy, what you use, I guess, both on the equity end and the fixed income end. How does this come together from a portfolio construction end?

Mark: I have more of a fixed-income background. So on the equity side, I'm typically using ETFs, mostly just passive investments. Obviously, there's a little bit of discretion on what I can do within the equity bucket. So for instance, about 3 or 4 months ago, I sold all the market cap-weighted S&P and moved it to either equal rate or into mid and small caps. And like I said, with Black Diamond, you can do that pretty quickly just using the ETFs. So that's primarily the only active stuff that we're really doing on the equity side. But we're doing the traditional buckets of large, mid and small on the U.S. side, international and emerging markets, and then a real estate component in there as well.

Michael: I'm presuming shifts from market cap-weighted to equal-weighted was just getting away from Magnificent 7 concentration, that dynamic.

Mark: Having the CFA, I've been able to do valuation work and I just look at some of these valuations and it just boggles my mind. One of the things I like doing is I have a bunch of weekly charts that I look at on a weekly basis. And the valuation differential between large and small U.S., it was just huge, 4.5 standard deviation spread. And so at that point, the combination of the ridiculous valuations in MAG7 and that valuation spread between large and small was the trigger I needed to say, "Okay, time to move some money from market cap weighted to small cap."

Michael: I love nerding out on data. What are your weekly charts? What's your weekly go-to? What do you like to monitor?

Mark: So I like looking at earnings estimates. A lot of the macro data I look at, I look at jobless claims and things like that for triggers to get a little sense of kind of risk on, risk off. Given that I have a fixed income background, I look at the yield curve a lot, just movement of interest rates. And really, I like looking at reactions to earnings. There's probably about 2 dozen charts that I have saved on YCharts that I kind of go through on a weekly basis.

Michael: And so you're finding these in YCharts as your investment research platform of choice. And then I guess just have a long list of saved charts, saved reports, and YCharts so you can pull these quickly when you want to rotate through them.

Mark: And honestly, if you don't have YCharts, the FRED database, I think, is the most underutilized piece of what's called technology out there. It's free.

Michael: The Fed's public database.

Mark: The Federal Reserve Bank of, I think, St. Louis, that puts it out. Yeah, the database is massive. And the amount of data in their arrivals is Bloomberg. And it's free.

Michael: I'm curious what led you to YCharts as opposed to Bloomberg and other solutions out there.

Mark: Well, for one thing, cost. Bloomberg is already expensive. We moved from Northwestern to Schwab as an independent RIA. And while we were at Northwestern, we got a grandfathered deal that Northwestern reps got from YCharts. It was a pretty good deal. And so we were able to keep that deal after leaving Northwestern. And Bloombergs have such granular data that are more geared towards kind of equity research. How many ships are leaving the port in Yemen on a Tuesday? That's the stuff that we don't really care about. YCharts has all the data that we really care about.

Using Closed-End Bond Funds To Generate Income To Meet Client Liabilities [51:18]

Michael: So help us understand a little bit more about how you implement the fixed income side. So you said equities is very ETFs oriented, more passive, right, we're just trying to buy our market exposures, buy our betas, or... Now, how does it work on the fixed-income side?

Mark: So the fixed income side is obviously a little bit more complex. I would say I think that lends itself to my background. But what we've seen and what I've kind of noticed over the last 15 years is you'll get these advisors who admittedly are very smart and great portfolio managers on the equity side, picking individual stocks or doing different things on the equity side. But when it comes to the bond side, they're simply just buying an open-ended mutual fund like a total bond fund or a total return fund, which to me makes zero sense.

Because if you can generate an additional 1% on the fixed income side, that can really improve the overall portfolio returns over 5, 10, 15-plus years. Because conceivably the fixed income side is going to do...well, in the pre-COVID environment, 3 to 4% if you're lucky. Maybe now it's 4 to 5. So adding 1% on 4 is a pretty good addition to your return profile. And if you're in a 60/40, that's on 40% of that money. And so we take that approach and we go even further, not just buying an active good manager, like any of the good ones that are out there, but we take it a little step further and we actually go into the account or assuming the asset types.

And so moving away from the open-end mutual fund and looking at the wrapper itself of where your bonds are housed or buying the individual bonds themselves, which is something I haven't done in a number of years because post-'08, it really made no sense to go buy individual bonds because the yields are so low. So we focus a lot on those components and the various pieces of those based on what's going on in the market.

And so we had talked a little earlier about closed-end funds and most people don't know much about them or focus on them at all, but they are a big piece of why we've done so well on the fixed income side. And it's having the patience and studying them for 2 decades that gives me the confidence to build portfolios with them because admittedly they do carry more risk than an open-end bond fund, but I think that risk is to your actual advantage because during periods when discounts are very wide, that's almost like a reallocation plan where you're buying $1 worth of assets for 85 cents on the dollar or buying $1 worth of assets for 85 cents. And so by doing that, you can greatly increase the bond side of the equation of the asset allocation.

Michael: So can you give us a little bit of, I'll call it a refresher on closed-end funds versus open-end and how it shows up the bond context? I'm envisioning a lot of us are like, "I know I covered closed-end funds in my CFP classes 7 or 12 years ago, but I haven't really ever bought any." So just help make sure we're on the same page about how these actually work in the fixed income context. Just make sure we're all synced up here.

Mark: So closed-end funds have been around a long time. In fact, they've been around longer than the open-end mutual funds that most people use have been. And in fact, Warren Buffett's original investment vehicle was a closed-end fund. So they've been around over a hundred years. And essentially, they were the preeminent vehicle of where investors would go for a pooled asset, whether it was stocks or bonds. And really, it didn't shift until kind of the early to mid-70s when Vanguard and Fidelity started coming into the scenes and introducing the open-end fund, that the focus moved from closed ends to open ends. And it really came down to marketing.

The big companies figured out that they could grow these open-end funds to become these massive scaled pooled vehicles and make a lot more money. And so they directed all their marketing dollars towards them. And then, of course, the advent of the 401(k) around 1980 shifted so many of those dollars towards the open-end vehicles that they now dwarf the closed-end side. But the closed-end space is really, we're sub-500 funds at this point and just a few hundred billion dollars in assets. So it's pennies in the sofa relative to the open-end mutual fund piece and ETFs.

Michael: So who issues them and why now? I'm not sure if we still have if we're down to 500 and it's so small, why hasn't it just gotten to 0? Why isn't everybody just doing this in open-end fund format? Who's...?

Mark: Yeah. There's some sponsors, Nuveen, BlackRock, and PIMCO are probably the biggest 3 sponsors of closed-end funds. The reason is simple. They do charge a little higher fee than an open-end fund does because they're not scalable like an open-end fund is. But also, you got to think about it from their point of view. These are captured assets, right? If you sell a closed-end fund, somebody else is buying it. The fee-generating revenue or assets under management doesn't change.

So an open-end fund and these companies have massive amounts of open-end funds, some of these open-end funds never take off, right? They'll have 30 million of seed capital and never grow and then they shut them down. Or you can think of a $2 billion fund that had great performance and suddenly has terrible performance and goes from $2 billion in assets to $50 million because everybody pulls their money. Whereas a closed-end fund that can't happen because the assets are captured in this pooled shell.

Michael: Right. So if the things unpopular, because at worst, its price goes down, so you get potential that it trades at a discount...

Mark: A larger discount, right?

Michael: ...to underlying. But from the asset manager's end, same holdings in the portfolio, we're building our same fee.

Mark: Correct. Correct. And they're still issued with, let's call it relative infrequency. We've only had 3 or 4 per year at the most for the last several years. There's a couple of good free resources out there. One of them, cefconnect.com, which is put out and sponsored by Nuveen. And the other one is cefdata.com, which is run by a guy named John Cole Scott out of Richmond, Virginia, who runs CEFA Advisors. And there's tons of data on them. So you can find all the information you need.

But from an advisor standpoint, these things are great tools for retirement because unlike an open-end bond fund, a bond closed-end fund typically pays monthly in cash and at a steady rate. So you can almost think of it, as we talked about earlier, as a paycheck replacement. You know how much income is coming in on a monthly basis and what day it's even coming in. And so when I'm modeling out, as we talked about earlier, those liabilities in terms of the amount of spending they need, a closed-end bond fund is ideally one of the best tools out there because I know exactly what it's paying and how much the client's going to receive in cash and what day.

Michael: So are most of the closed-end bond funds at this point a fixed list of holdings, meaning whatever was in the thing when it launched and got going, that's what's in it, it's not necessarily being actively traded and rotated on the underlying?

Mark: No. They are actively managed. Now, one of the things I talk about a lot with clients is turnover. And so how much trading is actually done in portfolios? Well, if you look at an open-end bond fund, like a Fidelity Total Bond, and you look at their turnover rates, it's in the hundreds of percent, meaning that if it's a $1 billion portfolio over the course of the year, they're doing $3 or $4 billion worth of trading. And all that stuff is a drag on performance.

And my old boss, Jerry Paul, who ran the Invesco High Yield Bond Fund for a number of years, he used to say that when it's an open-end bond fund, people would put in the money when everything was up in value and pull out when everything was down in value. So he was like a forced seller when things were down and a forced buyer when things were up. And that's the opposite of what we should be doing. Whereas a closed-end fund, they never have to sell if they don't want to, right? Because they're never having to meet redemptions.

And so the portfolio manager can buy what he wants to buy. He can buy the most illiquid stuff that he would like to buy. And obviously, the illiquidity premium will pay you a greater yield, right? 2 bonds that are completely identical, one's IBM and one is Bill's technology company on the street. Well, even though they're both rated the same credit rating, Bill's is going to definitely pay you more because it doesn't trade very often. And so the closed-end fund is able to go buy those knowing that they never have to sell if they don't want to.

Michael: So these aren't necessarily bullet-style funds that have fixed maturity dates where they close and wind down. Nominally, they may be perpetuity funds.

Mark: Almost all the funds are perpetuity funds. There are some that are term funds. There's basically 3 types of closed-end funds, a perpetual fund, a term fund, which has a certain date that it's going to liquidate in the future, and then a target term fund, which has a certain date it's going to liquidate and a certain price that it aims to liquidate at. But the vast majority are perpetual.

Michael: Okay. And it sounds like you're largely buying the perpetuity versions. You're not doing these as term funds or target funds to try to have maturities align with certain dates.

Mark: We do both. The term funds have had some great opportunities and outcomes in the last few years because if you can buy a muni closed-end that's paying you 4.5% tax-free yield, and it's going to liquidate 3 years from now and it's trading at a 6% discount where you're getting that 4.5% yield, and you have that 6% discount that you know is going to close in the next 2 years because it's going to liquidate at NAV, well, you're really getting a 6.5% yield on that fund, right? Because you're going to get 2% annually from the discount. Now, it's not going to be linear. But if you hold it to its liquidation date, you can substantially outperform what a, let's call it, passive or open-end muni fund would do. So we're playing both. There's actually a lot of funds that are turning out in the next 6 months that we have substantial positions in because you could really create a lot of the additional alpha by buying these funds at even 2% discounts and capturing that over a 6-month period. Well, that's an additional 4% annualized.

Michael: It's like illiquidity premium. I guess it shows up as an illiquidity discount and you earn it back in a hold-to-maturity scenario.

Mark: Exactly. Because it'll self-liquidate on you and then you can just roll those proceeds into something else.

Michael: And so how you pick what to buy, it sounds like, can be everything from you're looking at managers and their results and I'll call it traditional evaluate managers scenario, you're looking at holdings because you got to understand what's going on there, especially if it's trading at a discount. You're buying sometimes with predictions or anticipations about whether the discount's going to narrow by market virtue or because you're holding to a maturity or liquidation. This is all coming in. It's still a good amount of security analysis of the closed-fund vehicle.

Mark: Yeah. It's all that above. And I spend the greater part of my day doing all that stuff and looking at our client portfolios, seeing which clients based on my notes, who is more risk-averse, who can tolerate a little bit more of the closed-end funds versus individual bonds.

And like I said, with my most of our clients being bond-heavy, that's made a huge difference in their outcomes. So we've been happy with it and it's worked. And it sounds like it's a lot of work but honestly, we're not day trading, we're not weekly trading. We're buying here and there on the edges when I see opportunity. We do it in the master account and allocate to the underlying clients. But this is not some strategy where there's this big algorithm or all these computers and servers running things. It's really not that much additional labor.

What Noble Wealth Looks Like Today [1:05:30]

Michael: So then help us understand what this, I guess, adds up to in terms of the advisory firm as it exists today. So assets under management or clients or revenue or however you measure, help us visualize the overall practice now.

Mark: So we manage a little over $322 million for 160 client households. We've grown pretty steadily over the last few years. We did, like I said, pull out of Northwestern, went to Schwab. Some clients did stay with other advisors at Northwestern when we did that. So we had to make up some ground because we had some joint work arrangements with our advisors. And so we got paid out for some, we bought out other clients for others. So we had a little bit of a step back there in AUM and we've since gained it back with new clients and obviously asset growth.

Most of our clients are baby boomer clients who are geared more towards income. We readily admit, hey, we're not trying to find the next Apple and we're not trying to find the next Google. We're just trying to get you to that finish line. And so we're a team of 6 now. We just hired a sixth person. And conceivably, with the technology out there, we think we can double in size and not need to add anybody.

Michael: And revenue overall?

Mark: Revenue is a little over $2.1 [million], I believe. Daniel and our team does that. Our fees are actually relatively low relative to the industry itself. We do start out at 1 [percent] but it quickly goes down to 0.8 [percent]. And we do it on...

Michael: How quickly? Where do you get down to 0.8?

Mark: So the way the fee schedule works is we don't do it like tax brackets where it's tiered like oh, the first x dollars is... So once you hit a threshold, you get the whole caboodle gets down to that new level.

Michael: Okay. So it's like a cliff level if you hit this number everything back to dollar 1 is at this new threshold.

Mark: Correct. So at $1 million, you're basically at... We start off at 1, but our average fee right now, I think, is right around 0.8% or 0.77%. And that includes everything with planning and all the things that come with it, right? And we talked a little bit earlier about we have this chart, it's called the Iceberg Chart, that shows people think all we're doing is asset management. That's the piece above the water. But below the surface, there's...we have a list out of things that we do and there's dozens of stuff that we're doing on a daily, weekly, or annual basis.

Michael: And is fee structure just uniform across the portfolio versus do you have a, "We charge this for fixed income and this for equities?"

Mark: Yeah, uniform.

What Surprised Mark The Most On His Journey [1:08:33]

Michael: So as you've gone through this journey, what's surprised you the most about the process like building and scaling up the advisory business?

Mark: Well, obviously, going independent was tough. And I had some personal challenges at the exact time that we were doing the move out of Northwestern.

Michael: How fantastic. Yeah.

Mark: Perfect timing as always, right? And so that threw a little bit of a monkey wrench and things. So overcoming that was a little bit more than I had planned.

Michael: Was it surprising that going independent was tough? Did you fear it, or were there things that blindsided you as you went in compared to what you were expecting?

Mark: So I had worked at an RIA prior to being at Northwestern so I kind of knew the RIA space prior to our going independent. There was no fear of, "Oh, what is going independent? We're not going to have this back-office support," or anything like that. It was more of a fear of, "Are the clients going to come with us or are we going to make a big mistake or some kind of big error?" Things that you didn't have to worry about prior are now things that you kind of have to have front and center in addition to the normal things of managing a financial advisory business.

And I credit Chris, who's our CEO. He's taken it all on and done exceptionally well at managing some of these hurdles that have come across more from a managerial perspective. And then from a portfolio side, it coincided, our move coincided with this big bond bear market, the equity market itself going into a bear market. And so that's, from a market standpoint, not a great time either.

Michael: Because you left back in 2022 when...

Mark: Correct.

Michael: ...bonds decided to go wonky.

Mark: We literally left in the end of September, October 1st, 2022, right as the markets were at their lows, interest rates were at their highs. And so obviously, we timed that well. But from an adversity standpoint, we turned it into kind of a benefit because one of the things at Northwestern that was exceptionally difficult to do was buy individual bonds. And we didn't really talk about it too much, but once we left Northwestern, again, remembering this October of 2022, the 10-year just crested over 5%, right, and you have this opportunity to kind of lock in these high yields not knowing that you're at the highs, but knowing that they're pretty high relative to the last 15 years.

Michael: I would say it looked a heck of a lot better than it had for a long, long time.

Mark: Exactly. And so, for the first time, we're able to actually buy individual bonds and for the first time in 17 years, they actually look good enough to buy. And so, we've turned that kind of let's call it lemons into lemonade by going out and starting to shift our bond portfolios substantially. Because at this point, I had really reduced, the year prior, really reduced our closed-end fund exposure because the interest rate risk was so significant.

I could see the Fed was starting to raise rates. I didn't think they'd go to 5.5%, but not knowing, I'm going to err on the side of conservatism and sell down my closed ends. And so when you started selling those out and you say, "Okay. Well, where's the opportunity?" The opportunity was going to the individual bonds because you can buy...we were able to buy a...I was able to buy BBB+/A- minus corporate bonds with a 6.5% yield. And 2 years, earlier you couldn't even get a single B junk bond for that.

And so where there's adversity, there's that whole opportunity. And so we were able to overcome that and really take advantage of it and turn it into this great almost marketing tool. Not that it wasn't a huge advantage for the client, but we were able to say, "Hey, look, we're able to lock these yields in for the next 5, 10, 15 years and if rates go down to zero again, your fixed income is going to earn that 6, 6.5% for the next 5 to 10 years while everybody else is earning 2 or 3.

Michael: Were there any second thoughts when you were in the midst of the transition watching bond market get crushed at the time?

Mark: Yeah. There's always those second thoughts and there's always... I guess it wasn't so much on the transitioning part, more so about the portfolio positioning part. And so a lot of people second guess themselves and you're always like, "Oh, well, I should have done this," or, "I could have done that." And one of the things I've been studying for the last several years, 5-plus years, is behavioral finance and one of the things I like to focus on is not with just myself but with clients as well is minimizing regret. So how can I most minimize regret for myself on the portfolio side but also for the client? And so I tend not to be too backward-looking. I tend to be more forward-looking and saying, "Okay. Well, where's the next opportunity? What is this market giving us that it wasn't giving us 6 months ago, 1 year ago?" And really looking at the challenge as the opportunity.

The Low Point For Mark During His Career [1:14:16]

Michael: So, you've done this for a long time. I think you said you were going all the way back to tech crash in 2000, 2002. So as you reflect back on the whole journey, what was the low point for your career?

Mark: I would say I've had a few low points. I'd say a couple of big ones were I was the last employee hired at Janus after Eliot Spitzer, who was the attorney general of New York a long time ago before he was even governor, issued his market timing where people were trading the mutual funds after hours, issued that report, and assets just flew out the door. And I had just moved from Boston to Colorado, starting a family, and it was kind of that, "Oh, my God. What am I going to do type of thing if I lose my job?" That was a low point.

Michael: You moved to an asset manager right before the New York attorney general filed suit against them.

Mark: Correct. I was the last employee.

Michael: Because I'm going to assume they really didn't do a lot of hiring right after that.

Mark: There was a hiring freeze for 4 years following that. That shows you how much money was going out the door from Janus. And if you remember Janus from the '90s, they were taking in $1 billion a day at certain points. And Vanguard does that today but back in the '90s, that was a lot of money coming in the door. So these guys were spending money and flush with cash everywhere. And for that to change, it literally changed overnight with that suit being filed. So that was a low point, '08. It's hard to overestimate that because you have every single asset falling so substantially and your revenue as a firm dropping along with it, right? And so you never know if your job is stable at that point or not. And I had only been with the RIA for about 1 year, 1.5 years when that happened.

Michael: I was going to ask, were you still at Janus at that point?

Mark: No. I knew at some point I wanted to move from the institutional side to the wealth management side. And so in early '07, I had moved from Janus to an RIA. And my boss there had hired 2 portfolio managers or junior analysts let's call it at the same time, and so then a year later, you had the financial crisis and it's like, okay, well revenue is down 25%. Someone's getting cut here. And, of course, you're at this...you're not sleeping, you're worried every day that today's the day. And so that was a pretty big low point.

Michael: So I'm curious it's like you went to Janus and the attorney general filed suit, and assets dropped. You went to the RIA and the market crashed. Did anything really bad happen when you went to the next firm?

Mark: So honestly, joining Chris and Chris's dad really at Northwestern, that was probably one of my high points, I would say. Because we didn't... This was, what was it, late '15, I believe, or early '16. There's a little bit of a bear market going on at that point but in reality, I was able to kind of take the tools and the things I learned both on the institutional side at JPMorgan and at Janus and then at the old RIA side and take those tools to what I would say is it was Bob ran a great firm but he was still within the Northwestern system. So it was a little archaic the way portfolios were managed. And so I was able to use those tools that I had gained to kind of let's call it modernize a little bit of the portfolios that were...that he had already built up in the firm.

Michael: Because I guess, particularly, 10-plus years ago, just the brokerage side wasn't as built out, the advisory side wasn't as built out.

Mark: Correct. And like I said a little while ago, it was a bunch of mutual funds, American Funds, and total bond funds or total return funds. And when you have a 5-plus million dollar client and you're in kind of that generic total-return fund or that generic large-cap fund, those clients are very, I would say, at risk because someone's going to come along and say a $5 million client shouldn't be in open-end mutual funds. And then you're at risk of getting those clients stolen away. So when I say about modernizing, it's about moving those clients towards kind of where the big boys are playing and protecting yourself really as a firm from losing those clients.

Michael: So out of curiosity, I feel like so much the industry dialogue these days is the move from insurance and brokerage towards RIA because I'm fascinated that you were at an RIA, it sounds like you were at an RIA in the late 2000s, early 2010s, you went to the insurance company, to a practice with the Northwestern. So just what drew you to the practice or led you to make the shift there?

Mark: Honestly, it was the people. I met with the group and really enjoyed talking with them and meeting with them, and knowing that at some point, they were not going to be at Northwestern and knowing that I could help them not only modernize the portfolios but help them with the move if and when that actually came. And honestly, it was the people. That's what drove me to them.

Michael: Interesting. But it sounds like it wasn't like they wanted you to come in because they're about to break away.

Mark: No.

Michael: You went in 2015/2016 and I think you said the transition happened 2 years ago. So it was 6-plus years at the insurance company.

Mark: Correct. So yeah, a long runway between arriving and actually leaving, but some of that...sometimes that stuff takes a long time.

Michael: Oh, yeah. It's a big change.

Mark: And we prepared for it.

What Mark Would Tell His Younger Self [1:20:53]

Michael: So anything else you know now you wish you could go back and tell you from 10, 20 years ago about navigating your career and building a firm?

Mark: Focus less on the minutia of things that 1 year or 2 years from now you're going to look back and say, "That was completely meaningless."

Michael: Yeah. But you don't think it's going to be at the time.

Mark: You don't think of at the time, right? And so one of the things that I look back on is it's events in the markets, it's events with certain clients. And I think about it and even to this day, I have clients that if we ever have...we don't get clients that leave very often but when they do, I take it personally. It's one of those things you say you don't want to do. And a lot of times, it's not anything that we've done. It's someone died or things outside our control. But it happens. And it's one of those things that no matter how many...and like I said, I studied behavioral finance, and I spend a lot of time on the psychological aspect of this business. Even with all this knowledge, you still have a hard time overcoming these things. So that's one thing I try to not do, is just don't focus on things that you know are not going to be material a year or so from now.

Mark's Advice For Newer Advisors [1:22:28]

Michael: So any other advice you would give younger, newer advisors coming into the profession today and trying to get started on a good foot?

Mark: I think be knowledgeable of the markets. I think a lot of times advisors, they come into this business and they say, "Well, I don't really need to know the...I don't need to be a CFA in terms of my knowledge and can just get by with just knowing the basics." I find that to be a little bit like being a doctor or a surgeon and just kind of stopping after Biology 101. You should always be a product of the markets and know them. You don't need to maybe be at a CFA level because you're not going to be running a hedge fund but you need to be able to discuss them and know the risks that your clients are being exposed to.

And I think a lot of new advisors are really missing that opportunity to study the markets and focus on not just the planning aspect of it but the portfolio management side. There was an advisor at Northwestern who was kind of one of their bigger advisors and he used to say that the asset management side is commodity business and you don't really need to focus much time on it. And I used to think, "God, that's the opposite of what I think is reality." And so I kind of push younger advisors to really study the markets and study kind of market history really, and focus a lot on having that knowledge in the back of your head because clients, they can sniff out when you don't really know much about certain things. And if you don't really know much about the markets, they're not going to really trust you with their hard-earned money.

Michael: Are there particular resources or programs, or books that you like for that? I guess for those who do not certainly want to go all the way down the CFA path.

Mark: Yeah. The CIMA in terms of a kind of a designation I think is a really good one for...

Michael: CIMA from Investments & Wealth Institute.

Mark: Correct. And kind of knowing that information, I think it gives you a good foundation, a little bit of a slightly above the average foundation of the markets. But there's so many good books out there. I like Howard Marks's "Mastering the Market Cycle." I think that's a great book for conceptualizing the macroeconomic piece of markets and bringing it down to kind of a portfolio management level.

Ray Dalio's "Principles" book, I think, is a great one. There's so many out there. And Morgan Housel's "Psychology of Money," I think, is a great one from a psychological perspective. So there's so many out there. I have clients or advisors who say, "Oh, what about 'The Intelligent Investor?'" Honestly, I don't find that book all that helpful for what we do. I think it's overplayed. Same thing with "One Up on Wall Street" from Peter Lynch and things like that. I want to books that kind of make you think about what the markets are doing, why they're doing it, and how it relates to client portfolios are the ones you kind of want to focus on. And so I spend a lot of time on, like I said, the behavioral side and the macro side.

What Success Means To Mark [1:26:02]

Michael: So as we wrap up, this is a podcast about success and just the very word sometimes, success means different things to different people. And so you're on this wonderful growth path with the firm, $300 million and rising. So the business seems in a wonderful place now. How do you define success for yourself at this point?

Mark: Well, I think for us success is more so than just growing assets and growing revenue. Well, obviously, that's our goal. And the 3 partners at our firm are all fairly young. I'm the oldest at the firm at 46. And so we have big aspirations in terms of how much assets we want to bring in. That is not how we define success.

Success for us is really for one, stewarding our clients to their objectives and doing so in a way that doesn't keep them up at night. I feel like that's a huge part of our business. I think it was Roger Whitney who puts out a retirement blog on a weekly basis. He had a great quote where he said just because a certain portfolio gets you to your objective, is it worth it if you have to white knuckle it the entire time? And to me, that quote said it all because I feel like a lot of clients of other advisors or say do-it-yourselfers for that matter are white-knuckling a lot of the time.

And so for us, I think success is more on not having them white knuckle it. But also from a firm side, we are a PBC firm. We're not an LLC. So it's a public benefit corporation. And so giving back to the community is a big factor in our business. And so this is something that we're just really implementing. But we want to give a certain percentage of revenue each year to charity. And we want to commit a certain number of hours each year to a charitable endeavor like building houses for underprivileged people or things like that. So to us, success is really how much we can also give back to the community.

Michael: Very cool. Very cool. Well, thank you so much, Mark, for joining us on the "Financial Advisor Success" podcast.

Mark: I appreciate you having me.

Michael: Absolutely.