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Behind the Scenes of Investment Decisions

Table of Contents

• Introduction
• How Yardley Wealth Management Selects Funds
• Monitoring Software and Portfolio Rebalancing
• The VIP Section in Finance
• Conclusion

Introduction

Madison: Hello everyone, and welcome to the fifth episode of ‘Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer’. I’m Madison Demora, and I am here with Mike Garry. Mike is the founder and CEO of Yardley Wealth Management, a firm he founded in 2006. We are located right outside of Philadelphia in Yardley, Pennsylvania, which is in Bucks County. Mike, in the previous episode, we spoke a little bit about our firm, and I was wondering if we could speak a little more so our listeners can understand a bit more about us.

Mike: Always a great idea, Maddie. Thanks.

How Yardley Wealth Management Selects Funds

Madison: All right, so let’s get into it. How do we know what funds to buy and sell? Is there some sort of computer model or algorithm?

Mike: Well, we get help from computers, but all of our investing decisions are made by mature, responsible humans.

Madison: And do we have those here?

Mike: We do! Lots of them!

Madison: So what do these mature, responsible humans do, and how do computers get involved?

Mike: All right, so our investment philosophy is that some guy sitting in his office in Yardley, PA is not going to be able to beat the stock market, not on a consistent basis. So what we do is we buy mutual funds and ETFs that are low cost and tax efficient and that do well compared to their peers. And so we use a company called Fi 360, who we use to monitor the various funds that we own. So about monthly, we upload the funds that we have into Fi 360, and it measures, or it judges mutual funds and ETFs based on nine individual fiduciary criteria. So a couple of things that might not be obvious, but the fund has to be a certain size. The manager has to have a certain tenure. It has to actually more or less do what it says it’s going to do. It’s hard to believe that’s a judge, right? Like, hey, this large cap value fund is actually a large cap value fund. Anyway, not all funds do it as they advertise. And then also the other measures are cost, because low costs matter, and performance against other like funds over various times, and then some other more like financial sharp ratio and things like that, that we don’t really get into too much. Anyway, it measures funds, and it’s like golf, where the low score is better. So if the fund is excels in everything, it gets a zero, and if it’s terrible in everything, it gets a 99. And so we tried to it have funds mostly in the first quartile, so the top 25% of funds, but also know that sometimes even great funds aren’t going to be in that top quartile. Maybe how they invest is a little out of style right now. So we’re not going to just kick somebody out because it drops out of the first quartile as long as we know the reason why. So we use that third party way of knowing whether the funds that we have are worth keeping or whether we should explore options. And then when we decide to explore options, we use that same software to take a look and see what funds might be better in the space. So we don’t do a lot of changing of the funds that we use. The most recent big change we did was back in the fall. We added a new emerging markets fund. The symbol is FRDM, and it is a freedom weighted index. So there’s no Russia, China, Saudi Arabia. It only buys stocks in countries with capitalism, rule of law, and where there’s no autocracies. So it’s a really cool thing. I’m glad we’ve started it. Anyway. So that’s how we know what funds to use.

Monitoring Software and Portfolio Rebalancing

Mike: And then in terms of what we do in clients portfolios, we use different software for that. We use something called Tamarac, which is our rebalancing software. So when people start with us, we figure out what their asset allocation should be. That’s what percentage of stocks, bonds, and if they need cash in their portfolio, how much cash. And then we create a model in Tamarac for that client, or assign one that we’ve used for somebody else. And so we will have an idea of approximately what percent in each fund the client should have. So, for example, clients might have, depending on their size, whether they have taxable accounts or not, whether they have multiple accounts or not, generally somewhere between like, eight and twelve or 13 funds for most models. And we will assign the different asset classes. For example, like small cap value might be 4% in a client’s portfolio. Well, we use that model to keep track of that. And we had an overall model deviation by how much a client or a client’s household is off of their model, easily. And then we also have a separate notification if someone is off a particular holding by more than 20%. So if you are supposed to have 4% in small cap value, let’s say if it goes below 3.2% or above 4.8%, we’ll get notified. So in one of our screens, where someone’s out of tolerance, we’ll say,” oh, Maddie’s account is out of tolerance. Let me take a look and see if trades should be made”. Now, some computer algorithm is not going to be making that trade. What’s going to happen is an adult, mature, responsible financial advisor, maybe even me will take a look at that and look at the client’s overall portfolio and see whether it makes sense to make a trade. And some of the things that we might take into consideration is what’s the size of the trade? Is it really small? Does it make sense to do that? Will there be a transaction charge from Schwab or TD Ameritrade? If we make that trade, is it in a taxable account? And would it be a taxable gain? And it is a taxable gain close to the end of the year. So say it’s December 31 and we see this trade and it seems to make sense, but the client already has gains for the year and there are no other losses to wash it from. And so I know if I take that gain, there is going to be an immediate tax impact for that client. I will usually wait till January 2, 3rd, 4th whenever to make that trade if the client is still out of tolerance. So we use software and it’s very helpful, and it really makes the decision making process much easier for us because it’s really easy to get the information so that we can make the decision. So in that example, we’ll see what the client’s long term gains are, or short term gains are, what the gains would be if we made the proposed trade, we’ll know the client, so we know what tax brackets they’re in. And so it makes the decision making process so much better. So sorry to say, it’s not like some algorithm that just goes bing and a trade is made. It might be nice if it was that easy, but I don’t know if that would be as good. I think that we use the tools that are available to us right now. We pay a lot of money for those tools, and it’s a lot of training because sometimes, especially Tamarac is very complicated, but they really, really help. So how’s that for a nice long winded answer? That mature, responsible humans do this and not computers?

Madison: Yeah, it sounds great. It sounds like a lot goes into it.

Mike: Yeah, it is. And it takes a while to set everything up. And then we have to monitor the models, we have to monitor the funds we need to make sure the trades happen. And then the stock and bond markets are open 235 days a year. And so people’s allocations change, funds performance is better or worse at different times. And so it’s a lot to keep on top of. But I think we do a really good job. We have a tight ship here.

Madison: Yes, that’s what it sounds like. Is there anything else you wanted to add to that?

Mike: No, I think that’s a pretty good summary. I’m sure I missed some things, but I think that’s the basic gist of how we manage portfolios.

The VIP Section in Finance

Madison: Okay. All right. So now we know that. What would you like to discuss today?

Mike: Well, what I’d like to discuss today is that the VIP section in finance is not what it’s cracked up to be.

Madison: I didn’t know there was a VIP section in finance.

Mike: And do you believe that? There is and we’re not in it. Isn’t that terrible? So, would you like to know what the VIP section is in finance?

Madison: Should I? I guess you’re going to tell me anyway.

Mike: You know, I am going to. Maddie. So, think of hedge funds, private equity, non traded REIT, things like that.

Madison: So what makes them VIP?

Mike: You know, they’re hard to enter. They have high minimums, and you need to be an accredited investor, which isn’t really that special anymore. You need to have a certain income or net worth to be able to purchase some of these things. And when the rules came into place, that would be somebody who was fairly rich. But it doesn’t actually mean that the person is knowledgeable about these things. So it’s kind of a silly standard.

Madison: Why is that?

Mike: Why is it a silly standard?

Madison: Yes.

Mike: The income and net worth are relatively low. Maybe it’s like $200,000 of income or a million dollars in net worth outside of your house. So, sure, most of America would like to be in that position, but there are literally millions of Americans who are in that position, and the vast majority of them are not knowledgeable in this kind of investing. And I think the basic thing is that the SEC feels that, hey, these people can afford to take the risk, and so that’s why we’re going to let them invest. I don’t know that’s a good idea, but that’s what it is. And so it doesn’t matter if Mike Garry thinks it’s a good idea or not. So, high minimums, and you need to be an accredited investor, which really isn’t that special. They have high fees and it’s hard to get into. And so you would think, like, okay, so that’s like the Ivy League school, it’s expensive and hard to get into, so it must be really worth it. Like, if you went to Harvard or Princeton, it’s probably worth it for most people, right? I don’t think that’s the case for these kinds of investments, though, because the way that they are ran is more for the managers of those funds and their employees rather than the client. And what I mean by that is they charge pretty high fees on an ongoing basis. They charge more fees if the fund does well and they don’t tell you what they’re going to invest in necessarily. And they will often make it hard to leave. So you can’t always get your money out. So they’ll have different times for when you could do a redemption. Right. So if you think about an investment that’s expensive, that might be hard to do, maybe hard to get your money out of. They don’t really know what it is. That just doesn’t give me the warm fuzzies. They also don’t often tell what their performance is. And so you have to go and find it. And it might not be easy. You could look up what the performance of the S&P 500 is in 2 seconds with your smartphone. If I gave you the name of a private equity fund, you may or may not be able to tell what the performance is. You may or may not be able to tell what is invested in. You may or may not be able to tell how easy it is to get your money in or out of it, or what your fees would be. So it’s really opaque compared to other investments. So, like the funds that we use, mutual funds and ETFs, and maybe they’d be considered boring. But we know what they are, we know what’s in them, we know what their track record is. We can get in and out of them with a few simple clicks. They don’t cost a lot of money and they’re very tax efficient. Right. So I think that most of the VIP section it’s sold because people want to be in the “in club”, you want to be in the right click, like, “oh, well, my broker sold me this non traded REIT because the other rich people on my block bought it”. Well, maybe it’s good, but that’s not the reason to buy something. Just having that prestige of being an accredited investor and the thought that this is what other people do. And there’s this feeling in a lot of ways that the rich do things differently than you and me, and that’s true in a lot of things. But in terms of investing, it’s not necessarily better. So the truly rich can own businesses where they can make a lot of money, or they can develop properties or have private interest in things. That’s different. Yes. That is something that really rich people can access, that you and I can’t access. But buying funds, like we discussed here, is not a thing that’s special. And, in fact, it hurts their returns. One interesting thing. I don’t know if you know the Forbes 400. Forbes for a million years has been publishing a list of the richest people in America. And 20, 30, 40 years ago, that list would be populated by people, whose families, and they started big American companies, right? So it would be the descendants of the Waltons from Walmart or Bill Gates from Microsoft or Warren Buffett. And now, while those people are still on the list, now, a lot of the people on that list are people who are hedge fund managers or private equity managers or venture capital fund managers. And the thing is, they have made a lot of money from those funds. They don’t have a lot of their clients who have made a lot of money from those funds. Right. So it’s a VIP section that I would suggest to say, no, thank you. To not saying they can’t be great businesses or that they might be good or morally neutral about what they are as their existence. But I’m saying I don’t think they’re things for most people to invest in. I think most people who do invest in them become disappointed if they take a good, hard look at what their results have been.

Conclusion

Madison: Okay, so it’s more like a club to join.

Mike: Yeah, that’s it. An expensive club to join.

Madison: Yeah, exactly.

Mike: Very expensive club to join. I’d rather go to one in Vegas. Not that I’d know about that either. But Maddie, this has been great. Thank you so much.

Madison: Yeah, absolutely. So for more information on Yardley Wealth Management, you could visit our website at yardleywealth.net, you can also follow us on socials. Yardley Wealth Management. This podcast has been produced by Madison Demora and Mike Garry, with technical and artistic help from Poe productions.