Even though we learn that money is merely a means of exchange, a store of value, or a unit of account, it’s so much more than this. Money captures so much of what we grapple with like hope, joy, fear, regret, and envy, yet it’s widely surveyed as being the least spoken-about issue when compared to religion, mortality, and marriage. Dr. Brian Portnoy, the author of The Geometry of Wealth, joins us today to share his view on wealth, which moves past the conventional understanding of accumulation. We kick off the show by discussing some of Brian’s research findings around the way people avoid talking about money. From there, we move onto his idea of funded contentment, which he hopes will get people to think about the different facets that go into a contented, joyful, and meaningful life. While this is a purposely loaded concept, Brian conveys the message in a simple, clear way to show that building wealth requires an assessment of many aspects of life. Then, we move onto how Brian believes financial crises affect people’s financial wellness. Although there are certainly immediate devastating effects of these crises, Brian takes it a step further, sharing a conceptual view of how these shifts intersect with people’s financial plans. After this, we turn our attention to adaptive simplicity and how it relates to goal-setting. We round the show off by discussing how the financial management industry is changing, and what Brian hopes the role of the advisor will increasingly become. Be sure to tune in today!

Key Points From This Episode:

• Learn more about Brian’s rationale for comparing money to Lord Voldemort. [0:03:31.0]

• Why money — contrary to what we’ve learned — is a qualitative, not quantitative. [0:05:58.0]

• What Brian hopes to get people to think about with his ‘funded contentment’ idea. [0:06:44.0]

• How the shapes Brian uses in Geometry of Wealth relate to the journey of achieving wealth. [0:08:36.0]

• The three-step process to achieve funded contentment. [0:09:22.0]

• Unpacking priorities and decisions and how they intersect with building wealth. [0:10:54.0]

• The importance of calibrating planning with purpose and where people fall short. [0:13:50.0]

• Where people in America are in their financial wellness journey. [0:15:43.0]

• The four corners of the square: Exploring investment expectations and how people view this. [0:17:37.0]

• Brian’s practical and conceptual takes on how financial crises’ impact on financial wellness.[0:21:12.0]

• Why Brian disagrees that volatility is not a great measure of risk for a long-term investor. [0:29:13.0]

• ‘Adaptive simplicity:’ What this is and why it’s key in financial planning. [0:32:15.0]

• How to set financial goals, which are static, when being flexible is key. [0:35:17.0]

• Why Brian believes — despite his hedge fund experience — that investors can’t plan for mark-beating returns. [0:38:47.0]

• The role that hedge funds could play in investors’ retirement strategies. [0:42:47.0]

• What investors can do to understand if they can manage their own retirement. [0:45:34.0]

• How reframing the financial advisor relationship to a coaching one helps. [0:49:15.0]

• What the future of holistic financial advice should look like, according to Brian. [0:54:53.0]

• Insights into Brian’s firm, Shaping Wealth, and the work that they do. [0:55:37.0]

• Brian’s definition of success in his own life. [0:58:02.0]

Read The Transcript:

We're happy to have you. I want to start with a question about your most recent book. At the beginning of the book, you compare money to Lord Voldemort which probably sounds like a funny comparison to a lot of people, but you explain it as feared by most and mentioned by few. What do you think it is that gives money this status?

I think money is much more of an emotional lightning rod than people give it credit for, that people really think about. I think many of us in grade school or when we were young, we're taught that money is merely a means of exchange or a store of value or unit of account, but that's not really what's relevant when we think about having success financially.

Money captures many of the things in life that we grapple with hope, joy, fear, regret, envy and as a result. This is based on surveys from psychologists and other researchers. It's really the topic that we'd like to discuss the least compared to marriage and relationships, politics, religion, mortality. Money typically ranks in these surveys as the most uncomfortable topic. It's really because it touches on to our emotions somewhat deeply.

How do you reconcile like just based on what you just said, how is money touch on our emotions more than talking about our mortality?

I can't answer what the relative comparison is, but the thing about money is that it's so wide-ranging as an experience. We make dozens or more financial decisions every day, little things every now and then. A big decision. I don't think we sit around most of the time thinking about death. It's a heavy topic. Lots of movies and books deal with that. And certainly, we all give some thought to the beginning and end of things.

But money comes up so many times a day every day for our entire lives. Because it does trigger things like fear, regret, envy, it's just something that has led it to be an uncomfortable area.

Right. Yeah. Your book, Geometry of Wealth, which I absolutely loved had a line in it, a phrase in it called funded contentment. Can you describe like you did in your book how funded contentment compares to being rich?

I establish a fork in the road that I think it's important for people who think about having a healthy relationship with money and want to achieve financial wellness. That fork is between being rich and being wealthy. We tend to think of money in quantitative terms back to Ben's questions about sort of emotions and why is it such a triggering topic. We're taught to think of it quantitatively, but it's very much a qualitative experience.

We think about accumulating more money and the things that money buys. And perhaps something we can talk about is an important observation or finding from the social psychology literature which is that the accumulation of more doesn't necessarily make us as happy as we think we're going to be.

What I wanted to do in this project and how I developed my thoughts was distinguish that quest for more with the achievement of what's really important to you. I define true wealth as the ability to underwrite a meaningful life. Now, that's a deliberately loaded phrase, and we can talk about what's a meaningful life and what does it mean to underwrite that life.

This phrase, funded contentment, hopefully, focuses people on the idea that let's think about what makes for a contented joyful, meaningful, purposeful life and then recognize that money is an absolutely unavoidable topic on a day-to-day basis. We should think constructively. It's not always comfortable, but we should try to think constructively about how we go ahead and fund that contentment and maybe divert our attention a little bit. It can't be perfect, and it won't be 100% all the way, but divert our attention from that quest to be rich which is the equivalent to a quest for more which is ultimately quite unsatisfying.

I think the term to describe that, correct me if I'm wrong, is the hedonic treadmill. Is that right?

That's right. I speak to lots of audiences. One of my slides is nothing but the picture of a treadmill. The idea is that no matter how fast you sprint on a treadmill, you're not going to get any further than you are right now. That, I think, is an apt image for the way that we live in what is very much a consumer-based society where we're very attuned to getting the next thing but also more broadly. It's not a bad thing to be goals-oriented, but we are goals oriented.

We probably under theorize what it means to have a goal and what's involved with accomplishing that goal. Suffice it to say, for now, goals are, in some ways, less important than people make them out to be.

Interesting. The title of the book, the Geometry of Wealth is based on three shapes, the circle, the triangle, and the square. In the book, you use those shapes to describe the journey to achieving wealth like what you're just talking about. Can you describe what that journey looks like and how you relate it back to the shapes?

Yeah. The idea for the shapes was to acknowledge that we're being respectful of others when we try to simplify a complex situation and that even in finance which is so dominated by numbers that maybe we can use clearly stated words and even pictures and basic shapes to capture what's important.

I've been influenced by people like Carl Richards and others who have really brought illustration to the front of the industry. The brain processes images about 60,000 times faster than words. It's not a bad thing. It's not juvenile or sophomoric to capture complex ideas through simple drawings. That's the premise behind just coming up with shapes to capture our path toward true wealth.

What the circle, triangle, and square represent is sort of what I think is a three-step process for achieving funded contentment. Number one, we define our purpose at any moment in time. It's a circle because we're never done figuring that out, but we spend some time thinking about what's a meaningful life. Secondly, we set priorities both financial and otherwise. I think there's a right and a wrong way to think about priority setting and goal setting.

Then, third, the square, we make decisions across all dimensions of money life not just investing, but saving, spending, insuring, giving, and so forth. It's an iterated journey. That's what the circle represents. The triangle, three shapes, I think there's three broad priorities that should be thought about in a particular order.

The square with its four sides is a simple mental model of thinking about markets specifically and how we set appropriate expectations for what our money can do for us. I wanted to put something on the cover of the book that is the argument. So, circle, triangle, square, purpose, priorities, decisions, that is the argument of the book. The rest is detail.

I don't want you to give the book away here, but do you think you can touch on the points of the triangle and the corners of the square?

Yeah. Absolutely. The point was to give it away. I guess there's a difference between ingredients in the recipe, but the ingredients are there on the box plain to see, but when it comes to setting priorities and this is a broad observation.

I think we as human beings who have an instinct for growth and to thrive do think very naturally about more, accumulating more, achieving goals. But one thing we know as human beings from an anthropological point of view, but something we also know in the more narrow context of investing, is that those who think about risk first tend to do better. So, survive before you thrive.

When I think about my investment heroes, Charlie Munger, Howard Marks, people like that, they write in their own way about what I call being less wrong. We very much in all elements of our life especially competitive people in Canada and the US, we want to be more right all the time. we want to be faster, better, smarter, richer, and so forth.

I think it's critically important to invert that a little bit and say, "Well, why don't we first think about what could go wrong here?" I'm not talking in the very narrow sense of buying fire insurance for your home which you probably should have, but more broadly, what are the regrets in life that you would prefer not to have and how do you manage those first?

The triangle was built on a stack of three things that I call protect, match, and reach. So, triangle, three things. Protect is being less wrong, thinking about risk before return and having that smartly calibrated. The second level is match meaning that we want to have a balance in our life between assets and liabilities not just financially but psychologically.

If we can protect ourselves against bad things that could happen and if we have that balance in our life between assets and liabilities on multiple levels, then there's that third level of reach, which is you've achieved funded contentment to some extent at least for a moment in time. There's so many wonderful aspirational things we could do that are part of a joyful life. You're in a very good position to do that if you could get through the first two stages.

Really interesting. What happens if people skip one of these images? And is there an area that many people do skip over?

Yes and yes. Stepping back and just a comment on the financial advice business over the last half century, but especially over the last 10 or 20 years, the industry has moved toward so-called goals-based wealth management meaning that we're going to go beyond just the buying and selling of securities. We're going to articulate your goals and then build a portfolio that's calibrated to your time horizons, your risk tolerance, and all of that, all of those important considerations.

That's fine in and of itself. But for me, I think what's missing in many conversations between husband and wife, between advisor and client, between parent and child, is recognizing that we need to calibrate purpose and planning and that you have to have both a clear mind and dirty hands. It's one thing in this process to say, "I want to think about what a meaningful life is to me. I want to support my family or my community or this is what I aspire to do."

But unless you have embedded that in a robust financial plan, it's probably just a lot of talk. It's not that it's not valuable, but it might not lead you to anything. The flip side is to have a plan without recognizing what the purpose is. I mentioned toward the start that the whole concept of goals is problematic. The thing about goals whether it be the new home, your child getting into university, the big goal is, of course retirement.

A lot of times when we achieve those goals, the happiness that we think we're going to feel might not be there at all. If it is, the intensity and duration of that happiness is not particularly deep or long. I think if we can in a step prior to goals think about, well, what are the deeper sources of meaning that I'm trying to achieve here, we create a bedrock for those ephemeral goals that creates a much more robust financial planning process.

It may speak to the question that you just talked about as it relates to the financial industry, but do you have a sense for how most people are doing on this journey to wealth as you've described it?

Well, here in America, at least, we've got 330 million people. Things are a little bit nutty. I would say, generally, people are in terrible shape. There's different levels of financial wellness in terms of just getting by and paying the bills and having some emergency savings before you can even get to a place where you can establish and invest and save to achieve your goals and, beyond that, really think about this broader notion of funded contentment, something like a half, somewhere between 40 and 50% of American adults don't have $400 to spend in an emergency. Lately, we've been in an emergency.

This notion of financial fragility, unfortunately, is front and center in the US and in many parts of the world as it relates to people who can pay the bills who have a roof over their house that doesn't leak. The thing is the benchmark isn't visible because the benchmark is everybody's own life. I think one of the challenges that advisors and clients have, but we all have as individuals and individual investors, is that we will think about some global stock index as being the benchmark for success.

There's been progress in the advice business, but not as much as I think we need to move people away from saying, Did I beat the market as distinct from have I achieved my goals." Now, JP Morgan, the original JP Morgan, famously said whatever 100 years ago that nothing corrupts your financial judgment more than the sight of your neighbor getting rich.

We are social primates. We're looking around. We're competitive. We want to know what others are doing. We do want to win. What I try to do with the concept of funded contentment and the mental models that I've built around that is to hopefully encourage people to focus on what they can control. What they can control is how they articulate the life that they want to lead and then some of the specific financial decisions that go into it.

I do just want to touch on something that we were talking about with the shapes. You talked about the points of the triangle. Can you touch on the corners of the square before we continue?

Oh yeah. Sure. The square is focused on setting investment expectations. Even if we're talking about broader purpose and meaning and some of that squishy stuff and even if we expand the conversation to saving and spending and ensuring, the core of most financial plans is a portfolio. Then, the question becomes, "Well, how do you make good decisions to build the portfolio that's right for you?"

I spent a good part of 20 years doing investment due diligence, running portfolios, spent a fair amount of time in the hedge fund industry. I've been at the deep end of the pool in terms of complexity.

The square is just one way that I have tried to cut through the unbelievable noise and complexity of all things and investments and say there's only a few things that you really need to be thinking about to figure out whether your portfolio and the pieces that comprise your portfolio will live up to expectations because I wrote an earlier book a number of years ago called the Investors Paradox. The whole point of that book was that a successful investment is one that meets your expectations as opposed to beats the market or beats your neighbor's portfolio or anything like that.

What do we want to know? We want to know four things. We want to know what the growth potential is, return expectations. We're wired to love point estimates. We want to know that something can make 9% a year. The problem with the world is it doesn't work that way. We can think about ranges of outcomes in terms of growth potential. We want to understand the pain of owning that investment in finance speak we call that volatility and lots of other even more confusing words.

But the idea is that when things go down, value investors should say, "Oh, great. It's cheaper. I can buy a dollar for 50 cents." What happens in point of fact is that when things go down, people tend to sell. As a community of investors globally, we buy high and sell though which is do the opposite.

The third piece is fit. Where does this fit into a portfolio which is sometimes hard to assess because, again, going into finance world, we have these notions of correlation and portfolio theory is built on the basic, but profound notion that a series of assets that have low correlation with each other will build a more efficient portfolio.

But again, we're looking for point estimates in that discussion of fit when in point of fact it doesn't work that way. We need to have ranges. We think, generally, stocks and bonds are lowly correlated. The fact is sometimes they are highly correlated to each other, and sometimes they're negatively correlated to each other. Again, keep in mind the thread here is managing expectations.

Then, finally very quickly, the fourth corner of the square, the fourth way to manage expectations, in finance speak, we might call it liquidity. For real people, we can just say, "Well, what's the cost of changing your mind?" You buy a stock or a bond or a structured product or real estate, or you buy into a venture capital offering whatever the case may be. If you buy an ETF or a mutual fund every single day, you can buy and sell that thing. The cost of changing your mind is very low.

But it also means that you can demonstrate terrible behavior every day. If you buy into a private equity fund with a 10-year life, the cost of changing your mind is very, very high. You want to have a little bit more confidence about what that is. But at the same time, you are saving yourself from yourself in terms of feeling compelled to sell when something is going poorly.

Interesting. Let's go back to the financial wellness part. I'm curious what you think the impact of, and so many of us have lived through these crises, so the financial crisis of 2008 and then, this year's pandemic. What is the impact on people's financial wellness, do you think?

Let me answer that in two ways. One, very straightforward, one maybe a more highfalutin concept about time and temporality. The first impact is obvious which is that millions of people have lost jobs that they couldn't afford to lose. We've already globally seen changes in global wealth inequality. This will probably accelerate that. As we alluded to before, there are many financially fragile people. Now, there are probably more.

Financial wellness begins at the bottom floor with just being able to have a roof over your head and food on the table and make sure that your family's safe. Unfortunately, we might have taken a step back. For those of us who thankfully don't need to worry about the opportunity to be charitable, to give to others, to think about others, it hasn't been this high in a long time. People do need help.

The second little bit more conceptual answer to the question is based on the fact that humans have a very unique sense of time and temporality. It's a deep topic that I have a lot of fun with. I won't go into really too much, but suffice it to say that the human flexibility with the ability to imagine the future to remember the past and to be present is quite unique.

I like to say that we are time travelers of a sort although we never got the manual. Our brains are zipping around. There's actually tons of fascinating research now in neuroscience, neuropsychology about what the future self is all about and our ability to think forward as to who we want to be in the future in the context of the crisis that's happening right now.

What happens in a crisis is that ability to look longer term collapses. We've all either unfortunately experienced or know of others experiences when they're in an automobile accident. It's a little bit strange how the brain seems to have almost like a photographic memory of that accident. Why is that? It's because the brain goes into hyperdrive. If you think about just a camera shutter going off every fraction of a millisecond, we're taking a million pictures of what's going on. And so we have that vivid, vivid recollection.

Fortunately, we're not in that scenario much at all. Hopefully never. When we think about a crisis, what happens is that time collapses. We feel the need to take care of ourselves and our loved ones here now, as we should. Remember, our very first instinct going back hundreds of thousands of years is survival. You can't thrive unless you survive.

When that danger trigger deep in your brain goes off, you know what you got to do. That fight flight or freeze mentality, it's there. It's hardwired. It's not going anywhere. It's always on. It's an important part in the brains that's not going anywhere. What's important, just to tie a bow around temporality which I can sometimes talk too much about, is that we want to be prepared ahead of time for when these crises happen and our horizons collapse and this is where the help of others or just having a plan generally.

If you have something on paper where you yourself or your partner or your parent or your child or your advisor or a friend can say, "Wait a minute. We have a plan. We've talked about where we want to be in six months, six years, 26 years." We are physically in pain now because that fear is physically painful. Even if it's low grade, it creates anxiety. It has physical consequences.

We were calm and focused on the long term at some point in the past. Let's revisit what we said then. We almost with like a crowbar and a door that's hard to open, we can then expand our time horizons out. But the challenge in any crisis including this one is that we are focused on the here and now, and all of your best laid plans can easily go out the window unless you in some way through your own discipline or through the help of others can stay on track.

Is there a way for someone to know if they're more susceptible to this time collapse before it happens?

It's a good question. I've not thought about that before. I don't know. I would think about the answer to the question through the lens of executive functioning. I've got three teenagers, so executive functioning and just the ability to like stay focused and do what you're supposed to do is sort of front and center in the Portnoy household.

I think there are some people who are calmer and more disposed toward planning and probably don't need much of any help to stay calm and stay on the plan versus those that are a little bit more volatile in the moment. I wouldn't know how to think about the numbers. These are just very generic personality types I'm referring to.

But part of what advisors and educators and coaches should do and what people might want to do on their own is evaluate what is the nature of someone. Are they more spontaneous? Are they more of a planning? Planning mindset, neither is right or wrong. It's not an area for judgment. We're just born the way we are in the same way that I like the color blue more than the color orange. I might be more planning oriented than spontaneous. I don't know. Just who I am.

Knowing yourself is the key to being a good investor and generally to being good with money. Howard Marks, again one of my heroes who's written about this, he said anybody that wants to be a great investor and wants to manage money really well, the one degree they should have is not in finance but in psychology.

One of the things that's so tricky for people I think and this crisis has been no different is that even if you have the right plan and even if you thought about the things that you were just talking about to make sure you're taking an appropriate amount of volatility risk on is that every crisis is so different. This one's such a good example. It makes it hard.

Yeah. In some circles, you're never supposed to say this time is different because we're all supposed to be students of history. Oh yeah, this is repeating patterns we've seen since the Roman era. I think that's a bunch of [inaudible 00:27:40]. I think it's always different. History doesn't repeat, but people do. Human nature is somewhat unflappable. We respond to incentives and internal and external factors in certain ways.

Think about the last 20 years. You have the COVID crisis. You had the GFC. You had the tech meltdown and so on and so on all the way back through history to say generically that the market went down 20 or 27.4% or whatever your precise number is tells you nothing about the nature of the threat or the perception of threat.

In addition, things are always different because we as human beings who get sort of one ticket for the merry-go-round, we're all experiencing this for the first time. We need to figure it out. It's not like we spend 100 years reading all of history and say, "Oh, okay. I get the patterns. Now, let my life begin." We're living life in real time. There are better or worse things that we can do to plan for things that we can't anticipate.

But let's not forget, a lot of the joy in life comes from its uncertainty, the ability to explore and discover and be on an adventure. The downside of that is sometimes things don't go well, and we need to respond, and we need to adapt.

One of the things that we've said on this podcast a couple of times and once recently that I know you disagree with is that volatility is not a great measure of risk for a long-term investor. Can you explain why we're wrong on that or why you don't agree anyway?

You're so wrong. Let's have a screaming argument. No. You listen to Warren Buffett and other investing luminaries. They will say that volatility is not risk because you're effectively at any moment marking to market some stock or portfolio that you own, but the loss isn't "real" because you haven't sold anything. On paper, it's less, but if you've got a long enough time horizon and you've done your work and you've made some intelligent choices, then it's going to be fine.

Volatility to some investors, many investors, is considered to be just noise. Come at it from a completely different perspective which is that the behavioral investor responds to greed and fear on a daily basis. If they are unfortunately looking at the market every day, they've got countless opportunities to make many bad decisions.

If we generally buy high and sell low, the opposite of what we're supposed to do based on that survival fight versus flight mentality, then, when the market goes down, we tend to sell. Okay. Should we sell? No, or at least probably not. Do many of us sell? Absolutely. If I look at flows at least data from the US mutual fund industry, massive, 2007, 2008 forward, what happened? The market went down 50-plus percent, the equity market. Investors sprinted away from their investments. They sold, and they went to cash.

Well, what happened? Starting in March of 2009, the market took off. And over the course of a decade, it went up four, 500%-plus and a good chunk of those gains were made in those first few years. If you look at the data from the Investment Company Institute, however, just quarterly and annual fund flows, you'll see that positive flows back into mutual funds, equity mutual funds didn't turn positive until 2014. Okay.

You've got a phenomenon where people sell during volatility when they shouldn't, buy when things get calm. How many clients do you have? How many people do I know who say, "You know what? I just want the market to come back a little bit more, and I'll feel more comfortable getting in." All they're doing is foregoing gains.

When we listen to brilliant people, and I'm not being sarcastic, genuinely, brilliant people like Howard Marks and Charlie Munger and Warren Buffett, and these sorts of people, they're playing a very different game. They are accumulating more. They've got massive pools of capital. Remember, the game here for us and it's not a game, but it's what we're trying to do is goals-based investing. When volatility hits and people sell, they're less likely to hit their goals. QED volatility equals risk.

In your book, you've talk about adaptive simplicity. You talked about what that is and why it's so important in financial planning.

I think there's a very fascinating debate right now in our lives generally about complex versus simple. Stepping back, we've never has humans had to process more information and more choice than at any point before in recorded history. Okay. We can talk about paradox of choice where the more and more choice that you get, the more miserable you become.

There's an informational analogy which is that the more and more information that you accumulate, the more decisions you want to make, but the more decisions that you make, the chance of messing up. Simplicity is in. On the residential world, think about Marie Kondo and World of Tidying Up, all anybody's doing these days, it seems its cleaning their closets which I guess if you're stuck at home for two months, it's all you have to do anyway.

But we're in a world of tidying up. I think in that vein complexity as is seen as a complexity good, simplicity bad. I would put a slightly different spin on it which is to say that life's rich pageant comes through complexity. All right. The messiness of life, the relationships that we have, stories that we tell, they are complicated. They are fun to engage with and figure out.

A lot of the things that we want to do in this world like build bridges and rocket ships to the moon and super computers, that's all complex. There's skill, and there's joy in pushing that forward.

Complex, actually pretty good thing because it helps us solve big problems. Simplicity, good I think intuitively because it just feels like we've got things figured out. Adaptive simplicity is simply the notion that we don't know what's going to happen. The most overused phrase of all time is that everyone gets punched in the face, and everyone has a plan until they get punched in the face even though it's overused. I botched it.

We are constantly moving from complex to simple. There's something actually constructive or joyful about that process. We don't know what's going to happen in life generally. We certainly don't know what's going to happen in the markets. Accepting that dynamic of not knowing what the future holds and then on top of that being open to rolling with the punches while we try to make sense of things is this notion of adaptive simplicity.

As we move from circle, triangle, square defining purpose, setting priorities, making decisions, having that adaptive mindset, I think, is really empowering to people, more empowering than they might realize because once you accept that we don't know what's going to happen and really nobody else has figured it out too, you have a wide space of license or permission to go do your thing.

Given that dichotomy between simplicity and complexity and the importance of being able to adapt, how do you think people should be thinking about setting financial goals which are static, aren't they?

Yeah. That's one of the problems with goal setting. Goals are a very good thing. Without goals, we're probably in bad shape. We just have to appreciate that there are some wrinkles, one being that when we achieve them, we tend not to be as happy as we think we're going to be.

Another thing is that they change or maybe even completely reverse. Let's just talk about it in the context of financial planning. I think conversation between client and advisor that is explicitly under the umbrella of adaptive thinking or adaptation is going to be more constructive and more fun. Let's just take retirement. It's the number one goal for most people in the western world.

Retirement, one way to spin it is that many of us develop our identity and social connections through work. What we want to do is accumulate enough money to stop doing what's meaningful to us. It's a strange process. Retirement wasn't a thing in the world until about 150, 200 years ago.

We have this goal of retirement. As people age 55 or 60 or 65, whatever the number is in your circumstance, as I meet with, talk with not only advisors and clients, a person or a couple will get to that age, and they've done everything right in terms of saving, appropriately making good investment decisions, not overspending, all the basic stuff that we're supposed to do and then you're a big almost celebratory meeting and the advisor says, "You guys did it.. You've done everything right for the last 30 years to get to this point where now you can do what you want."

Increasingly, I hear from advisors as well as just regular people that the question then, and it's often frankly from the man in the relationship, is what's next. I'm glad we did this, but what's next? I got maybe, I hope, 30 years to go or at least 25. There's only so much golf I can play.

When we interrogate that retirement narrative and say that there's different ways to script all of that, we immediately become ghost writers for our client's authentic voice as they tell their story in pencil not pen because it's going to get erased and rewritten.

If we're just taking a standard financial plan and saying, "Hey, we're all living the same vanilla script of I want to buy a house, I want to send my kids to college, I want to retire," first of all, that's what I want to do. I'm not saying that's illegitimate. Of course, that's what you want to do, but recognizing that the scope and shape of those goals as well as other things you haven't thought about are going to emerge.

If you introduce adaptation at the beginning of a relationship and say, "We're going to try our best to prepare for what we know might happen," but there's going to be things that we don't anticipate, and we're going to have to pivot, I think those relationships in a financial advice context go a lot better.

I have a question for the square part of your theory. You've worked extensively in the hedge fund world for a long time. You've talked about having thousands of manager interviews. Clearly, you're an expert in that space, but the world of hedge funds believe that there's efficiencies that can be exploited over time. Based on your experience, do you think it's reasonable for investors to plan on or expect market beating returns?

No. The answer is no for so many reasons. One is most hedge funds don't aim to beat the market. Most hedge funds aim to deliver attractive risk adjusted returns. Hedge funds hedge. Let's just take the basic case of the most common strategies, long short equity. You're long a bunch of stocks that you think are going to go up. You're short a bunch of stocks that you think are going to go down.

Your so-called net exposure to the market is 50%. Someone gives you $100, and you buy a $100's worth of stocks. You're short $50's worth of stocks. You have some leverage in the portfolio and your net market exposure 100 minus 50 is 50. Well, the market happens, and the market goes up. You have a number of stocks that are short which means that they're going to be working against you while the stocks that you're long are going to work for you.

All else equal, the beta of that portfolio, apologies because you don't want to get into jargon, but the market exposure of the portfolio should suggest that when the market goes up, you're going to have some up capture, and when the market goes down, you're going to protect a little bit well. The original premise of hedge fund investing, and it's still to some extent the core proposition, is that you can achieve good returns for less risk or for any given unit of risk that you take, you can achieve more.

The challenge about talking about "hedge funds" is that it's not an asset class. It is a vast space filled with literally thousands of idiosyncratic firms trading every market on the planet. Whether it be equities or bonds or loans or commodities or derivatives, the important thing about getting involved with any form of complex investments, this gets back to the square, is what are my expectations here?

It very well might be worth it based on good due diligence that you think that they're going to achieve whatever it is they say they're going to achieve. One hedge fund manager might say, "Hey, we're looking to blow the market away." Okay. That's fine, and others might say, "Oh, no. We're just looking to make a steady 5% over a cash hurdle or over LIBOR or something like that, you got to ask all these questions to figure out what they're doing and then, in turn ask yourself, "Okay. How does that particular piece fit into my portfolio?"

The key is expectations management. I did have a career for more than 10 years and doing due diligence on hedge funds. That was the name of the game. You read everything they write. You sit down, and you do interviews. You do a bunch of quantitative analysis and ultimately conclude that there's enough of a program here with reliable expectations that I think it's going to be a good fit for me or for the client portfolio that I'm building.

Would you expect a typical active manager to outperform the market?

No. There's no evidence of that. The opposite is true. If you look at any number of data sources, Standard & Poor's does an annual survey of this, but you'll see that a majority, and in most cases a large majority of active managers, don't beat their style benchmark. As an old Morningstar guy, the style box is virtually a tattooed on my forehead.

Think about large growth, small value, mid cap core, whatever. There's an enormous amount of data available now in each of those nine boxes in terms of large mid, small cap, growth value core, something like 80 to 90% of active managers over any rolling time period, one, three, five, 10 years do not beat their benchmark.

The hedge fund piece is interesting just the way that you were talking about it. Maybe, it makes sense for some people in some cases or some institutions entities, whatever it may be, if it aligns with their objectives, when we think about the typical individual who's trying to accumulate forward of retirement goal, do you think hedge funds have a role in that type of situation?

There could be a role, but it's at best limited. I believe that to the extent that so-called alternative investments so certain hedge fund strategies as well as private equity and venture and certain credit strategies in the context of an institutional portfolio that has the time and expertise to really be vigilant and to appreciate vicissitudes of what that portfolio is going to do and how the pieces relate to each other, it could make a lot of sense.

In fact, we know that "Yale endowment model," the David Swensen model going back 30 plus years was built on the idea that it elaborated on the original portfolio theory from Markowitz from the late 1950s that said if you put together a bunch of different investments that have a low correlation to each other, you get more for less.

Institutional investors on the back of the way Swensen wrote about endowment investing, they're doing that, and there's trillions invested in hedge funds. That's all fine and good. As it relates to individuals, it so depends on the opportunity. Let me give let me give two contrary examples. I'll be very brief. You have the long, short equity example where it's of a trading instrument. The firm claims they do better research on small cap or mid cap stocks around the world, and they're going to be long, and they're going to be short.

We can see a very mixed history of whether those folks are able to achieve their goals. It does require a fair amount of vigilance to even know what they're doing. A second might be more of a structured situation. So, take structured credit where there's a real estate investment or a land investment or something that's going to generate some sort of income that's not predictable, but there's something that you can do in understanding where you are in the capital stock and the security that's associated with that particular sliver of the capital stock that you're invested in.

You can do deep due diligence there and say, "Okay. We are much more senior than the junior debt, let alone the equity, and there's something reliable about that." In turn, I might be able to generate X% a year for myself or for my client portfolio. That very much could come in a hedge fund, and the hedge fund is just a legal structure.

It's a private partnership. There might be plenty of those that could be super appropriate for income-seeking investor as long as they are comfortable with the complexity and, in many cases, leverage and illiquidity.

Yeah. Right. Maybe, this next question speaks to that to an extent anyway at least the expertise piece. How do you think again talking about individuals who are accumulating for retirement or decumulating in retirement, how do you think someone should decide if they are equipped to manage their own investments and their own retirement plan?

Something I under-appreciated until a few years ago and now, I think is about as important as anything in our industry is recognizing that there are two phases to the process of being an investor accumulation and decumulation.

I think that the accumulation phase which is what really all of finance is built on, if you think about Markowitz and Fama and French and all of the luminaries that have created sort of the investment complex that we work through today, wJack Bogle did with vanguard, you name it, it's about accumulating assets.

It's about more. There does come a point where for any number of reasons we stop accumulating assets, and we have to live off the cash flows of the assets that we have assembled over time. I think the latter is incredibly difficult. It's only as I've grown up in the industry and now hang out with lots of financial advisors. I myself, with aging parents and growing kids and moderately complicated life, think about, "Well, what would it mean to create income from the assets I've accumulated?"

There's nothing in efficient markets theory or in portfolio theory or what David Swensen does at Yale that tells me how I should do that. At bare minimum, anyone who anticipates having to live off of their assets that they've accumulated over the first 30 or 40 years of their life should in some ways have a relationship with a financial advisor.

It's just so difficult to figure out those cash flows on top of that certain insurance needs at least in the states, healthcare related insurance, incredibly complicated. There are so many reasons for people to do that. That's my base argument. If you're in the accumulation phase or going to be entering it in the next 10 or 15 years having a partner that helps you think through what you need to do, super important.

I think there's the next level which is even during the accumulation stage, we do find from a lot of studies that people who work with advisors tend to have better investment outcomes than those who don't. With respect to you guys and all of my advisor buddies, it's not because you're great investors. It's because you keep and you might be making very intelligent portfolios that are spot-on appropriate for who the client is.

But the real juice in the squeeze here is that you consistently can help people avoid being the worst version of themselves at the worst possible times. That intervention helping people envision a budget and cash flows, helping them avoid bad decision during volatile times to the point we made earlier about time collapsing during crises, it's just good to have help.

I think on the back of that, many people who just think that this is an investment game and that you go to an advisor because he or she's going to build you a great portfolio, they're missing the good stuff. The good stuff's only getting better because based on social psychology decision theory, neuroscience, neurobiology, and so forth, we now know more and more and more about better decision making and among other things the fact that it takes a certain skill to turn a good decision into a good habit. I don't decide every day to brush my teeth. I just brush my teeth. It's a habit.

There are ways to do that with money life that most people haven't mastered. Those who work with an advisor are much more likely to not only make good decisions, but to form good habits.

Okay. Someone decides they want to work with an advisor, they want to get the good stuff, what's your practical advice for someone who's going out to a very complicated marketplace that we all work in? What do you tell that person that comes and says, "Brian, what's the checklist? What should I be looking for to get the good stuff?"

Yeah. Cameron, I wish I had a good answer for that. I think it's a super legitimate and hard question. I guess one way I think about it is to replace the word advisor with coach and maybe think of this through a coaching framework and then create an analogy with our physical fitness. I don't think many of us are averse to getting in shape and maybe working with someone who can encourage us or show us how to exercise in the right way.

But on top of that instruction, keep us disciplined like, "Hey, we're meeting in the park at 6:00 AM and you're going to run around. We can all imagine that the personality of that coach is going to gel with us or not. Maybe, we want somebody who's stern, a military sergeant type. Maybe, we want someone who's just softer and more encouraging. We also want to have a sense of the type of people they've helped in the past.

I find a guy that maybe has experience helping people, sort of chubby, 50-year-old guys that would like to be slightly less chubby. Have you worked with people like me? Well, just pour that back into the financial advice or financial wellness and coaching space which is how does this feel because it's going to be a relationship. We're going to end up sharing things with our advisors that we probably don't even share with our husband or wife at times.

Is there a comfort level here? I guess there are ways to think about skill through the lens of experience, but really that personality fit and, hey, have you helped other people like me in the past? Tell me how that went. What went right? What might have got wrong? How are you better now than you were in the past? Do you see anything specific about how you would coach me that might be different than other people that would be in my cohort?

I love the question because there's such a supermarket or marketplace of solutions out there. It's unbelievably overwhelming again to one of the most influential books in my career, the Paradox of Choice, the more choice we get, the more miserable we become. We also have something called decision fatigue as well as choice paralysis.

You're at the market. There's a hundred different types of breakfast cereal. You're like, "I don't know what I want." You just walk away. You don't even buy the cereal.

Let's look on the other end. You said that one of the biggest questions that people have is, "Am I going to be okay?" Is our industry doing a pretty good job of helping people keep the answer to that question yes?

I think the answer is mixed. I think that the parts of the industry and the good news is that this part of the industry from where I sit is growing rapidly. That engages not only in goals-based planning, but embraces a more holistic coaching approach which isn't say that it's squishy or that it's therapy, but like you really try to help people in their money life which is all-encompassing.

It's not just about a portfolio, goals-targeted portfolio. That's growing like a weed. More and more people are turning to that. In every industry in the history of capitalism, competition and technology puts people out of business. And most people in our industry, hey, is capitalism a good thing or a bad thing? A lot of people say, "Yeah, it's a good thing," but then you have to accept that we have this process of creative destruction where there are going to be solutions from the bottom up that come up and basically make what you do your formal specialty with the moat. Now, it's just a commodity. I think getting people to recognize that is critically important.

It ends up being about delivering experiences. I think we had Dennis Moseley-Williams on the podcast who I think you know-

Yeah. I know him.

... a while ago. Well, he talked all about the experience economy and that whole concept. I think you hit the nail on the head perfectly in one of the things you said earlier in this part of the conversation where you differentiated investment management from the broader picture of financial advice. I think that's one of the pieces that investors. The end investors get wrong. When you go out to get investment advice, it shouldn't just be about the portfolio.

One of the things about me and the two of you and probably a lot of people we hang out with is that we're pretty excited about this industry because in a world of endless noise and complexity, we're pretty well positioned to just help people do better. Sometimes I forget that, number one, people don't know and they don't care and also the industry has changed so quickly that it wasn't that long ago that we were all just sort of stock brokers just buying and selling stocks.

There was no e-trade or Schwab. That came around like in the '90s. Just not that long ago, this was an industry that sold securities and other investment products to people. Period. There was no plan. Then, planning came around. Now, coaching is coming around. There's a small, but burgeoning field of financial therapy. There's all these green shoots in a larger global push toward wellness.

Because money coming all the way to the beginning, Lord Voldemort, we don't want to talk about it. We don't want to envision this dangerous thing. It's totally legitimate to think about our emotional wellness, our physical wellness and so forth, but wellness related to money, it's still taboo in many circles. I'm sure you have conversations with clients where sometimes they just don't want to go there. But you know the right answer is somewhere where they don't want to go.

I have those conversations with people as well. I think it's on us to articulate a constructive division for what financial advice can be that combines both rigorous planning. Skills-based requires years of experience and training while at the same time demonstrating empathy and not just squishy, oh, it's going to be okay, but there's a way to listen to people. Active listening is a skill.

If you combine rigor and empathy together, we're all in a position to do great things for people, but most of the work remains to be done.

You're doing some of it now, and you mentioned green shoots. I think that you are one of those at the moment within our industry. Can you talk a little bit about your current venture, Shaping Wealth?

Yeah. Sure. It's a relatively new firm, but one that I've been thinking about for many years. I've been on my journey in this industry for more than two decades. My evolution was really, hey, it's all about investments, picking good fund managers, and building better portfolios.

Two things happened. Number one, I learned something, maybe a little bit more than something about the way the investment business works and where we can find skill versus just people who are lucky or in the right market at the right time. Then, I'm 20 years older. Again, I've got three teenage kids, a wife, my parents are getting older. There's a lot going on that I think about and I want to be helpful for and just sort out in my own mind.

The Geometry of Wealth came out 2018, was sort of a dual project. I don't know if it counts as a midlife crisis or anything, but writing the book helped me sort through some stuff in my mind. I think through the lens of funded contentment about what I want in in my own life, but it also at the same time reflected where I think the wealth management industry in the brightest definition was is and is going.

I launched a firm that is going to put these mental models that we've been talking about today into motion for different audiences that I hope will find them helpful. First and foremost, that's wealth management platforms, financial advisors. There's a big uptick granted from a small base in corporate financial wellness programs. Again, that's becoming more legitimate helping people be healthy or have a helpline if they're stressed or depressed or anxious. That's been around for a long time helping people understand their own money lives relatively new.

Then, third, I'm already very active in financial literacy, youth financial literacy. As a volunteer effort for some years now and I have a number of things I want to do with others is to structure a way for not just kids, but kids with their parents and families to have better conversations about all of this stuff because I honestly believe that folks can end up in a much better place if they're taught early on that money is not Lord Voldemort, that money is something that we can approach and that we can talk about while at the same time acknowledging that it makes us nervous for a reason.

Our last question, and I realized you may have answered part of it in the last response, how do you define success in your own life?

I really do use funded contentment as a tool to think about things. On the contentment part, and Cameron, you're nice enough to read the book, there's four parts to that. I call it the four Cs, connection, control, context, and competence. In brief, that means that we are social beings and our social relationships mean so much to us. We value control or autonomy and self-determination competence. We get so much of our identity from work or hobby or vocation and then finally context that sense that you're living for something beyond yourself not just your family but a bigger idea, your country, your religion, your sports team, whatever it might be.

I've been pretty intentional just in the last three or four years as I've been working on this project and writing a lot and not just publicly, but journaling for myself of taking those four underlying sources of meaning and really thinking at times, "Well, am I living up to those standards? Am I diving into those areas of living a meaningful life in a way that I can," and recognizing that whether we like it or not, money figures into all of this at minimum putting a roof over your head and food on the table, and so trying to sync it all up.

Honestly, the Geometry of Wealth, the circle, triangle, square, that's my personal mental model for living a good life. I've shared it with people. And, hopefully, they find it helpful.

Well, Brian, thanks so much for sharing time with us. This has been frankly a sensational interview. I'm not surprised because I absolutely love Geometry of Wealth. It's a phenomenal book. Thanks so much for joining us today.

It's my pleasure. It's a great conversation, guys. Thank you so much for your time.

Books From Today’s Episode:

The Geometry of Wealth —  https://amzn.to/2AZpIkg

The Investor’s Paradox —  https://amzn.to/2MPzsjX

The Paradox of Choice —  https://amzn.to/37gKtEm

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Shaping Wealth —  https://shapingwealth.com/

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Brian Portnoy on LinkedIn —  https://www.linkedin.com/in/brianportnoy/