Angelica Montagano

November 26, 2020

Decision Making

Episode 126: Dr. Brian Portnoy and Josh Brown: Beyond the Orthodoxy - How Financial Pros Invest

Angelica Montagano

November 26, 2020

Decision Making

Josh Brown has spent his career helping people invest and manage portfolios. His clients range from individuals to corporations, retirement plans and charitable foundations. Josh is the author of the book Backstage Wall Street and How I Invest My Money. He is on the advisory board of Brightscope, where he hopes to help usher in a new era of transparency for the financial advisory industry. Josh blogs at The Reformed Broker, where he discusses markets, politics, economics, media, culture and finance using statistics, satire, anecdotes, pop culture references, sarcasm, fact, fantasy and any other device that help to get his points across and easily understood.

Over the past 29 years, Brian Portnoy has been an educator, investor, writer, and entrepreneur. During his career in the hedge fund and mutual fund industries, he built a passion for simplifying the complex world of money. He has written two books in the field of behavioral finance, The Investor’s Paradox and The Geometry of Wealth, which address not only how to make better financial decisions but how money figures into a meaningful life. Alongside his writing, he has delivered keynote addresses, smaller workshops, and private consultations across the world to thousands of individuals, advisors, and institutions. He is actively engaged in the push for better youth financial literacy and serve on the advisory board of the Alliance for Decision Education.

Dr. Brian Portnoy and Josh Brown’s book How I Invest My Money, captures the stories and investment strategies of 25 top financial advisors. The book highlights that while there are established dogmas that tell you how and why you ought to invest, there is no ‘one-size-fits-all’ way to invest. Today we speak with Brian and Josh about the key insights that we can derive from their work. We open our conversation by exploring how they conceived and developed their book before talking about why fully rational investing is a myth. After diving into how we allocate money to solve our unique needs, Brian and Josh share how people use their portfolios to express themselves. We then discuss common investing themes in the book, including how most advisors have an aversion to debt, and how their experiences have guided their strategies and outlooks. From why we should place more value on social and human capital, we look into why financial planning has a profound impact on how you manage your investments. We touch on direct indexing, the relationship between money and happiness, and the unexpected yet incredible perspectives that came from giving advisors a license to tell their stories. Near the end of the episode, Brian and Josh reflect on how their book might have changed their views and how their work fits into their visions for the financial industry. Tune in to hear more on the usually secretive topic of how financial advisors invest their money.

Key Points From This Episode:

Introducing Brian Portnoy and Josh Brown, authors of How I Invest My Money. [0:0:15]
Why we invest and reflections on commentary made by the Rational Reminder community. [0:02:58]
Josh shares his motivations for being transparent on where and how he invests. [0:05:25]
Hear about the genesis and subsequent development of Brian and Josh’s book. [0:07:19]
The common needs that individual investors have beyond getting a return. [0:10:18]
How the uniqueness of everyone’s life affects their investing decisions. [0:13:09]
Why there is no strict ‘right way’ to invest — invest according to what’s right for you. [0:14:35]
ESG investment and seeing your portfolio as a form of expression. [0:17:21]
Exploring common investment themes that arise in Josh and Brian’s book. [0:20:07]
How Brian and Josh developed their personal investing outlooks. [0:21:44]
Why we should place more value in human and social capital. [0:25:16]
Brian expands on why we should invest in human and social capital. [0:28:35]
The importance of financial planning in managing both your life and investments. [0:31:50]
Answering the question: is direct indexing the future for outcome-driven portfolios? [0:36:55]
Assessing a client’s risk profile as central to modern financial advising. [0:39:34]
Portfolio customization and direct indexing versus helping clients create a portfolio around their purposes. [0:40:58]
Funding contentment and the relationship between money and happiness. [0:42:22]
Whether the stories featured in their book have Brian and Josh’s views. [0:46:18]
When your life is your benchmark, how do you derive your portfolio benchmark. [0:49:15]
How their book fits into Brian and Josh’s visions for their industry. [0:54:43]

Read the Transcript:

Can you talk about how you decided to write that post? Like where did the motivation come from?

I don't know that there was a specific trigger. I just had been asked the question a couple of times and it occurred to me that I've never really answered it in public. No one was giving me a forum to do it so I said I'll just write up on the blog. I didn't really expect people to be that interested quite frankly, but I was wrong. There was a lot of interest in the topic. A lot of the interest by the way was coming from other industry people who were saying, "Yeah, I never really talked about how I invest my own money either." That's kind of the genesis of the whole thing.

How did it feel to disclose how you invest? Did you have any internal conflict being that transparent?

Josh: If I did, I've long since passed the point where transparency is an issue for me. I've probably said too much. I don't look at it as invading my own privacy or whatever. I kind of tell everyone most of what's on my mind most of the time. I know you're not supposed to, but I don't think it phased me even for a second.

In my retirement account as with the retirement accounts of all of our employees, we own the same models, the same securities as our clients and that's always been the case since we founded the firm and set up our own 401(k). We're along with them for better or for worse in every market environment.

Brian, question for you. How did this idea - the concept that Josh created with that blog post -how did you get the idea to turn that into a book? What was that process like?

Brian: Just started with a text. Read almost everything Josh publishes. I read this one. It hit me like it hit a lot of people, like good for him. Just be transparent and cover [inaudible] about. This is the way I think about things and here's Jack Bogle's story about the founder of index funds investing in his son's hedge fund operation because he wants to support his son. Of course he did. I mean, does it make sense from a Bogle head point of view? It makes zero sense, but he was supporting his child. Things like that really hit me. I just texted him. I said, "This is great stuff. We know so many people that would probably want to tell similar stories. Maybe there's a project here."

We went back and forth a little bit and we didn't have some corporate retreat. We chatted for a few minutes and like yeah, this could be a project and I've got a relationship with Herrmann House which has become the megaphone for financial Twitter publishing us and Morgan Housel and Daniel Crosby, and [Matt Faber 00:08:16] and so many others. They loved the idea so much so that from the moment I texted Josh to us having a book contract was something like 74 hours.

Josh: I think though, really, our publisher, respects your judgment so much, Brian, that even though we didn't have a fully fleshed out pitch, I think he knew that if you were excited about it, then it was worth moving forward. I think that's a credit to your reputation in the industry and what he's already seen you accomplish.

Brian: I appreciate you saying that, but we also had kind of a gut feel as did Craig, as did the first two people we spoke to, were Morgan Housel and Christine Benz. Can you name two people who are more respected in our industry? Person after person you're like, yeah. It's time for me to share what I'm really doing. The way the process worked is Josh obviously had his blog already. I wrote my version, which you guys saw. It's a pretty personal story about my parents and practical decisions Tracy and I have made in recent years. We asked Morgan and Christine to do a test run. They were both totally into it. They banked out their chapters within a week or two and they were fabulous. They're more or less exactly what you see in the book now.

I think it was Josh's idea like, "Hey, let's get two great voices like that, like on paper." And so now we have four chapters. Now let's go out to our network of financial advisors, portfolio managers, venture capitalists, just people that are like smart with a major criteria in that you have to have invested other people's money at some point. You have to have skin in the game. I mean, in previous careers, I've made terrible decisions and lost other people's money and it feels like absolute (beep) and so then putting forth my own personal portfolio in the context of having done that, and we've all done that it made it more real and it just took off from there.

Josh you said in a post: I'm not buying individual stocks because I think I'm going to generate alpha. I just love stocks and have ever since I was 20 years old and it's my money, I get to do whatever I want with it. Life isn't always consistent. It's a common theme I picked up, is there so many needs that these advisors and these contributors talked about other than return. Would you agree with my observation? That's kind of a common theme and did anything in there surprise you?

Josh: I completely agree with that observation. I think people want to just be fulfilled and they want to do certain things that on a spreadsheet don't make sense, but if everyone just followed what they thought was perfectly logical, then the world would look like the way it does in economics textbooks with the rational consumer, but it's really not that way. Thank God it's not that way. It's what makes life interesting, is that everyone takes these kinds of detours and those things for emotional reasons. Now, if you're managing 100% of your money based on emotional reasons, you obviously going to have very poor results.

I don't think there's anything wrong with an investor who's got 80 or 90% of their portfolio invested in rules-based low cost, low tax, discipline strategies and then with 10 or 20% does things that by the book they're not supposed to do. Maybe that means funding their nephew's startup. Maybe that means recreationally trading stocks on Robinhood in their spare time. Maybe that means picking 10 or 12 stocks that they just want to have an overweight to. They don't think they know better than the market. They just want to own them. That's the case with me.

I'm not interested in the high priests of fishing frontiers and listening to these people on Twitter talk about how the only correct portfolio is the S&P 500 at two basis points and if you're not doing that, then you're violating some sacrosanct dictate from the gods of investing. It's total bull. Most of these guys are unemployed to begin with. They're consultants. I don't care what they think. I'm a pro. I know how to invest in my clients. I'm capable of investing for myself, and if I want to do something that is outside of the lines, the artificial lines that have been drawn by the quants or whatever, try and stop me. What are you going to do about it? It's my money.

That's how I feel and I like to help other people break it away from the chains of what they're being told all the time is the right way to do things. I feel like we're getting to that place. 2020 was a year where a lot of things had been thrown out. I think thou must allocate 100%, the Vanguard has probably been thrown out this year and it's refreshing.

Brian: My addition to what Josh just said is that like life's messy. I don't at all enjoy, despite having the career that I do. I don't find the stock market particularly interesting at all. Like Josh and I are really different that way. It's not what I do. It's not that interesting to me. I've got other interests, whatever. When you go across 25 storeys here, I think what you see when you pull back to like 10 miles high is that everybody's life is kind of a mess. Like not in a bad way, just like, okay, you got growing kids, you got aging parents, you got communities and neighbors that might need your assistance. You've also got a business where you've got clients. This notion of mental accounting that you've got buckets for different things.

You need to have your emergency savings fund. That's invested a certain way and then you've got retirement assets, but then maybe there's five or seven other things going on. When you add it all up, your portfolio looks like a disaster. It doesn't map up to anything the theorists or the high priests would say, but who the hell cares? You're actually like just allocating your assets to solve the problems that you need to. I think that's a good thing for people to read. Read my chapter and Josh's chapter and 23 others and be like, "Oh yeah, I have permission to figure this (beep) out and like allocate in a smart way.

Josh: Brian, don't you think people like worry that there's a right way and a wrong way and that there's a very thick line dividing the two and they don't want to be wrong and it's our job to say no, it's not really like that.

Brian: I mean, I've already gotten feedback based on people saw some early copies or early chapters and they're like, I never even thought about that. I have a similar challenge with a business investment that I've been trying to make and I've been trying to do it this way because I thought there was a right way but this other dude just bootstrapped the whole thing and made it work. What I think the book is going to do, which makes me truly happy, I think it's going to give folks permission or license to like just figure out what's important to them and invest accordingly. Sure. I didn't come across anybody in the book where was like, "Oh man, that seems really foolish."

Josh: Howard Lindzon has no bonds at all in his portfolio and explains why, and then Carolyn McClanahan has half her money in bonds and both can end up being correct for the reasons that they stayed and the lifestyles that they lead and the ideas and concepts that are meaningful to them. One of them doesn't have to be wrong about that.

Brian: One of themes I thought was that people are holding more cash than is optimal. "Optimal" according to the models, but guess what? Our human capital and our financial capital are highly correlated and so people like me and Josh and others maybe keep a little bit more in cash than the models would say because your livelihood is dependent on some of the same things that your portfolio is dependent on and so you act accordingly. A lot of people reading the book aren't going to necessarily be in the financial services industry. Maybe that's not a point for them, but it just comes back to the fact that your life is messy and you plan accordingly and there's really not an orthodoxy.

I have zero regrets. There was a huge bump in the market yesterday. I'm cashed up. I underperformed, I guess if I ran the numbers. I didn't, but I'm guessing I underperformed. Who the hell cares?

Ben Felix: I think the concept that people shouldn't even feel like they need to have permission to allocate their assets however they want to, I think getting that message across is important. My portfolio looks very clean and as far as I'm concerned is allocated exactly how the orthodoxy would suggest, but that doesn't make it right.

Josh: There are people that just don't express themselves with their portfolios. It's not important to them and I think you're an exemplar of that. You've got other outlets to be individualistic and the way that you're investing is just not the way you choose to do it. Whereas there are people who they're expressing their political and social beliefs through their portfolio and we have Perth Tolle in the book as an exemplar of that and she believes very strongly that people should not allocate assets around the world in countries that are anti-democratic or anti-human rights, and so she's literally created a series of indexes and now there are products based on those indexes that allow her to express that belief in the way she's getting exposure to stocks.

Who is to say she's wrong and someone else that's a completely apathetic toward human rights abuses in foreign countries is right. It's almost a question of morality and how do you answer that with a portfolio. It's really hard to do, and yet as hard as it is to do, ESG investing is like one of the predominant movements of modern times in terms of finance. It's taking root all over the world and now all over America. These are things that I think we'll wrestle with forever. These ideas of like is one way to invest morally better than another. Is there a spiritual need to invest in a certain way? For some people the answer is yes. For some people the answer is no. I don't think there's anyone who is the final arbiter of whether or not one side is right.

Brian: The whole ESG discussion that's been going on, actually maps perfectly to the general concept of the book where you can't say ESG is wrong. Even from an economic perspective, you can say someone's, even if they're getting a lower expected return, they're making up the difference with unemotional dividend. You can even make the economic argument as opposed to just an emotional psychological one.

Josh: I just liked talking about ESG in your shot of Cliff Asness because he handles it really well. Look, I get why it pisses people off, especially people who are quantitatively oriented because it's the polar opposite of a lot of that belief system. Also, it flies in the face of libertarianism. There are a lot of interesting places where these things collide. I think there'll be people debating these things for as long as we're around and I'm not sure anyone will ever be able to declare victory.

You guys know the orthodoxy as we're calling it, and you guys call it in the book as well as anybody and you also said that throughout all of the essays in the book, nothing jumped out at you as being totally ridiculous. Were there any common themes? Like, is there anything that everybody's doing or that most people are doing?

Brian: There were few tendencies or tilts. I mean, I mentioned one which is larger than optimal cash stakes for whatever reason. Could be just your own risk tolerance. It could be your human and financial capital correlation, whatever. There seemed to be an aversion to debt and specifically a few people had paid off their mortgages. Again, like just given the math to do. Like paying off your mortgage now, probably not the greatest idea given the spread that you can capture potentially, because that's where the orthodoxy is.

Josh: And they know the math. They know that mortgage with a low interest rate is like smart in today's day and age and they know that, but they still don't feel like it.

Brian: I made reference to it in my chapter. I invest in this private limited partnership that does odd lot in investing, tax equivalent yield somewhere between four and a half and 6%. Okay. When a notional or nominal return of whatever that works out to be two and a half, 3%. No great shakes, but the spread that I could capture on really safe assets that I invest and keep my mortgage or pay off my mortgage. Yeah. The orthodoxy is I shouldn't have done it. I really like knowing that other than not paying my taxes, no one can touch my house. Who's to tell me that's wrong. Like, it's the way I want to live my life.

I have a question about where you got your own philosophies from. Blair duQuesnay for example, gave the event that happened where Michael Goodman gave her a copy of Charley Ellis' book and that set her down the path of ETF index type portfolios. Have you guys had similar events in your lives?

Brian: For me, for sure because I've spent close to two decades in the hedge fund industry and if there's one big takeaway I have is that there's no complexity premium. I have been in the corner office of some of the largest hedge funds in the world. Met these guys, had dinner with them, have had access to their portfolios line by line, hundred page due diligence reports, hundreds of times over. I don't want to say there's no there there, but there's less there than we might think. My personal experience over the last 21 years is that there's actually a simplicity premium not only in terms of mental anguish of figuring all this stuff out, but actually in terms of paying lower fees and just buying into average or average plus. There's other things, but that's the main takeaway from my career and why my portfolio has ended up the way it has.

Josh: I would say that I spent the first decade or so of my career doing retail brokerage at second and third tier broker dealers in Long Island in New York City. I learned everything not to do before I learned anything that you should do. All of my formative years were filled with lessons of like, "Oh, don't do that. Look at this idiot. Never do what he just did." Literally I worked for people that just had no idea what they were doing. The clients were gamblers, the brokers were reckless. They were using margin. They were churning accounts. They were doing concentrated positions. They were doubling down on things that went down because of ego. It was easier to do that than to admit they were wrong and set like every negative lesson you can conceivably learn from investing. I had a front seat for it.

Then it took me, because I'm not very bright, probably eight or nine years longer than it should have. It should have only taken me one year to figure out that what I was doing as a retail broker was not helping anyone, but when I finally did get the message in the financial crisis, I started reading Barry Ritholtz's blog and I think I learned everything I needed to learn about the economy and people who tell the truth and the difference between anecdote and data. I learned all of that stuff from Barry and at the same time, somebody handed me a little green book called Simple Wealth, Inevitable Wealth. It's on the shelf behind me. It had a gold tree on it and was written by Nick Murray and I never heard of him and I never heard of the book. It's probably 150 pages, but it absolutely changed my life, because when I was finished reading it, I said, "I now know the truth."

I've never been able to say that before. I'd never understood why it was important to have an investment philosophy, but once I read it, I became a zealot. It's really steered right every year for the last 10 years in terms of what to do when markets are up, what to do when they're down, how to explain risk versus reward and so many important concepts that I've since been able to relay to other advisors and my clients. I think like that was a very formative period of time for me that I had to go through, but discovering Barry and then discovering Nick Murray, I think were really, really important for me.

The title of the book probably makes people think how I invest, make people think about how someone invests their financial capital, like how their portfolio is allocated but human capital comes up in the book a bit. Social capital, I don't know if it comes up explicitly, but it comes up. Josh, you talked about in the book, one of your biggest assets being your investment in Ritholtz, which isn't I guess necessarily human capital, but it's definitely very closely tied to yours. Do you think when people start thinking and talking about asset allocation, do you think there's an overemphasis on the portfolio and an underemphasis on the other types of capital that we have available to us?

Josh: We know definitively that there is. My colleague, Nick Maggiulli, who was the chief operating officer at Ritholtz Wealth but he's got the blog that many of your listeners are probably familiar with, Of Dollars And Data. He did a remarkable study or a blog post recently where he determined that if you had underperformed the stock market from 1982 to the year 2000, if you underperformed the S&P 500 by 5% a year, you still did better than the investor who outperformed the S&P from I think 1960 to 1980. What is the lesson here? The lesson here is that most of what ends up happening in your portfolio as far as returns go over long periods of time will have absolutely nothing to do with how you invest. It's really going to have to do with the conditions that you're given based on when you were born and your life cycle thereafter.

Now, you got lucky, right? You could be roommates with the guy whose cousin started Uber and you put in the first $10,000 and then you go on a (beep) book tour telling everyone how they should do the same thing. That's the thing that can happen, but for most people that's not what what's going to happen. What's actually going to happen is what goes on in financial markets over the next 30 or 40 years will be very influential to their returns and they have the ability to help or harm themselves with good or bad behavior and smart decision making, but really how much money you save and how much you don't spend will be way more important than do you own 20% emerging markets or 18% emerging markets.

Most of the stuff about portfolio construction that's important has already been said in some way, shape or form, and then deconstructing it significantly further with 6,000 word blog posts, I find to be beside the point and not necessarily important or helpful for people to spend a ton of time on. What should you spend time on? I think human capital and social capital should occupy almost all of your time of your working life, making relationships, meeting people, getting smarter, becoming useful to the people around you. That's what you should spend your time on. Not what % gold, what % treasuries. It's not going to matter. It's all going to even out, right? How can you really elevate yourself? Build your career, build your network, make people happy around you, be productive. It's not a secret, but that's the secret.

Brian: I just love the way Josh put that. I'm just processing it. Well, first thing just the joke that I bought in the past that's of course not funny, is that like the only good investment decision my dad ever made was being born in 1942. His prime earning and investing years were from like 1982 to 1995. Talk about luck versus, he's a genius, right? No. No, no. From the bottom up, I think about one of the contributors to the book was that of Rainey Braxton who just has amazing life story and a lot of challenges along the way. Almost her entire chapter is about human capital and how she's invested in herself.

African-American, some pretty in your face challenges, unfortunately, although very predictable and what she did along the way in terms of choosing where to go to college, what certifications and degrees to get after that, the amazing new financial planning firm that she just co-founded within the last year or two. I mean, her chapter is one of many, but Josh talks about it. I talk about. Almost all of us either explicitly but almost always implicitly talk about this notion that investing in yourself like knowledge, your skill sets, but also your attitude toward adaptation. There's this old notion from economics, sociology of creative destruction. People "love capitalism" but often neglect the fact that the main feature of capitalism is that it destroys everything in its path.

I grew up in Pittsburgh in the 1970s. I'm pretty familiar with what happens to industries over long cycles. If we can give a little bit of encouragement to people to, as Josh says, don't make mistakes in your portfolio. Don't do really stupid things. Don't just punt on Tesla all day long. If you want to gamble and have some fun, great, but be less wrong in your investment portfolio, and then spend most of your time investing in yourself, investing in your relationships.

In many cases, that's the way things are going to go well for you and maybe in future volumes we emphasize that a little bit more Josh. I don't know because the human and social capital piece... I mean, I mentor a number of younger people. It's all about human and social capital. What are you learning? Who you're meeting, who you're trying to help. How are you making mistakes in an environment where you can learn from them? When we talk about how I invest, it's how I invest my money. It's really how I invest my capital.

Josh: I say to myself, when young people like, what should I invest in? And then you don't give them ticker symbols. You give them life advice. They're like upset about it. Dude, any ticker symbol I could've given you, I promise that information is worthless probably within five minutes of you hearing it.

Brian: Although the funny thing is I spoke to a group of young investors on Friday and I said, "You know what? Over the weekend I would rotate into small value on a one day trade." The thank you notes I've gotten, I nailed it. I absolutely nailed it.

Josh, I know your firm does financial planning at the core of your offering. Can you talk about the importance coming out of all these different conversations from people?

Josh: First of all, I actually would go so far as to say that an advisor making an investment portfolio recommendation to a client who hasn't done a financial plan with them, is like malpractice. I understand it's not quite as life or death as a doctor prescribing a medication without diagnosing anything, but it's pretty close, right? It's life and death of someone's savings maybe. We will not. I don't care how much money. Somebody says here's $50 million. Just invest it and make it into $60 million. That's not what we do. Barry actually was the one, I think, even though Barry is not a financial advisor or a financial planner, Barry was the one that had that insight before we really built the firm around financial planning.

We had a guy call up the farm, I love you, Barry Ritholtz. I just want to give you my money. Just invest it, but I inherited it. I have $4 million. I'm going to give a million dollars to four different financial advisors and then whoever does the best for me gets the whole thing. He said this to me because I haven't like answered the calls at this point. I tell Barry the story goes, "Give me this guy's phone number." I swear to you, he calls [inaudible 00:33:47]. Just listen schmuck, this is the stupidest thing I've ever heard. Let me explain to you why, and I am financial advisor accustomed to like the customer's always right, and Barry's just listen to me. You have just set up the world's worst incentive system. You have just literally encouraged four people to swing for the fences with your money because coming in second place and third place isn't good enough and if they blow it all up, so what? They're not getting the whole thing.

Whoever hits the lottery with your money, you're going to give the rest of it to, but you have four people taking as much risk as possible. They have nothing to lose. You have everything to lose. It's the worst thing I've ever heard. I'll tell you what? We don't want to be part of the running and if you have enough money to meet our minimum when this experiment is over, feel free to call us then, and then I think he slammed the phone. I swear. I think he slammed the phone down. I was just like, you could do that. You could tell an investor the truth like that.

Now, I don't remember... It might be apocryphal to say that the guy ended up calling back a year later and gave us the account. I'm not 100% sure because this is like 2011 or something or 2010 but anyway, just watching that process play out, I think was such a wake up call to me that there is a better way to do this and it's got to be built on planning. Because otherwise if the benchmark is making someone "happy" based on their performance versus an index, you can never really win that battle on every timeframe over a long enough time. You could win it for three months and then lose it in the fourth month. You could win it for three years and then lose it in the three years and three months. You could lose that battle over six months, but win it over 10 years, but lose the client in that initial six month period.

You have to be managing towards something that's meaningful, and so for us, we built the firm on investing toward people's individual desires and needs and wants and objectives. When we did that it was like rocket fuel. The practice exploded and became a firm because it's what people really want at the end of the day. It's what rational people really want.

Brian: Part of the job of the financial advisor is to explain like that's what this is all about, because people do show up and they read us or listen to us or watch Josh on TV and they're like, "Oh, I want to own a high performing stock or a high performing portfolio overall." The industry generally needs to do a better job at saying that's not what this is about. There's nothing wrong with wanting more and growing a million into 2 million or whatever the numbers are, but as Josh just articulated explaining like what's at stake here. If you're not doing that in 2020 going forward, like what the hell are you doing? I don't know.

Josh: I think the next evolution now is already at hand with direct indexing. We began using direct indexing earlier this year. I look at it as a giant leap forward in the ability to deliver outcome driven portfolios and the outcome being not tilting toward a factor because you think you'll beat the market, but the outcome being the client's needs being met and satisfaction, but then introducing these ideas of like clients that have really big exposure in their lives to a certain industry, or even a certain stock, being able to mitigate that risk.

We talk to young multi-millionaires in the Bay Area, in San Francisco, in Palo Alto. You talk to somebody, my net worth is $8 million and six and a half million of that is Apple and then I'm going to buy that. How the hell is that financial advice, right? That's like one example of a zillion I could give you, but building portfolios now that are highly customizable within reason, not in silliness, but within reason is the next evolution of our industry and 0% commissions are driving that. Technology is driving that and then just this idea that everything on the internet is customized.

There are people that are romantically interested in people that are dressed as furries, people that are dressed like baseball mascots. They have a place for that on the internet. It's a customized community just for them. There's probably 50,000 of them worldwide, but they have found each other. This is what the internet has done. If I like Brian's sweatshirt, but I want it in a specific shade of green on the internet the way Cameron's is, I can find that. Of course that's where portfolios are going. We want to build indexes, but we want to build customized indexes for what each client wants or needs. That includes excluding gun manufacturers from a portfolio. That is where I sense things are going and it's very much in line with this idea of outcome oriented portfolios.

If a client has a portfolio that's been customized for them, there's much less of a chance that they will throw the whole thing out the first time the market endures volatility, right? Because it's bespoke. It's something that was built just for them. It's not a pile of 70 ETFs. I feel that that is a giant leap forward that the industry is in the process of reckoning with right now.

Brian: I'll throw just another word into the mix, which is risk. I think it is central for the modern advisor to assess the overall risk profile of a client or of a family that they work with. I don't mean in the narrow sense of giving them a questionnaire and asking them, "Hey, if the market fell 30%, how would you feel? Good, bad, indifferent? Like that's dumb and old school, but to our earlier point about people are managing their financial capital, but it implicates how their skillset and their job. The guy in the Bay Area who works for a tech company, who's loaded up on tech shares. It's the job of the advisor to say you're probably taking way more risk than you think you are, unless you have some lottery like objective here that you want to go for broke and if that's what they want, maybe you help them. Maybe you don't, but I think we're also in a new era.

Josh talked about on a tactical sentence. I think we're in an era of helping people understand what it is they really want to achieve, not just their goals, but their purpose and creating not only a portfolio, but money life generally that maps up to that. Their saving behavior. Their spending. What their approach to charitable giving is, so on and so forth. Like there's so much left to be done that the advice business hasn't because the history is mostly just about selling products for a commission. That's dead.

Ben Felix: I was checking my own biases when you were talking Josh, because earlier on, we briefly talked about how you feel that it's okay to have a reasonably large percentage of your portfolio that you are expressing your values and your feelings through whereas I'm different. I don't agree with the all of the holdings within my portfolio, like I don't have an ESG tilt. That doesn't mean I hate the environment and love companies that are evil. I just express those values in different ways. When you're talking about portfolio customization, like we've looked at direct indexing and did not come to the conclusion that that's the future. What Brian said is what has resonated with us more, which is the idea of not just goals-based financial planning and not just helping people figure out what their objectives are, but taking a bigger step back and helping people think about what their purpose is and how money relates to that. That's where I think there's a huge opportunity for our industry.

Now to be fair, I completely understand how direct indexing can fit with that. When we looked at it, that's not where we arrived at.

Brian: I think they're complimentary. I think what Josh is talking about is the ability to really slice in a way that we weren't able to even like a few years ago. You can do a lot at the portfolio level and then that gets embedded within sort of a better conversation.

Cameron Passmore: One of the things you talked about, Brian, when you joined us last time on the podcast was the whole concept of funded contentment. There's a lot of discussions around that in these stories. Maybe you can comment about the relationship between money and happiness and what you observed in these contributions from the writers.

Brian: Well, let me take a step back when Josh and I were kind of imagining the book. We didn't give any instructions. I just want to be clear like we said to the 23 others, read Josh's blog. You got 1500 words and a blank piece of paper. You don't have to just talk about your portfolio. It's really about money life, feel free to talk about saving and spending as well as investing. That was really it. Did people ask follow-up questions? Well, yeah, of course they did but what struck both of us immediately when we began getting these drafts was like, holy. These are like just personal stories.

I coined this phrase, funded contentment, true wealth is the ability to underwrite a meaningful life. Maybe that's one good way to frame it but I think virtually everybody in their own way talked about what it meant to lead a happy fulfilled life and more often than not what it meant to help others, especially their family and maybe in some cases, community or broader ideas and charity and how they've kind of arranged their money life accordingly. Perhaps the most gratifying part of this was finding 23 super qualified people. Many of them were friends and not knowing what they were going to send, and either Josh got it first, or I got it first and we were both like, holy shit. Did you read Bob Seawright's chapter about his lake cottage? Did you read Leighann Miko's chapter about growing up in pretty dire straits?

Shirl Penney is worth a fortune. He's built this amazing business. I have all the respect in the world for him. I didn't know he was homeless as a teenager. They lived in a car. I mean holy. When I go back to that earlier point about permission or just license to tell your own story and to do really whatever it is you want, the fact that people went there, I'd like to think that this is going to inspire others. Even in their own mind, even at the back of the book where we put some blank pages with lines on it to tell their own story and I hope, and it's an aspiration of mine that as the book hits our industry, the financial advice business, that advisors read this and they're like oh, I'm allowed to talk about these things.

I have permission to talk about these things, and now I can share maybe some things with clients and they can share things with me, and kind of the empathy factor that allows us to get into not just big picture questions about purpose, but tactical issues about what should be in your portfolio or not. Especially now with the technologies that are available. It kind of unites the whole thing, but until you open the door, you can't go into the room.

Josh: I like what you said about permission. Imagine like reading Shirl's chapter and reading Tyrone Ross's chapter, and then dictating to them from on high what their asset allocation has to be to accord with your own personal investing philosophy. The notion of it is just absurd. Look what these people have come through, look what they've achieved and look how closely intertwined money and security and their future happiness. Look at how these things all mix together. How could you possibly think that you know better than they do, how they should be investing their own capital. I think that's a really good point, Brian.

After reading all of these essays from all these people, did you change your mind about anything? Josh, I want to ask you specifically in the context of dealing with Ritholtz clients, is this going to change anything in the way that you guys approach client relationships or conversations?

Josh: I hope that the 33 employees at Ritholtz Wealth get a chance to go through the book and they'll see some of their friends and colleagues in there, of course. I didn't make it required reading. They have enough to read with all the blogs we do and all the research we put out, but I do hope that, I suppose, just from being in contact with the concepts in the book, that it's a reminder and an affirmation to them of why what they do is so important. That's what I'm hoping becomes the takeaway.

Brian, was there anything that you change your mind about after reading these essays?

Brian: Yeah. I actually went and bought the property next to Bob Seawright's and I'm building a huge miniature golf complex there that's noisy and loud. That's the one thing. Change isn't the right word. I feel like affirmation is the word and just good old fashioned confirmation bias. Let me put it this way. 23 authors, I'd say with eight or nine of them, I had relatively long live phone conversations that were quite raw about them being nervous to say some of the things that they had put in their chapter. Okay. Now, these are all people that are relatively prominent. They've had enormous amounts of success and they were pretty kind of wound up about, can I go there? Can I talk about these things?

Perhaps the main affirmation is that these are topics that people want to talk about and I don't just mean like which index fund to buy or what your sector rotation strategy is, but how do you align saving, and spending, investing to map up to your goals and your values? The fact that we had earnest struggles among some of these authors to really go there so to speak tells me that there's so much more work to do in the industry to help others go there. Which doesn't mean that we're therapists. We're not talking to people about their deep family histories or anything like that. This is a positive, it's looking forward. What do you want to do? But at the same time, you do need to crack the shell a little bit to get into what's really important to you.

I think the industry for too many decades has been, hey, what should be important to you is to have a portfolio that nominally beats some random benchmark like the S&P 500 and if we do that, we're good and if we don't, we're not. What a load of (beep). I just hope that era is receding. It's not. It's going to be around forever. Much of this game, it's about choosing the benchmark that you want to beat before trying to beat it. We're all friends with Daniel Crosby. He says your life is the benchmark. What is it you want to do? Invest accordingly.

Josh, in a world of direct indexing and totally customized portfolios where your life is hypothetically the benchmark, what is the actual portfolio benchmark in that case? Or do you even measure performance? How do you guys think about that? Or how what'd you think about that?

Josh: That would be a function of how far away you're straying from the beta of the benchmark. If you're straying so far away that it's unrecognizable and no longer representative of what you're doing, then I think that's self-explanatory. But if you're saying we want to pursue a value/momentum barbell approach, and so the benchmark on the equity side would be some kind of a blend of hypothetically Russell value depending on what eggs we're putting on what basket. You can certainly play that game. For us we'll put up the MSEI country world and the Barclays agg and we'll call it a day and if we have a client that's not intelligent enough to look at a three month, nine month, 12 month period of us versus that and think that we're doing great, or we're doing terribly, then we have failed in the onboarding and subsequent indoctrination of that client and it's not their fault, it's our fault for letting them in, but we really don't have those situations.

Most of our new clients are people who've already been through the benchmarking nonsense with one or two advisors. They started off with the guy whose specialty was managing the managers. They played that whole game. They were unsatisfied with that, of course. So then the next game they played was, oh, now I have a real money manager and it's a guy that couldn't cut as a hedge fund so he's now in private banking or whatever, and he's got five CFAs running around his office picking stocks, and that doesn't work, of course. Then that person comes to us and says, "All right. I've had my fun. I've figured it out, so what are you guys doing for me?" When we explain to them we're going to build them a portfolio that answers the real questions they have, which are, will I be okay? Can I accomplish all of the things I want to with my money? Have I actually even thought about what I want to do with this money? Which generation is this for, the current or a future generation?

Can I handle the volatility accordingly if it's for a future gene... right? Once we go through that process and then we look at their tax situation, that's where the direct indexing starts to come into play even more so being able to address tax issues and then we look at their insurance coverage and then we look at inheritance stuff, states and trust, that once we've gone through all of that with somebody, if their IQ is above 110 and they're like successful and normal people, that's a client for life. We're doing things for them that they understand how incredible the results will be over time if they stick to what we're doing for them. That's the way I look at this business.

I did it the exact opposite way before for long enough to know that even if the way I'm doing it is not the highest elevation of this art form of giving advice, it's good enough and it's way better than what most other people are doing for them. That's been our approach to the business and I think the tools that we use, whether they're ETFs or funds, they're helpful but it's not really the story. The story is we're answering the big questions for them and we're keeping them focused on those big questions when it really counts.

How does this book fits into your own personal mission inside and perhaps outside of the industry?

Brian: I guess I'm at sort of the next fork in the road or juncture in my career. I have such a non-linear weird career. I think I've had four careers, maybe five, depending on how you count and along the way, probably like a dozen plus jobs, politics, then academia, then manager selection, then behavioral finance, then this new thing that I'm watching right now, behavioral finance learning platform. I feel really good about it. Like I'm really proud of what Josh and I did with the sketches contributed and the depth of the conversations and friendships I've formed with now everybody in the volume.

Whether it's inside my career or just generally living in this weird world we're in right now. The ability to create broader spaces where people have permission to talk about things that really matter to them, that matters to me because I remember, and this is three years ago, The Geometry of Wealth had just come out. I live in a diverse neighborhood, North side of Chicago, Wrigley Field and the lake a mile behind me. My neighbor two doors down, working class, saw that I had this book called The Geometry of Wealth. Oh, I don't have real money. I couldn't read that. I probably wouldn't know what you're talking about. What I said to her was, you know what? Whether or not you're rich, I don't know but you actually might already be very wealthy. Why don't you think about it? We can talk about it.

To me, last thing I'll say on my journey, this book is sort of the latest step stone for me to hopefully help people talk about things that are really important to them.

How do you personally define success in your life?

Josh: Oh, man. I don't have a good answer for that. I just keep going. I don't even know why I'm doing half the stuff I do. I'm doing what I want most of the time. Sometimes that's not true, but most of the time it is. I'm the boss now. I could just say I don't do this anymore if I really want it to not do it, but I really like what I'm doing. I like who I'm doing it with. I like my clients. I like my coworkers. What else do you want in life? Maybe I've found success. I don't know, at the same time I'm not like, all right, I'm good. If everything stopped right here and this is like the highest pinnacle I've achieved. I don't think I'd be happy with that. Maybe I haven't found success. I don't really have a good answer for that because I really haven't figured it out, but I don't stop.

I would just stop if I didn't like it, but my situation is like not that bad. I just got to spend an hour with the three of you guys having like an amazing conversation and it's work. It's like, I'm on the clock right now. How could I be like, I'm not successful if I'm able to take an hour to do that but by the same token, I'm very restless. I feel like there's always more and that's probably going to be the death of me, but I'm not upset about it. I think, well, maybe one day we'll have this conversation in five years and I'll have a more fully formed idea of what I consider success, but I think I have both achieved it and not even come close to achieved it. Is a little bit of a push and pull each day.