Aaron Aaron

Aaron Watkins Aaron

Director of Digital Strategy at Johns Hopkins Medicine. He

Johns Hopkins Medicine. He

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Hy-Vee Inc




Founder - Baltimore Parlay

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Aaron-Watkins | Aaron Watkins Aaron is the Director of Digital Strategy at Johns Hopkins Medicine. He also co-founded Baltimore Parlay to connect with people around Baltimore interested in user experience and information architecture. He’s […] | Aaron-Watkins Aaron Watkins
Aaron Watkins - BaltimoreTech.net BaltimoreTech.net New here? We'd love to meet you!Introduce Yourself Thanks! We just got a little bit cooler because of you. Events You Attend

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Aaron-Watkins | Aaron Watkins Aaron is the Director of Digital Strategy at Johns Hopkins Medicine. He also co-founded Baltimore Parlay to connect with people around Baltimore interested in user experience and information architecture. He’s […] | Aaron-Watkins Aaron Watkins
Aaron Watkins - BaltimoreTech.net BaltimoreTech.net New here? We'd love to meet you!Introduce Yourself Thanks! Events You Attend

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September 18, 2015 123 CommentsMy Businesses, Value InvestingBy Joshua Kennon Thoughts on Starting the Global Asset Management Firm A few of you have expressed interest in the behind-the-scenes process of launching the global asset management business Aaron and I are establishing to provide a mechanism to take on outside funds alongside our own; a natural extension of what we've been doing for so many years privately. Sharing it will help me clarify my thoughts, too, so consider this the first installment in a series that will probably cover a lot of ground. As we work on getting the firm up and running either by the end of this year or the first half of next year, I've spent the past few months reading through thousands upon thousands of pages of regulatory filings for financial institutions in the United States, throwing myself into it with the obsessiveness that is a core part of who I am. I want to understand who is already managing money, on what terms they are doing it, how much they charge, the structures they employ, the business models they prefer; all of it. Even last week, when Aaron and I went to visit his parents at the lake, I showed up carting a stack of 500+ pages of SEC forms and a pocketful of highlighters, off in a chair and muttering to myself, pen flying across the page with notes. It's led me to three realizations. First, Aaron and I are in a wonderfully unique place compared to nearly everyone else who has gone down this path. We have, as Charlie Munger might say, the luxury of operating according to our core principles and ideals because we don't need the income. We can take on people we like, turning others away if they aren't the right cultural or temperamental fit. Not having to sing for our proverbial supper changes the ballgame entirely. We are selecting the client as much as they are selecting us. Secondly, it made me realize how immoral some major players in the industry are by preying on the ignorance of investors. By the end of the first thousand or so pages, I probably sounded like Elizabeth Warren on a stump speech about Wall Street regulation, apoplectic about the need for major reforms. God help the RIA industry if I ever sit on a regulatory board because it will be like the Red Wedding. I think it would be an extraordinary public service to metaphorically burn some of these firms to the ground. It makes me appreciate the honest, good ones even more when I come across them. And they do exist. Though they are a rarer breed, there are people out there who truly care about their clients, who are rich themselves (and in many cases, much richer than their clients), and who always appear to be doing the right thing, even if it means their firm isn't as profitable or large as it could be. Thirdly, I have arrived at the conclusion there are really five types of firms operating in the United States today. The layperson throws all of them under some generic title like "portfolio manager", "investment advisor", "broker" or what have you but the differences are meaningful. Honest-to-God asset management firms (falling into one of two, or both, services) Private individualized asset management, often for high-net worth individuals However, if you start to separate the divisions, you see this is the real layout of the land. Clients and shareholders came to him, bought into his business, and he, along with his analysts, found specific securities to acquire with the client money, earning income from the activity. They setup an ETF, license the rights to use a certain stock market index (e.g., creating an S&P 500 ETF and paying S&P for the intellectual property), taking it public and earning a small management fee, hoping the volume makes up for the low expense ratios. Fees for real asset management services scale. There's almost no way to make them affordable for smaller investors (hence the focus on pooled mechanisms or high-net worth requirements). Fees are unique and not comparable, too, making it extremely important to read the fine print. For example, one revered asset management firm charges a flat 1.50% on all account account balances, with a minimum opening requirement of $5,000,000. It doesn't matter if you have $5,000,000 or $100,000,000, you're paying them 1.50%. The actual effective fee, however, is much lower because it excludes cash in the calculation of the fee and, as a matter of practice, the portfolio managers almost always have 8% to 20% of client portfolios in cash reserves. Client portfolios are typically fully paid for, in cash, with no margin debt. Clients hold the portfolios themselves in a custody account at a bank trust department so the firm doesn't even have access to the money. The international scope of the service - clients end up owning shares of operating companies around the planet, collecting dividends in dozens of currencies - ends up costing, under most conditions, a mere 1.25%, which is fantastic for the tax harvesting and risk reduction it permits. They can even do custom mandates (e.g., "I'm ready to stop working and want to collect at least 3% to 4% spendable cash per year without a risk of running out of money, so can you only find companies around the world that have strong balance sheets, low bankruptcy risk, stable political operating environments; make sure no more than 2% of assets are put in any one firm, and have the dividends direct-deposited into my checking account once a month as they pile up?"). Another, in contrast, charges 0.75%. It looks much cheaper. However, they then turn around and put client assets into underlying securities and proprietary hedge funds with significantly higher fees, some of which - I kid you not - in turn invest in other third-party funds and securities with their own layer of fees! It is impossible to tell but it very well could end up being 2% or even 5% or more by the time one got to the bottom of it all depending on the performance. Worse, you didn't even know what you owned or how much debt was being employed. No sane person should be working with this firm, yet they have billions of dollars under management. Some asset managers are generalists, hiring specific experts to oversee certain categories (e.g., Vanguard or American Century). Case in point: I recently read a post on the Boglehead forums by an investor who approached one of the better-known asset management firms. You might approach one and say, "I want you to serve as co-trustee for five trust funds I'm establishing for my children, watching out for my interests long after I've died. I want you to manage the trust principal, too, by only purchasing stocks with dividends that have been increased every year for 25 years, and rebalancing once per year on August 15th. The costs are going to be significant, but the peace of mind is worth it. You might say, "I have this enormous block of Microsoft I acquired over the years during my time with the firm. There are huge unrealized capital gains and I'd like to diversify while lowering my tax bill as much as possible. You might say, "I have this block of apartment buildings I want to donate to my alma mater but I want my grand niece to receive a private pension from the income for 12 years following my death. All of this can be done. Some of these firms charge flat rates - e.g., a minimum retainer of $10,000 or $100,000 per year. Some charge as a percentage of assets. Some do both. For example, I saw one major practice in the United States that charged what appeared to be a jaw-dropping 2.25% to 2.55% annual fee on the first $5,000,000 in assets under management plus certain hourly charges. Comparison to the benchmark is wholly, inexcusably inappropriate because the fee is not just for asset management services in this case. Another arranges private military personnel to drop in and save you if you are abducted abroad or will secretly chip your children so they can be tracked anywhere from satellites.) This is one of those areas that the division between lower / middle classes and the upper class become painfully evident. As I explained in an older post, you'll hear people who have no idea what they're talking about suggest lottery winners forgo financial advisers to save on fees, buying Vanguard funds instead (mistaking the advice of some intelligent people to avoid "helpers" - which is not what the original authors and commentators were talking about only they don't know the difference). As I said then, and reiterate now, it's moronic; indicative of a person attempting to take the most rational situation for a reasonably successful office worker making $50,000 a year and scaling it to amounts he or she neither understands nor comprehends. To try and save themselves 1% to 3% per year over the index fund, they'll cost themselves 10x or 100x that in opportunity cost on an after-tax, inflation-adjusted basis. The sticker-rate performance relative to the benchmark is not what matters. The grand irony, of course, is that it takes a degree of sophistication to be able to spot which wealth management / financial planning firms are fair deals, adding significant val

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