“We often take for granted the very things that most deserve our gratitude.” -Cynthia Ozick (American writer)
There are many good quotes about gratitude, but I find the simplistic brilliance of this one particularly meaningful. If we take a few minutes to contemplate the insane complexity of the systems that comprise us and the world around us, it’s arguably impossible not to feel humbled and grateful.
Fulfilled, happy, flourishing
As I’ve recently learned from Dr. Paul Conti via the Huberman Lab podcast, “agency & gratitude” are the attributes that happy people tend to have in common. There are underlying layers of these attributes – such as the function-of-self and structure-of-self (each with various sub-components) – but the high level of “agency & gratitude” is a helpful lens through which to view our lives in aggregate. In investment speak, if the portfolio of my life consists only of two funds – an agency fund and a gratitude fund – then I can view my overall fulfillment and happiness through the absolute levels and trajectories of those funds. I’ve heard much more about gratitude over the years, but agency, which adds some degree of ownership/control to the equation, is seemingly essential as well.
Aligned with the teachings of David Bahnsen, what Dr. Conti is engaged in is the study of human flourishing. Humans are incredibly complex and unique, so this is no simple task; thus, he has developed an approach that allows people (and their therapists) to break down our lives into digestible, addressable components, part of which has to do with 3 “drives” within us: the aggressive drive, the pleasure drive, and the generative drive. If these drives are out of balance, our lives will be, too. I find the generative drive to be the most intriguing of the three, as it’s Conti’s way of expressing the omnipresent force that is human creativity.
While Dr. Conti focuses on people’s overall mental health, I can’t help but think that his teachings are also valuable in areas near and dear to my heart as a financial professional – namely wealth management and, of course, Alts – so that is what we’ll aim to explore further today. Here we go!
Your advisory relationship
Back in September, David Bahnsen wrote a Dividend Café on the topic of What to Look for in an Advisor. If you missed it, then I encourage you to check it out, but if you prefer the Cliff’s Notes version, here’s David’s summary from the article:
- Trust (coming from trustworthiness – a blend of gut/instinct and their willingness to tell you things you do not want to hear)
- Competence – rooted in intellectual curiosity and passion for financial markets
- Guiding principles – there is a process that drives how things are done, rooted in real beliefs.
- Depth and breadth of services – integrated wealth management that goes into all elements of financial needs and solutions, including tax, estate, and more
- Operational excellence – the experience should be pleasant and easy for you, the client.
- Alignment – the advisor should be paid by you, should work for you, and should not work for those who are counter-parties to you. A fiduciary standard of care is a must.
BONUS – thought leadership, intellectual capital, and a strong focus on content as a service
While the above has a ton of utility for selecting a financial advisor, when we contemplate agency & gratitude in the context of a wealth management relationship, it raises other considerations entirely. For instance, perhaps your relationship largely checks all of the above boxes, but it still doesn’t feel quite right. In that case, viewing your relationship through the lens of agency & gratitude may provide additional insights for pinpointing what’s wrong with your current advisory solution.
To me, the agency component refers to mutual respect. Especially as it relates to financial planning, your goals, and constructing an appropriate investment framework for your situation, you should feel heard and that your input is valued in the process. Prospective clients often share with me that they’ve had bad experiences with other firms, where they answer a couple of questions, get fit into basically 1-of-5 risk profiles, and then – voila! – they get the same portfolio as everyone else in that same risk profile. Instead, the feeling of agency will be manifested via a thoughtful approach that a) really considers the unique needs of your situation and b) utilizes an appropriate level of customization to help you achieve your objectives.
Gratitude is perhaps more obvious, but if you don’t feel grateful for your advisory relationship (or cannot bring yourself to feel some amount of appreciation after contemplating this), then it’s probably time to look elsewhere.
From the advisor’s perspective, if we don’t feel we have the necessary amount of agency in a given client relationship or aren’t thankful for certain clients, that can help drive decisions about the future of such relationships.
Alternative Agency
One of the characteristics that often accompanies alternative investment strategies is the sacrifice of daily liquidity. Arguably, giving up liquidity could also be viewed as giving up some degree of agency. Perhaps that’s true, but hear me out.
Reduced liquidity is required to make private investment strategies possible, as they require longer-term holding periods. But, beyond that, limiting liquidity is also a protection mechanism that allows investors to retain greater control over what they own (or what is held on their behalf by the manager). I’ve lived through painful examples counter to this when panic selling comes to bear in financial markets. Imagine you own a standard (daily-liquid) mutual fund, where you really like the underlying portfolio the manager has constructed; both you and the manager have an aligned goal, which is to own those underlying assets for the very long term. Then, imagine other investors of the fund begin selling their positions as quickly as they can for reasons that have absolutely nothing to do with the fund itself (and everything to do with sheer panic selling in financial markets). At the end of each day, the manager is forced to raise enough cash to meet the investor redemptions. At first, this may be possible by using credit lines, but it soon results in forced sales of portfolio holdings. The fund value drops, leading even more investors to redeem even more shares; more forced selling further reduces the prices of the underlying holdings. Rinse and repeat. Quickly, you lose all control as an investor, as there’s no way to know when the redemptions will stop, what will remain of the portfolio you previously believed in, or if the fund can even survive.
Now imagine that same scenario, but – in this case, the manager can limit redemptions of the fund to help maintain the integrity of the underlying portfolio. Do investors experience price volatility? Sure, but that’s from other investors (like the above daily-liquid fund) selling assets. Instead of being forced sellers, the manager with staying power can access credit lines to play offense, potentially taking advantage of a buying opportunity that only comes along a couple of times in a career. THAT’S agency for both the investor and the manager, and something I’ve come to appreciate increasingly throughout my career.
In addition, back in Nouveau Accredited, we covered investor qualifications required for investment in specific alts structures. For investors who have achieved the status of accredited investor, qualified client, and/or qualified purchaser, there is a natural degree of agency in being allowed to participate in these offerings in the first place.
Gratitude for Alts
From the advisor perspective, I’m very grateful for Alts, as they give us tools and investment characteristics that don’t exist in public markets. Depending on the client’s situation, I believe I can often construct better portfolios using Alts than without them. But that appreciation for Alts and what utility they can provide comes from years of developing an understanding of what they are and what they are not.
From the investor perspective, how might one increase gratitude for Alts? Step one is to get educated on this realm of the investment landscape. With that in mind, I’ll focus on private equity to close us out, as it often gets an undeserved bad rap (for more on that topic, check out David Bahnsen in Episode 132 of the Capital Record podcast). For starters, consider what is involved in running a PE strategy.
In the early life of a fund, teams are scrambling to raise capital via constant outreach to potential investors, including institutions, banks/wirehouses, independent advisors, family offices, and even individuals. That process involves a lot of correspondence and often a “roadshow” (aka extensive travel and meetings to educate potential investors and garner commitments). Concurrently, analysts and portfolio managers work to identify potential investment opportunities (e.g., properties, businesses) where the capital can be put to good use on behalf of the investors (LPs) consistent with the fund’s strategy.
Once an underlying investment is made, there’s a whole process of optimizing it to drive the underwritten outcomes. In real estate, that could involve renovation projects to drive value/occupancy and reconfiguring local operators; in other businesses, it may mean working directly with management on strategy, deploying capital for improvements, financial restructuring, M&A, spinoffs, improving operations, etc. These efforts apply to EACH underlying project/property/business, and it all needs to roll up to the fund level through the various lenses of compliance, legal, fund administration, operations/finance (think capital calls and distributions to LPs, as well as funding underlying holdings), and valuation. In other words, it takes a small army to run a successful PE firm, and investors can be grateful they don’t have to do it themselves.
This edition was the first Alt Blend I’ve written entirely on a single flight, as all of us at TBG are heading to beautiful Newport Beach for our annual team retreat – a time when agency & gratitude are front and center. Thank you for reading, and thanks to our clients for the agency and the many reasons for gratitude they afford us every day.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
