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Ep 5: Two blokes from Birmingham
311 Plays1 year ago
Over the years I’ve found that some of the stanchest and most effective advocates of evidence-based investing are those who’ve actually worked in the active fund management industry and seen its shortcomings at first hand.
Lars Kroijer is one example, and another is Preston McSwain. Preston hails from Birmingham, Alabama, and worked for more than 20 years selling and marketing complex investment products for a range of firms including Lehman Brothers.
But Lehman’s collapse and the ensuing global market meltdown prompted a complete rethink about investing and how best to serve consumers. He now runs Fiduciary Wealth Partners in Boston, managing the wealth of high-net worth individuals, and primarily using Vanguard index funds.
The latest episode of the TEBI Podcast tells his remarkable story.
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Transcript
Introduction to Tebi Podcast
00:00:04
Speaker
Hello and welcome to the latest podcast from Tebi, the evidence-based investor brought to you by Regis Media, connecting advisors with clients. I'm Robin Power. This week's show is all about one man's journey from one side of the active passive investing divide to the other.
00:00:24
Speaker
On the face of it, Preston McSwain and I have a great deal in common. We were born a few weeks apart and we're both from Birmingham, though in his case the Alabama version.
Preston McSwain's Background
00:00:35
Speaker
Preston runs a firm called Fiduciary Wealth Partners in Boston, Massachusetts, which serves high net worth individuals and uses mainly low-cost index funds.
00:00:47
Speaker
He's also a supporter of the Transparency Task Force, a UK-based organisation of which I'm an ambassador that's campaigning for fairer, more transparent fees and charges in asset management.
00:01:00
Speaker
But Preston has an interesting background. He was, for many years, a strong believer in active fund management. Indeed, he was working as a broker for Lehman Brothers at the time of its collapse in September 2008. I've been to visit Preston McSwain and this is his story.
00:01:23
Speaker
Preston, we've communicated so much on social media. I feel I know you quite well, but this is actually the first time that we've got to meet. Tell me about your firm and how it started because you started in the investing industry doing something really very different to what you're doing today, didn't you?
00:01:46
Speaker
Yes, and maybe even a little bit of no. If anything, I've come full circle. So I started my career at State Street Asset Management. It's now called SSGA, home of spiders and SPY, et cetera, helping to put together presentations, doing analysis of how to appropriately
00:02:06
Speaker
package and present index funds to various investors, primarily institutional investors. I then, however, spent, yes, a better part of, oh, 20, 25 years of my career across the asset management industry, the trust industry, and large investment banks.
Shift from Active to Evidence-Based Investing
00:02:25
Speaker
Developing, marketing, selling, most any active, complex, structured product strategy you could imagine.
00:02:31
Speaker
Shame on you Preston, shame on you. So you were actually marketing and selling actively managed funds. How did that go? It went quite well, especially for the firms that I worked for. And there certainly were and I'm sure are time periods when some of those strategies, well some of those strategies have performed well and will perform well.
00:02:56
Speaker
The interesting thing happens when you break away from the large firms and break away from the constant, quite frankly, internal marketing that's going on. Break away from the drink and the Kool-Aid. You tend to step back and consider different points of view, and that's what I did when I started the firm.
00:03:17
Speaker
So when did you start to realize that the funds that you were marketing and selling possibly weren't all that they were cracked up to be?
00:03:27
Speaker
So I think a lot of people in the industry look at all sorts of reams of data. And I think at least a lot of folks that are good students in the market realize that asset allocation tends to add the majority value in client portfolios, not necessarily products or the sexy new thing. So when starting my own firm, if anything,
00:03:52
Speaker
I kind of went, again, back to the future, back to getting anchored on independent analysis versus analysis that was being presented to me by internal folks. I didn't have as many potential conflicts as it relates to knowing that if I sold this very interesting, attractive strategy, I was going to be paid a lot.
Core Values in Investing
00:04:17
Speaker
So tell me what your firm is all about. What are its core values, if you like? I think it's best encapsulated in an experience I had with a lot of clients. A family who was working with me through various asset management firms, large investment banks, and then became one of my first clients when we started the firm. And I went down to meet with this family at their home.
00:04:49
Speaker
And sitting on the couch, the husband and wife turned to me and said, hey Preston, we've been working with you for a long time and we hired you to manage our money and to give us portfolio advice.
00:05:04
Speaker
And we've been very pleased with that. You've done a wonderful job. You know what we've come to realize we really pay you for, however? And they said, transparency, simplicity, and peace of mind. And just then, really a light bulb came off. First of all, I joked with them and I said, hey, if you don't mind, we're going to use that. But it really did anchor me even more on what, Robin, what you talk about a lot of times, what does the evidence suggest really adds value?
00:05:32
Speaker
about evidence-based investing. This is a phrase that we're hearing a lot more regularly. And possibly we're hearing the phrase passive investing, possibly less regularly, although clearly passive investing has been hugely popular here in the US, particularly in sort of recent years and months. What's your own view of those two different phrases?
00:05:59
Speaker
First of all, as I joked with you earlier, when we met Robin, you used the word passive to describe index investing. And I told you that you owed me $5. And I'm joking about that to some extent. But we actually do have a jar around here that any time you use the word passive, you got to throw $5 at it. So what don't you like about it? It's a phenomenally emotional word.
00:06:23
Speaker
And I think it gives the connotation of, quite frankly, what the definition of passive is. And if you look in the Oxford under bridge, to the Webster's, etc., it says inert. It says docile. It has ericinonyms such as acquiescent.
00:06:41
Speaker
Who wants to invest in something that's inert? That's docile. Exactly. It's a very bad marketing phrase, isn't it? Why do you prefer evidence-based investing? I think it's a horrible marketing phrase, but much, much more importantly, it's a horrible descriptor.
00:06:58
Speaker
So we can have all sorts of fun with marketing. And I've spent a lot of time studying marketing, et cetera. But let's talk about what should matter, not marketing, but actually outcomes and what an institution, an individual, a professional actually does. And index investing is, in my experience, actually extremely hard. In fact, I would argue the easy thing to do, maybe the passive thing to do,
00:07:27
Speaker
Maybe certainly the acquiescent thing to do is to give in to what are wonderful emotional presentations that are given by a lot of the investment management industry. You're listening to Preston McSwain talking to me, Robin Powell, on the Tebbe podcast. More from Preston in a moment. But first, a word from our sponsor.
00:07:50
Speaker
Hi, it's Will. I'm a producer from Regis Media. We know running a financial advisory firm is hard work, but we also know the value of high-quality, regular content and marketing. And that's where we come in. We support firms by helping them attract and retain clients through a mixture of video content, social marketing and written articles. To find out more, visit our website RegisMedia.com.
Reframing Passive Investing
00:08:15
Speaker
So you prefer the phrase evidence-based investing, but you've got another phrase, haven't you, of your own that you like even more? I've had a little fun with this, and I'm not sure where we'll go with it. But the other day I was thinking about index investing, and I was actually doing a comparison on behalf of a family that I was going to present to.
00:08:37
Speaker
And of course, they were asking me how index investment strategies performed relative to other investment management choices that they have. When we're making any decisions in life, there's opportunity cost. Are we good on this path? What's the potential cost? So I think relative actually is a very appropriate way to think about index investing. So I have a little fun with it and came up with this term relative alpha.
00:09:05
Speaker
Again, not sure where we're going to go with this, but let's think about that a little bit. How about if you went to a cocktail party and you said, hey, I've identified this wonderful strategy. It's completely liquid. It's extraordinarily tax efficient. And of course, you have to lean in a little bit when you're saying these things wrong. It outperforms most
00:09:32
Speaker
any other strategy in its asset class and peer group over most any time period up markets, down markets, sideways markets that I've been able to identify over decades. My gosh, I just think this thing's wonderful. I bet you get a lot of people to lean in. And I bet you get a lot of people actually to potentially pay a lot of money.
00:09:54
Speaker
for that. I'm sure you're right, and very effective way of getting attention at a cocktail party, even more effective by sort of pitching the idea to the financial media, for example. I just think that words matter in all aspects of life, right? In policy and politics and professions. And we should be careful.
00:10:20
Speaker
as it relates to the words they use, the connotations they give, and the emotional responses that they evoke. And I would suggest that passive, as it relates to describing investment strategy, that many academics, professionals, research studies have shown adds a lot of value relative to most any other choice you can make, should not be called nerd, should not be thought of as docile,
00:10:50
Speaker
Sure. Now, we're up here in Boston, northeast of the United States. I can see the
00:10:58
Speaker
Fenway Park, the Red Sox stadium, out of the window here. But you're actually from Alabama, aren't you? And I noticed in one of your recent posts, you actually quoted an Alabama folk song. What was all that about? Well, so it was actually a Zach Brown song to be respectful of Zach. But the song is Chicken Fried. And he talks about what's really important. And he goes on and has some fun about a cold beer or a Friday night.
00:11:30
Speaker
The love of family and people that are close to you, Frank, are relationships to our children. As I mentioned this morning, I was just at a school play and quite frankly got quite emotional as it relates to something that my little guy was up there talking about. What's really important?
00:11:48
Speaker
I would argue that as it relates to our profession, what really should be important is translating ideas into simple terms so that everybody can understand and giving complete transparency as to what folks are really paying for. It's okay to pay a lot for something, right? I'm wearing a decent shirt and have on a nice watch and, you know, those things make me feel good, right? What's wrong with that?
00:12:17
Speaker
Right? Different strokes for different folks. But I do think that investors should be given more information as it relates to the good, the bad, and the ugly, so to speak. Right? As it relates to the pros and cons of both sides of an opportunity they are presented before they invest. My view is that if that happened, they would have greater peace of mind. Right?
00:12:47
Speaker
they would exhale more when having that cold beer on a Friday night, right? In hints stick to their investment strategy. Sticks to that fund, whether it be quite frankly an active fund or passive fund, through good or bad times. Why? Because the evidence consistently shows that strategies don't blow up, people do, right? That's very well put. I want to finish on a little discussion around transparency, if I may.
00:13:17
Speaker
You're a great believer in transparency and indeed you are now a supporter of the UK-based transparency task force for which I'm an official ambassador. Why is transparency so important for you?
Advocacy for Transparency
00:13:32
Speaker
Why shouldn't it be important to everyone? It would be the way maybe I would answer that. Why should anyone be resisting a freer sharing of information? Why should anyone be resisting? Let's not use a negative word, right?
00:13:47
Speaker
Why should anyone be in favor of promoting a complete free sharing of information? Do you think it will happen? I mean, we had the fiduciary rule here towards the back end of the Obama administration. There's now a question mark as to whether that is going to stand in the future. Are you confident that we're heading to a more transparent future as far as the fund industry is concerned?
00:14:12
Speaker
I think it's up to us. And what I mean by that is that we could have a lot of fun over a cold beer debating this regulation and that regulation. And I do think that certain regulation is very appropriate. I've seen all sorts of things happen in the industry. But you know something, at the end of the day, there's a basic thing called supply and demand.
00:14:31
Speaker
And so I actually really value these conversations. I value what you're doing and value what the Transparency Task Force is doing. Would love for us to do more of it here in the States. Kudos to you all in the UK. If we start the investing public meeting, the professionals in the investment industry demanding more transparency, well, guess what? Regardless of regulation,
00:14:55
Speaker
It's going to come. Exactly. We have to ask for it. There's one final question. As a task force, we are keen to encourage similar like-minded people from around the world to like yourself to get involved in this campaign for transparency. Because after all, it is a global industry that we are up against. Wouldn't it be great to have a transparency task force symposium in the United States, perhaps even in Boston? I'll tell you what.
00:15:25
Speaker
There was a great movie here in the States, I'm sure it was talked about over in the UK, called The Field of Dreams, right? If you build it, they will come. I'll tell you what. We'll sponsor it. We'll help get our sponsors if you come. Deal? That's a deal, Preston. Thank you. It's lovely talking to you. Yes, wonderful. Thank you very much.
00:15:43
Speaker
And let's get out there and create more demand for this. Because again, then the industry will come. And that's it for this week. Thanks to Preston McSwain, to all our listeners, and our sponsor Regis Media. Until next time, from me, Robin Powell, goodbye.