Cutting Out the Middlemen

When it comes to getting solid investment advice and learning where to put your money to grow your ‘nest egg’ for retirement, most of your options are not efficient. Mutual funds, financial advisors, insurance agents, etc. all claim they can manage your money and provide for your financial security when you no longer have an earned income. The options seem limitless, so let’s take a look at a couple of the more popular models available. In doing so, we hope to highlight the difference in service that Ballast can provide.

First, consider the financial advisor that sells you his/her services by laying out a financial plan after assessing your risk profile and determining how much longer you are going to work.  Typically, the process leads to building a portfolio of individual stocks and mutual funds – or ETF’s – that you will put money into every month or every other week (dollar-cost averaging).  This service will typically cost you 1.0% to 1.5% of the amount you have invested with that financial advisor to pay for his/her services.  You also will get charged annual service fees for each mutual fund that are as high as 2.5%, but that are typically only between 0.5% and 1.0%.  These fees pay for the mutual fund managers and their employees, while also giving the owners of the mutual fund a nice return on their investment.  In addition, you are charged with brokerage fees when you buy or sell individual stocks.  In other words, there are a lot of individuals and institutions that get paid by you putting your money into this model.

Second, consider annuities, which are another popular option in today’s world when it comes to principal protection and “guaranteed” returns. Annuities can be complicated – so let’s just keep it simple.  Say you purchase an annuity from a life insurance agent.  That agent is going to get a commission of at least 5% on the day you sign your contract.  So only 95% of your money actually gets put to work by the insurance company.  The insurance company will typically put your money to work in investment grade corporate debt securities or structured securities.  The insurance company needs to earn enough return to pay you back the 5% they paid the agent on day 1, but they also need to cover their cost of operations to generate a large enough return on equities.

Here at Ballast we ask ourselves, why not cut out all of the middlemen? Why not find an investment firm that will put your money to work in assets that a mutual fund or an insurance company invests in and keep more the return on those assets to YOURSELF?  There are investment professionals that provide these services for a flat fee.  With them, YOUR investment portfolio will be structured in a way to fit YOUR needs…not the needs of the thousands of others. THAT is efficiency.

Statement of Beliefs

Statement of Beliefs

The capital markets are a complex web where at the end of the road two parties intersect – those who need capital and those who provide capital.

Despite the nebulous nature of this enormous market place, this intersection can simply be divided into two sides:

  1. ‘buy side’ – those with capital – think of insurance companies, pensions, endowments and individual investors and
  2. ‘sell side’ – those seeking capital or those selling securities on behalf of those in need of capital – think of large or small corporations, small businesses and traditional wall street firms.

The incentive of each is diametrically opposed – the Buy Side wants to acquire the most value at the cheapest possible cost or lowest possible risk.  The Sell Side wants to sell the least amount of value at the highest possible price.  Wall Street has traditionally been the facilitator of these transactions but in doing so has traditionally represented the Sell Side.  As an individual investor, never confuse what side of the intersection you are on – you are always on the Buy Side. 

Based on our experiences and observations – many advisors are affiliated with broker/dealers (Wall Street) – these are ‘Sell Side’ entities.  The Sell Side’s obligation to its clients is ‘suitability’ – a product or security needs to pass a suitability standard.  This bar in our opinion is too low for those who place a high value on their capital.

The Buy Side’s obligation – as a manager of an investment portfolio – is as a fiduciary – a much different and higher standard.  This places a burden on the investment managers to act in a manner consistent with fiduciary standards.  This also keeps the investment manager on the same side of the intersection as their client.