By David Wolf, Chief Investment Officer & Managing Principal, BSW Wealth Partners
“Good is the enemy of great. We don’t have great schools, principally because we have good schools. We don’t have great government, principally because we have good government. Few people attain great lives, in large part because it is so easy to settle for a good life. Good is the enemy of great.” – Jim Collins, Good to Great
As it stands today in 2013, our industry has yet to achieve greatness. Yes, it has made (monumental and historic) strides. Yes, it is collegial, cozy, and well-intentioned. But it is decisively and merely . . . good – or, worse yet, “good enough.” The ongoing balkanization of terminology (Is it Green? Socially responsible? Sustainable? Impact?) is indicative of a systemic failure to maintain intellectual consistency and clarity in addressing the (often hazy) objectives of investors and their advisors; and akin to the dilution (and pollution?) of the natural foods channel (Organic Oreos anyone?).
I recently met with a client family on the East Coast whose impact objectives are as impressive as their professional credentials: published author, Harvard MBA, entrepreneurial wealth, etc. However, squaring their desires for “total portfolio activation” with advisory considerations of financial security, income production, liquidity, and accessible allocation vehicles left both of us feeling rather uninspired and nonplussed. Are screened equities, even with advocacy, “good enough?” What is “good enough” and isn’t that itself a cop out? Can secondary market transactions actually cause primary market behavioral changes or is it simply correlation without causation? Can we really expect to “consume our way out” of our problems? Aren’t any investments premised on perpetual global growth simply palliative? Is total portfolio activation actually attainable? If so, is it actually advisable?
One of the many compelling elements of Collins’ Good To Great framework is the Stockdale Paradox, named for the heroic tragedy of Admiral Jim Stockdale’s experience as a POW during the Vietnam War (recounted in Stockdale’s wrenching memoir, In Love and War). The Stockdale Paradox holds that in order overcome huge challenges one must retain faith that you will ultimately prevail regardless of the difficulties, and at the same time confront the brutal facts of your current reality, whatever they might be. If we aspire to realize the full potential of this industry and achieve greatness – in terms of reach, impact, lasting change, and both client and advisor satisfaction – perhaps we can begin by stirring the pot a bit, challenging the status quo, and confronting the brutal facts, asset class by asset class, to identify opportunities for collaboration, innovation, and breakthrough thinking – all while maintaining an unwavering faith that change is not only possible but also achievable.
Banking
At an elite gathering of advisory firms (at which our firm of $750 million of assets under management was a runt of the litter), my partner was challenged by a peer advisor with the novel question of, “Don’t talk to me about custodian, who is your banking partner?” Although advisors will evaluate and make recommendations to clients on important financial decisions, most act as if their responsibilities or purview end at their custodian’s border. Are we actively educating and steering clients out of “too big to fail” behemoths that pervert the political process, distort markets, and pursue reckless prop trading with depositor funds – privatizing profits while socializing losses? Or are we helping to facilitate and manage the transition of their banking to community banks and CDFIs? Are we helping them source and refinance their home mortgages into local banks that continue to hold or service these loans, recycling that capital directly into their communities? Are we cultivating direct engagement with our local community banking colleagues, or is simply holding a syndicated community investment note or CRA-qualified mutual fund here or there “good enough?” Clients are looking for integrated and holistic management of all of their financial matters, and this area is low hanging fruit for both deepening client and community relationships while also mobilizing meaningful amounts of capital to better ends.
Fixed Income
The New York Times’ Jim Stewart recently noted that “Pimco’s Corporate Opportunity Fund, which is managed by the star analyst Bill Gross, lost nearly 13.4 percent. Annualized, such declines are off the charts.”Although I strongly advocate individually laddered bond portfolios to mitigate these risks (Full disclosure: I am the founder of an impact municipal bond separately managed account strategy.), deeper philosophical issues remain unresolved with regard to fixed income as an impact asset class. For instance, the vast majority of bond positions (whether an SMA or mutual fund) are purchased on the secondary market. As such, is it too far a stretch to assert that these investment dollars actually precipitated the underlying project? Similarly, on the corporate bond side, bondholders don’t vote. So an important (perhaps the most important) element of social investing is often glaringly absent from corporate bond holdings: corporate engagement. Clearly, if we are going to move impact fixed income from good to great, we need an honest and robust industry debate about metrics and strategies for engagement at the issuer level.
Equities
No asset class demonstrates the dangerously widening philosophical rift between impact and SRI more than publicly traded stocks. As many advisors will attest, more and more clients are forsaking stocks entirely due to a general distrust of corporations, the markets, and the financial system, along with a sense that screened equities and engagement are not “impact enough.” With meager market-rate returns on bonds and the deterrent complexities of scale and lock-ups on private offerings, that leaves advisors in a very difficult pickle in terms of generating investment gains while also preserving liquidity. Meanwhile, although making an angel investment in a pre-revenue start-up company hoping to create an “online mobile platform for teenage girl entrepreneurs in rural Kenya” (actual business plan I’ve reviewed) may seem off the charts in terms of impact, how does it really compare on an absolute basis to, say, getting Coca-Cola to cut its emissions footprint?
Quite frankly, there is a rising generational tide of investors with whom the corporate engagement story no longer resonates – or, more likely, it is simply not being told effectively to Millennials acculturated to Facebook, memes, and Twitter feeds. Indeed, when some of the most progressive groups in social finance divest themselves of public equities altogether, it should serve as a shot across the bow that something is amiss and needs to be righted, immediately. How are we evaluating industry corporate engagement efforts in terms of efficacy? How are we communicating those efforts, successes, and failures to clients and investors? How do we make sense of public equities for skeptical clients? Or can we? Have our efforts here settled into a comfortable and “good enough” détente with corporate power or can we rekindle the spirit of urgency and outrage that birthed an entire industry?
Private Investing
This catch-all category captures private equity, venture capital, direct real estate, private loan funds, natural resources, most microfinance, angel investing, etc. It presents great promise and great(er) peril for investors and their advisors. For better or worse, private investing is a darling of both the media and investors, while often creating inordinate burdens for advisors in terms of time and energy expended. Except for the ultra-wealthy, most investors lack the asset base needed to participate in private investments at the scale advisory prudence would require for adequate diversification across vintage, manager, and sector – even if the opportunity set would allow for such, which it doesn’t. Further, most private impact investment vehicles may be long on impact story but are often woefully short on proven investment track record. This may be perfectly reasonable for the ultra-wealthy who want to push the impact envelope, but how about the equally-impassioned widow who needs to survive on her $2 million nest egg – but also wants total portfolio activation? Here, there may be an opportunity for an innovative foundation or philanthropic organization to, say, absorb the start-up and operating expenses of a professionally managed and broadly diversified fund that could mobilize more modest and palatable chunks of investor capital into high-impact private strategies and lower the “freight costs” of such a vehicle –somewhat akin to the model Vanguard has used to fundamentally disrupt the mutual fund industry. Without breakthrough thinking here, we risk squandering the current wave of energy and enthusiasm as investors find themselves continually shut out of opportunities – either via entry price, or complexity, or both.
Onward: Why Greatness?
Upon reviewing the countless examples of companies, teams, non-profits, and individuals who have successfully transitioned from good to great, there are remarkable, and yet unlikely, conclusions that can readily be drawn. First, it is not harder to make something great rather than good. It does not need to take longer; or be less fun. In fact, the rationale to strive for greatness need not even be precisely articulated. If the company, team, non-profit, individual – or even an industry – is pursuing work they love, that inspires them, and that matters deeply, then the question of why needs no answer. The important question is not why, but how, as confronting the brutal facts, is only half of the equation. The other half is the unwavering confidence that you will prevail. Yes, there are messy, sticky, and complex philosophical issues that must be addressed. And yes, there are concomitant operational, regulatory, and scale challenges that will require innovation across all asset classes. So what? Greatness is a choice. Let’s get to work.
Article by David Wolf, managing principal and Chief Investment Officer of BSW Wealth Partners ( www.bsw.com ), a Boulder, Colorado-based multi-family office and wealth advisory firm; and also the founder and Chief Investment Officer of R3 Returns, a tax-exempt impact bond strategy with $50 million of investor capital.
