Success That Lasts Jared Siegel

In this solo episode of Success That Lasts, Jared Siegel discusses the power narratives hold over us when making financial decisions, and how to think more empirically. He talks about the roles that skill and luck have in various aspects of life.


“After a career of helping people make financial decisions, one thing is overwhelmingly clear to me: people are not calculators, they’re storytellers,” Jared claims. Humans are biologically wired to connect cause and effect, even if it may be incorrect. The more you want something to be true, he adds, the more likely you are to believe the story that overestimates the odds of it being true.

If we learn how to second guess ‘easy’ narratives and learn to think more empirically, we can gain an advantage. 

According to a study done in collaboration with Dartmouth College, University of Chicago, California Institute of Technology and UCLA, less than 2% of people attempting to add value to the portfolio through predictions actually possess skill.

Over a shorter time frame, the influence that luck plays, both good and bad, is greater. However, as you expand the sample size, the influence that luck plays is diminished, and outcomes become much more predictable.


Resources
Jared Siegel on LinkedIn | Twitter
Email: jsiegel@delapwa.com 
DelapCPA.com

The Success Equation by Michael Mauboussin
Luck versus Skill Research Paper
Memo from Howard Mark

Michael DiJoseph is Senior Strategist in the Investment Advisory Research Center at Vanguard. He is a Certified Financial Analyst and volunteers as a member and secretary on the Board of Trustees at the Province of St. Thomas of Villanova Support Fund. Michael joins Jared Siegel to discuss the value of an advisor. 

Here are a few highlights from their conversation:

Vanguard Advisor’s Alpha found that advisors adhering to a holistic wealth management framework could add about 3% per year in annualized returns relative to the average experience. 

“We’re bad at forecasting the future because the future is simply not forecastable,” Michael claims.

Vanguard keeps updating its study about quantifying the value of an advisor because they “want to start talking to people in their language.” They aim to help both advisors and customers understand the value of this service.

Warren Buffet was a stock picker and active manager, but he looked at the numbers and drew the conclusion that most managers don't earn their fee, and much significant wealth is dissipated as a result of chasing a prediction-based approach to performance.

Being as proactive as possible is always an advantage, but there are times when that’s not the case - there is a time and a place to respond to anticipated things, Jared shares. Michael describes the reactive model within the Advisor Alpha framework.

“Staying the course doesn’t mean standing still,” Michael tells Jared. Staying the course actually requires an enormous amount of minor course corrections along the way. You don't just get on a boat and suddenly arrive at your destination by doing nothing.

Roth conversion effectively means you can accelerate the taxes on your tax-deferred money and convert it into tax-free money so that you won't have to pay it later, Michael explains. In an economic downturn, “the account value might be down; an individual's income might be down… Take advantage of that and accelerate taxes when the rate is lower - it might be higher in the future; use those losses to get a little creative.”

“There’s a lot of noise out there around millennials and Gen Z not being as good as investors…  I actually think it's the opposite. I think they've had a huge head start, and I think we're going to start seeing the benefits of better advice all around,” Michael says. 


Resources
Michael DiJoseph on LinkedIn

Dennis Jaffe is Senior Research Fellow at BanyanGlobal Family Business Advisors. As both an organizational consultant and clinical psychologist with over 40 years of experience, he is one of the architects of the emerging field of family enterprise consulting. He is also a frequent contributor to periodicals such as Family Business Journal of Financial Planning, Private Wealth Journal of Wealth management, and Worth magazine. Dennis joins Jared Siegel to share insights from his book Borrowed from Your Grandchildren about how large, long-lasting business families succeed across generations.

Here are a few highlights from their conversation:

Generative families are those with business that have gone past the third generation in terms of ownership and control; have an identity as both a family and a business; and were large and thriving, though not necessarily in the legacy business.

It’s fairly common that family businesses don’t last past the third generation, but that has less to do with wealth itself and more to do with the type of people in the business.

Successful business families make a commitment to the future, Dennis shares. “They developed all kinds of ways in which the family was creating non-financial wealth - they were creating value by educating the next generation, giving to the community, and having wonderful, thoughtful people get together.” 

In generative families, the wealth creator creates the wealth, but they do not create the generative idea - this is typically done by the second or third generation.

Jared asks Dennis to describe the roles of the first three generations of a business family. “The shift from the first generation where it's all about one person with no need to collaborate with anybody to the next generation comes when the family begins to have a single family meeting and they talk about their wealth,” Dennis explains. “Is this the business that they want to be in, or do they want to be in another business? Do they want to have a foundation? And they start to have conversations and out of the conversations the family says, ‘We have so much wealth, we have so many issues to talk about - we have to meet regularly.’”

Self-reliant wealth creators must get over the idea that because they've been so successful, they know how to do it better than anyone else.

Older generations have to understand that things are different, and should respect those differences rather than try to make things be the way they were before. They’d only be setting themselves up for failure by taking the latter route.


Resources
Dennis Jaffe on LinkedIn

Borrowed from Your Grandchildren: The Evolution of 100-Year Family Enterprises
Dear Younger Me: Wisdom for Family Enterprise Successors

Nathan Sosner is a national thought leader and Principal at AQR Capital Management, where he specializes in sophisticated investment programs for high-net-worth clients. His research on tax-aware investing has been published in the Journal of Wealth Management and the Financial Analyst Journal, who awarded him the Graham and Dodd Award for the best paper of the year in 2020. Nathan joins Jared Siegel to discuss the importance of tax efficiency.

Here are a few highlights from their conversation:

 The main difference between tax-agnostic and tax-aware strategies at AQR, Nathan shares, is that tax-aware funds think not only about investment styles but also about tax results of individual trades.

Jared asks Nathan how AQR quantifies the economic benefits of integrating income tax and estate tax planning in a portfolio design. “[We] approach management of that portfolio in tax-efficient ways,” Nathan responds “For example, if you started a program at the age of 40 and continued until 80, the after-tax wealth transferred to the family can be three times larger if you look to achieve tax efficiency and sensible investment strategy across all the dimensions, as opposed to only focusing on investment strategy and completely ignoring the income and estate tax implications of your investment.”

From a statistician’s point of view, the greater the success, the more attention it gets, and failures tend to fade away into the background. Wealth created by concentrated risk looks great post-factum, but that is because a large portion of the wealth distribution where wealth has been lost is ignored. “A concentrated risk is a constraint for many investors,” Nathan comments. 

According to Nathan’s research, volatility creates a significant drag on cumulative wealth, and the only way to reduce that drag is to reduce volatility through diversification. 

There isn’t a lot of information about the after tax risk adjusted performance of strategies, Jared says. It’s difficult to report performance on an after-tax basis because of its nature - individual clients' facts and circumstances, which would impact the net result of an investment.

Nathan shares what to consider when transitioning from one investment strategy to another. “There are four key parameters to changing a strategy, changing the portfolio tax efficiently,” he claims. “[They are] tracking error, build-in gain, how much leverage you are willing to take, and time.”


This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor. The recipient should conduct his or her own analysis and consult with professional advisors prior to making any investment decisions.

Resources
Nathan Sosner on LinkedIn 
AQR Capital Management

Regardless of How You Deal with Low-Basis Stock, Long-Short Strategies Can Help
Integration of Income and Estate Tax Planning
When Fortune Doesn’t Favor the Bold: Perils of Volatility for Wealth Growth and Preservation

In this solo episode of Success That Lasts, Jared Siegel unpacks structural capital and related topics. He shares insights about wealth succession and how families can ensure their heirs are fully equipped to inherit wealth.


“Families with significant wealth or family businesses often operate within a network of trust - partnerships, contracts, and other kinds of legal and business entity relationships,” Jared says. “In this context, structural capital represents the family’s cumulative understanding of this network and ability to navigate it efficiently.”

It’s human nature to value things based on how much they cost us. Therefore, you value wealth you are given differently than if you had suffered, sacrificed, and risked for it.

The key to efficiency is making a checklist - one of the most simple and humble techniques, according to author, surgeon, and public health researcher Atul Gawande. Even the Air Force and leading hospitals use checklists to manage their everyday tasks.

“The single most important reason for creating a trust in the first place should be to provide a gift that promotes the beneficiary’s real freedom,” Jared advises. “A trust that's well designed should deliver an enhancement to the beneficiary that cultivates a greater maturity and equips them to pursue their own aspirations.”


Resources
Jared Siegel on LinkedIn | Twitter
Email: jsiegel@delapwa.com 
DelapCPA.com

The Checklist Manifesto by Atul Gawande
Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values by Roy Williams and Vic Preisser

In this solo episode of Success That Lasts, Jared Siegel discusses the concepts of harmony and balance. He defines different types of capital and how they intersect to create real wealth. 

Harmony is nuanced, Jared shares, requiring some level of skillful and simultaneous execution. To be well-coordinated, harmony needs balance and complexity. Jared explores what that looks like in wealth planning.

A family’s human capital includes its individual family members’ physical and emotional health, as well as their resilience - their ability to learn, grow and adapt. Their relational capital reflects each member’s ability to discuss difficult topics together or to collaborate in complex efforts.

Prior to the Industrial Revolution, wealth transfer was more about the transfer of wisdom and opportunities, not necessarily money. “If you inherited your family’s land, you were still required to work. You had to [put in the] effort, sacrifice and grind… to actually generate income that you and your family could live on ,” Jared explains. 

Financial capital is merely a tool - nothing more, nothing less. It’s neither good nor bad, but it really begs the question - what are you trying to accomplish with your wealth?


Resources
Jared Siegel on LinkedIn | Twitter
Email: jsiegel@delapwa.com 
DelapCPA.com