Scott Bell spent the last ten years at one of the largest and most revered firms on Wall Street. In 2008, he started the firm Gross Domestic Product and within less than a year is already managing over $25 million in assets. No longer confined by corporate protocol Scott is redefining the industry. Through Scott’s influence Gross Domestic Product approaches wealth management in a unique way, helping their clients envision and accomplish their dreams and define their legacy.
Here are my 5 questions with Scott and his answers:
1) You left the security of a high-profile job at one of the biggest asset management firms to pursue the dream of starting your own firm in the height of our generation’s worst financial crisis, what inspired you to pull a Jerry Maguire and start the journey of your own entrepreneurial endeavor?
The reason I left to start my own endeavor is because I saw the writing on the wall… Wall Street is broken. I believe this to be true on so many levels. I will save most of the evidence for my book, “Everything Your Advisor Doesn’t Tell You”, but today I will share one eye opening experience to your readers:
First, the economics of the wealth management industry are wholly skewed against the individual investor. Unfortunately, the individual investor is nothing more than a cog in a giant “gotta move this stuff” world, you – the individual – are a loss leader. Unless you have $50 million with a Wall Street firm, you are a commodity, you and your money is actually a bit of of a loss leader. Here’s how it works:
All of the major Wall Street firms offer an almost identical menu of choice in investments. This is not an accident. Every manager or mutual fund you own makes the promise to do all of their trading and buying (and all of their research for that matter) from the referring firm… negotiating the same “good enough” deal. The more business the manger receives, the more it basically churns the account (albeit legally and with data to support their moves — conveniently provided by Wall Street’s research). As the manager flips over the portfolio, sometimes doing what is counter to a firm’s call, buying everything you are selling or vice versa, you (Joe Public) are being spun to the tune of billions of dollars a year.
The inherent problem is those aggregated commissions start to become real money. Actually, trading revenue is often 5 to 10 times bigger than the commission revenues realized in the wealth management division by your broker. And the more money that goes to the manager from the referring firm, the more trips and conferences are sponsored, the more free lunches are bought by the management companies to wine and dine the sales force, to inspire your broker to sell you more crap you don’t need.
Truly, a full 70 to 80% of the money manager firms in the world are offering returns worse or only equal to an index. When you factor in the cost of trades (which you never see) and taxes, it’s an even worse deal. Even in a flat-fee arrangement, the advisors in most firms are only compensated once they get you paying for a product or manager. What do you think, they get paid to keep you in cash? They are motivated to sell you on products that might not fit your needs, even if it’s the wrong decision financially. Motion breeds activity, which busies the mind enough to allow people to forget the raw deal they are being served. Activity in some perverted way implies value.
2) Although your expertise is in financial markets, I gather from knowing you that you view investing as a part in the gamut of one’s overall well-being. How does this view affect your (and your company’s) approach to wealth management?
Experts sometimes talk about the “big three” with regard to importance in one’s life: health, family and money.
The amount of money you have (or don’t) really represents nothing more than a series of decisions, good ones and bad ones almost regardless of income. How does a nurse and Joe the plumber become the Millionaires Next Door, yet the guy making $350K a year “living the life” has nothing to show for his efforts? Clearly having more money is not the sole recipe for success.
Because I believe this to be true, as part of my firm’s process, we’ve actually taken the time to hire a coach who works with our clients to define and continually refine what their life values are.
Often times, we get caught up in the illusion that “stuff” equals happiness. Retirement becomes a destination, with all of the trappings. I see people who are disappointed to realize that once they’ve “made it” to the top, it just means that it’s more work to maintain the life they’ve created, often leading to disappointment/depression. Those fancy cars are really nothing more than rolling liabilities unless there is perceived value tied to owning them, most of the time it is just another shiny object, what’s the point?
It is the person who walks through life, knowing what makes them tick that seems to get satisfaction and peace with where they are. Decisions are much less impulsive and often much easier to make clearly when these values are at the front of your mind. Instead of money becoming an enabler of materialism, wealth becomes the vehicle for values like security, time with family, and creating a legacy. This is the essence of one’s well-being in their relationship with money… this is what we foster.
3) Your firm is beating the stock market by a significant percentage but, as with almost all asset management firms, your clients have had to take significant losses in the stock market. What do you say to the client that is down X% for the year and wants to take their money out of stocks?
Most of what my job entails is managing people’s expectations. I cannot tell you what the market will do specifically at any given time, no one can. I can, however, with a fair degree of accuracy provide a workable range of possibilities. The essence of my company’s duty is to ensure that people are true to themselves in knowing how much risk they can handle, so that they don’t sell out usually when the market is at its worst.
4) What are your thoughts on the current state of economic affairs? I realize this is a pretty open-ended question so limit your answer to the opinions you hold that people could possibly takeaway and immediately act upon?
What we’ve just witnessed is the closing argument for why the “slash and burn” economics of the 20th Century is not sustainable. We cannot slash rates and continue to burn money. Guess what? It has consequences and you are paying for them. This mess will take 20 years to clean up. Our banks have destroyed themselves, our health care system is bankrupt, our manufacturing base is a fraction of what it once was, and we have two of the three major pistons of our economic engine almost completely seized: consumers and private sector. Fortunately, the government (the third piston) is here to help. This is not without cost. In about 2 to 3 years, if we are lucky — we could be staring down the barrel of some pretty hefty inflation. Right now, every world government is throwing the kitchen sink at the problem, so I believe eventually we will turn the corner.
I am worried however that we could be in a liquidity trap, so I am investing in TIPS, Preferreds, select hi-yield and hi-quality corporate bonds, and high quality large US multinational firms that pay sustainable dividends greater than 4% — making stuff that will either be part of the new economy or making stuff people absolutely need. I am also investing in large US multinationals with good cashflow, no debt and a secular growth story (like Google, Apple, Cisco, etc.). Stocks and oil are actually the best place to be in inflationary times because of their purported pricing power. I am also investing in agricultural commodities, with the idea that more people, means more stuff to eat, which means more money. Baked in all of our portfolios, we build a solid foundation of indexes for our clients and then fill in the gaps with individual beaten up Blue-Chip stocks (almost buy and hold) that fit their investment profile. It’s pretty simple actually, which I think is the key to our success, clients can understand it because it is not the smoke and mirrors I have described in your other questions.
5) As a follow-up to the last question, knowing you are somewhat of an optimist, what should we be optimistic about with regards to the future financial health of the United States? Any predictions? Or markets we should keep a close eye on?
We all should be optimists with the dream of America right now. It’s our execution as a nation that needs some work. This is our chance to redefine the next 50 years of our history. It won’t be easy or fun, but from chaos comes clarity, and we are just starting to see things clearly now.
As for the markets, visibility is very low currently. Normally, as financial practitioners we try to forecast 6 months into the future. In today’s market, we are lucky to forecast into the next quarter. Regardless, there are some great companies selling for prices that warrant attention.
But honestly, in the next quarter, we could easily retest the lows. You asked for immediately actionable items in the last question. The news that consumer credit card debt is going to face some the similar struggles that the mortgage market went through probably is what will take us back to a Dow below 8000. However, details of the stimulus plan from the new administration coupled with next quarter’s earnings that beat Wall Street estimates and we could easily rally back to 10,000 on sentiment. From there, this continues to be a “show-me” story with real estate being front and center — which for the next two years probably isn’t great, so we are even more conservative with our allocations for the foreseeable future.
