2956: Alignment Within Your Investments by Chris Odegard of The Prolific Investor on Financial Growth

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[00:00:40] [SPEAKER_00]: This is Optimal Finance Daily, Alignment Within Your Investments by Chris Odegard of TheProlificInvestor.net.

[00:00:49] [SPEAKER_00]: Today's topic is alignment within your investments. Depending on the type of investing you do, other people may be involved. These other people might be a conventional investment advisor or financial planner, a syndicator, or a turnkey single family residence provider, or a turnkey provider. To simplify things a bit, I'm also going to refer to these other people as your partners. When their objectives are aligned with yours, it's magical.

[00:01:17] [SPEAKER_00]: When they're not, things can go wrong. Think about three people paddling in a canoe. When they're all paddling in sync in the same direction, the canoe glides smoothly through the water. If just one of the three gets out of sync or starts paddling in a different direction, the canoe's course is altered. It's the same with investments.

[00:01:37] [SPEAKER_00]: Let's look at how each of the three previously mentioned partners is compensated to see how well their objectives are aligned with yours, the investor.

[00:01:47] [SPEAKER_00]: The Conventional Investment Advisor or Financial Planner

[00:01:50] [SPEAKER_00]: If you invest in stocks, bonds, and mutual funds, your objective is most likely growth in the value of your portfolio. If you hire a conventional advisor to manage this portfolio, in some cases, they charge you something called assets under management or AUM fee, which is simply a fancy term for your account balance.

[00:02:11] [SPEAKER_00]: To make the math easy, let's say the advisor's AUM fee is 1%. If you start the year with a million dollar portfolio and end the year with a million dollar portfolio, so no growth, you will still pay your advisor $10,000.

[00:02:27] [SPEAKER_00]: And now your account balance at the beginning of the next year will be $990,000.

[00:02:33] [SPEAKER_00]: What did the advisor do for this $10,000 fee? He chose the mix of stocks, bonds, and mutual funds to best meet your investment objectives.

[00:02:42] [SPEAKER_00]: Unless your objective was to have no growth, your advisor failed but still got paid.

[00:02:49] [SPEAKER_00]: Certainly the advisor is incentivized to grow your portfolio because the higher its value, the more money he makes.

[00:02:55] [SPEAKER_00]: The problem is, he makes money even when you lose money.

[00:02:59] [SPEAKER_00]: That is not what I consider alignment.

[00:03:02] [SPEAKER_00]: A big disclaimer here is that I do not use a conventional advisor anymore.

[00:03:06] [SPEAKER_00]: My reading on this topic, however, is that the AUM fee is still in use but may be declining in popularity.

[00:03:14] [SPEAKER_00]: The syndicator

[00:03:16] [SPEAKER_00]: First of all, what's a syndicator?

[00:03:17] [SPEAKER_00]: When you're driving down the road and you see a new apartment building, hotel, or golf course under construction, it's very unlikely that one person wrote a $10 million check to fund that project.

[00:03:29] [SPEAKER_00]: Typically, these projects are funded by investors like me, who each put up a portion of the money.

[00:03:34] [SPEAKER_00]: These are called syndications, which is another fancy term meaning the pooling of money to acquire an asset.

[00:03:41] [SPEAKER_00]: The person or group of people who put these deals together is called the syndicator.

[00:03:46] [SPEAKER_00]: In most of these syndications in which I invest, the syndicator's compensation is a percentage of the profits the asset produces once it is up and running, but only after I have received all of my original investment back.

[00:04:00] [SPEAKER_00]: If I invest $100,000 into an apartment syndication and it takes four years for me to get my $100,000 back, the syndicator waits four years to get her share of the profit.

[00:04:12] [SPEAKER_00]: It's no coincidence that one of my investment objectives is how quickly my original investment is returned to me.

[00:04:18] [SPEAKER_00]: So you can see that in this situation, the syndicator and my interests are completely aligned.

[00:04:24] [SPEAKER_00]: The turnkey single family residence provider

[00:04:28] [SPEAKER_00]: What's a turnkey single family residence provider?

[00:04:32] [SPEAKER_00]: Let me answer by way of example.

[00:04:34] [SPEAKER_00]: One way to buy a single family residence or SFR rental is to do it yourself.

[00:04:40] [SPEAKER_00]: Buy it, fix it, find tenants, manage it, etc.

[00:04:43] [SPEAKER_00]: The other way is to use a turnkey SFR provider.

[00:04:47] [SPEAKER_00]: In this situation, you can buy what's called a loaded rental, an SFR rental that already has paying tenants in it and is being professionally managed.

[00:04:56] [SPEAKER_00]: There are numerous such providers across the country.

[00:04:59] [SPEAKER_00]: I talked with a guy who provides this type of service and he has a vertically integrated company,

[00:05:04] [SPEAKER_00]: which includes a brokerage firm, a construction company, and a property management company.

[00:05:09] [SPEAKER_00]: He works a specific market in the U.S. and buys houses he knows will be good rentals,

[00:05:14] [SPEAKER_00]: does quality repairs and remodeling,

[00:05:17] [SPEAKER_00]: screens and installs qualified tenants,

[00:05:20] [SPEAKER_00]: manages the property, and then sells it to you.

[00:05:22] [SPEAKER_00]: All you have to do is show up with cash or a bank loan.

[00:05:26] [SPEAKER_00]: Here's the great part.

[00:05:27] [SPEAKER_00]: He said to me,

[00:05:28] [SPEAKER_00]: I'm not going to sell you a bad rental with shabby repairs and deadbeat tenants

[00:05:32] [SPEAKER_00]: because at the end of the day, as the property manager, I'm stuck with the problem.

[00:05:37] [SPEAKER_00]: As a landlord and investor, he and I both want the same thing.

[00:05:41] [SPEAKER_00]: A profitable, smoothly operating, and hassle-free rental property.

[00:05:46] [SPEAKER_00]: Alignment doesn't get much better than this.

[00:05:48] [SPEAKER_00]: So the next time you're making an investment, make sure number one,

[00:05:52] [SPEAKER_00]: you and your partner's interests are aligned.

[00:05:54] [SPEAKER_00]: And number two, you only do business with people you know, like, and trust.

[00:06:04] [SPEAKER_00]: You just listened to the post titled,

[00:06:06] [SPEAKER_00]: Alignment Within Your Investments,

[00:06:08] [SPEAKER_00]: by Chris Odegaard of theprolificinvestor.net.

[00:06:11] [SPEAKER_00]: And I'll be right back with my commentary.

[00:06:14] [SPEAKER_00]: While I do enjoy articles warning about the downsides to working with financial planners,

[00:06:19] [SPEAKER_00]: I've also come to realize that not everyone has interest in managing their own investments.

[00:06:25] [SPEAKER_00]: And it can be intimidating to come up with your own financial plan.

[00:06:29] [SPEAKER_00]: I know it was for me once upon a time.

[00:06:31] [SPEAKER_00]: I don't personally work with a financial advisor

[00:06:34] [SPEAKER_00]: because I enjoy reading about this stuff and doing it myself.

[00:06:37] [SPEAKER_00]: But if that's not you, it's okay.

[00:06:40] [SPEAKER_00]: You can still take control over your finances and work with someone else

[00:06:44] [SPEAKER_00]: without paying high assets under management fees.

[00:06:47] [SPEAKER_00]: There are really helpful robo-advisors out there like Betterment, M1 Finance, and Wealthfront

[00:06:53] [SPEAKER_00]: that can provide similar assurances as a financial advisor at a much lower cost.

[00:06:58] [SPEAKER_00]: And if you decide that you'd prefer a human,

[00:07:01] [SPEAKER_00]: I highly recommend that you consider a flat fee advisor.

[00:07:05] [SPEAKER_00]: This is different from fee-based, fee-only, or commission-based advisors

[00:07:10] [SPEAKER_00]: because most of the time they don't manage your investments for you.

[00:07:14] [SPEAKER_00]: They basically work with you on the financial plan

[00:07:17] [SPEAKER_00]: and show you how to implement that plan yourself.

[00:07:20] [SPEAKER_00]: And you're paying them a flat fee for their time and knowledge.

[00:07:24] [SPEAKER_00]: I'm likely going to use a flat fee advisor

[00:07:27] [SPEAKER_00]: to double-check my drawdown strategy for my portfolio as I approach early retirement.

[00:07:32] [SPEAKER_00]: And there's actually a matching service to flat free advisors

[00:07:36] [SPEAKER_00]: through the blog The Finance Buff, if you're interested in checking that out.

[00:07:40] [SPEAKER_00]: On a previous episode where we talked about financial planners and advisors,

[00:07:44] [SPEAKER_00]: it was brought to my attention that there are even flat fee advisors

[00:07:48] [SPEAKER_00]: who can also do investment management for you.

[00:07:51] [SPEAKER_00]: So if you're interested in the plan, the advice, and the implementation,

[00:07:55] [SPEAKER_00]: there are people out there who will do this for a flat fee

[00:07:59] [SPEAKER_00]: rather than a percentage of your portfolio.

[00:08:01] [SPEAKER_00]: Now, you won't find flat fee advisors who also do investment management

[00:08:05] [SPEAKER_00]: through The Finance Buff.

[00:08:06] [SPEAKER_00]: So if you're interested in this kind of help,

[00:08:09] [SPEAKER_00]: I'd invite you to check out Verbatim Financial.

[00:08:12] [SPEAKER_00]: I've been encouraging the founder, John Stoy,

[00:08:15] [SPEAKER_00]: to offer a similar service as The Finance Buff

[00:08:18] [SPEAKER_00]: in matching people with flat fee advisors

[00:08:20] [SPEAKER_00]: who also do investment management.

[00:08:23] [SPEAKER_00]: Perhaps if he sees that there's a real demand for this matching service,

[00:08:27] [SPEAKER_00]: he'll actually do it.

[00:08:29] [SPEAKER_00]: And that should do it for today.

[00:08:30] [SPEAKER_00]: Have a great start to your week,

[00:08:32] [SPEAKER_00]: and I'll see you tomorrow where your optimal life awaits.