Navigating Mutual Funds and Founding a Financial Planning Company | 16min snip from Economics Matters with Laurence Kotlikoff

Speaker 2
So just for everybody who's, who might not have any knowledge of a mutual fund would be holding, if you and I and the listeners are putting money into this fund, we hand them the manager of the fund or money, we get back shares of the fund and then we're equity owners or stockholders of the fund or the owners of the fund. And then the manager takes the money and goes buy securities like stocks and bonds and can be real estate type securities. And that's a mutual fund. That's correct. You invest in kinds of, we have 7,000 equity finance mutual funds in our country right now. More than banks, we only have about 4300 commercial banks anymore.
Speaker 1
And I think there may be more mutual funds than there are stocks. Yeah, actually. There are more mutual funds than there are public companies.
Speaker 2
Yeah, which is, Eric, yeah. That means that there are a lot of mutual fund managers and that they all think that their combination of the stocks can somehow beat the overall combination, which is. Yes, that's right.
Speaker 1
And at any rate, I got involved in that project of combining the two mutual fund companies and I put together a project plan to combine the two mutual fund companies, which was more complicated than it might at first appear. But at the end of that, I ended up being Scudder's liaison with AARP. And AARP became interested in offering financial and investment advice to its members. And Scudder decided that it would fund a project to advise AARP on how to do that. And I led that project. And actually, Larry, you and I met during that project because I was trying to figure out how Scudder could be in the business of offering financial advice to AARP members, because AARP doesn't do anything. It's a marketing organization. And it's a membership organization that has, I guess I would say I'm gonna get in trouble here if I'm not careful. So let's just say that I believe it endorses a number of products and services and it endorsed Scudder funds and it was going to endorse, and I'm probably gonna get the language wrong here too, but there are AARP sponsored
Speaker 2
or introduced
Speaker 1
Medicare supplemental insurance, for example, and other services of that kind. And the Scudder mutual funds were a service of that kind. And at any rate, I put together this plan for how Scudder could support AARP by providing financial advisory services to its members. And one of the components of that was going to be financial planning. And ES Planner was one of the pieces of software that we considered to use for that.
Speaker 2
So that was our early download version of MaxifyPlanner.com.
Speaker 1
Scudder then decided that it would not provide that service for AARP, even though AARP was interested. There were a lot of complexities going on at Scudder at that time that made it unadvisable for Scudder to do that. And Scudder was in the process of moving from ownership by the Zurich, the ownership by Deutsche Bank, Scudder was sold to Deutsche Bank. And I had thought that I was going to lead this business of offering financial advisory services to AARP members. And that just didn't happen. And I decided that I didn't want to, I guess I would say I decided that I wanted to take that idea and see if I could actually make a business out of it. And I talked to my boss at Scudder and said that was what I wanted to do. And he said that was fine. I don't remember whether he went on to Deutsche Bank or not. I don't believe he did. But at any rate, I got official permission from Scudder to take the idea. And I went and started Sensible Financial.
Speaker 2
So just to point out to everybody who's younger, this is like luck in the sense that Rick,
Speaker 1
Rick
Speaker 2
has this great economic education. Many doesn't have as much luck in that profession as he had wanted to have as an academic. Then he goes through this path of consulting, ends up consulting for this company, Scudder. And then by accident, by luck, he ends up with this assignment. And then he puts two and two together and says, now I can start my own company. And of course, your own company is in many ways a safer bet than may not seem so safe because a lot of small companies fail, but in some ways it's safer because you can't be fired.
Speaker 1
You can go first. That's true. You can be fired in that, clients in this case could fire me, right? But it is... You
Speaker 2
can have a crappy boss who fires you.
Speaker 1
That's true.
Speaker 2
Or sexist boss or racist boss or whatever. That's false. Yeah, drunken boss.
Speaker 1
I've heard of all these types of bosses that people have experienced. Let's be clear and say that all of my bosses were just fine.
Speaker 2
Yeah, no, most bosses are terrific, but there are a segment, which is a... But anyway, so you start Sensible Financial Planning and what you...
Speaker 1
2002.
Speaker 2
And it's, by the way, it's located it's SensibleFinancialPlanning.com, right? Right. And it's located in Waltham, Mass. Right. They have a lovely office, there's an old clock building that was an old clock factory that's been converted. It's great to see old America and dead buildings come back to life. And they used to make most of the clocks in the world or it wasn't some like huge fraction of the world's clock for made in one
Speaker 1
year. Or it was an early mass producer of watches. And not clocks, watches, yeah. And they made railroad watches. And there's a whole... There's a little museum in the building you can find out all about it. You have to come to the Waltham Watch Factory, but it was the largest employer in Waltham and employed 4,000 people in 1900. And Waltham is called the Watch City because it was the home of the Waltham Watch Company.
Speaker 2
So you start this company with how many people? It was just me. Just you. It was just me. And how did you get off the ground? How did you buy
Speaker 1
it? I had, because I'd done so much consulting, I had a lot of people whose contact information I had. I think I had 1,500 people in my Rolodex at the time. And I started sending out emails saying I was doing this. And at the time, the whole premise of the business was that I was going to help people save money on their mutual fund expenses by moving them from actively managed funds to index funds. That was the basic idea. And, but I sent this, I don't know if I called it a newsletter or not, but I was sending it out once a month. And about six months into it, and I was starting up. So I had to buy a computer and there were decisions to make.
Speaker 2
So you had a little office or you were just. I had a, in
Speaker 1
retrospect, now I think I would just start from home. But then I had an office in a shared facility, something like WeWork or HQ Global or Regis. And so I went in every day and it was exciting. But I sent this newsletter out and eventually people began to contact me. And I think I got my first money management client a little less than a year after I started. And then it just, it kind of mushroomed. And by October of 2003, I had, I wasn't charging enough. So lots of people were really interested to have me help them. And I had too much work. I couldn't do it all. And I was fortunate I had the severance package I got from Scotter. So that was keeping me afloat. And we just, it just grew.
Speaker 2
And today you have how many employers? We're at team people. 17, that's right. Success. And we're
Speaker 1
very fortunate to get this far.
Speaker 2
Yeah, yeah. And I've been visiting Rick and his employees for years and really dedicated to smart, well-preying folks. And so you decided to go the root of economic space planning. How did that work?
Speaker 1
Well, it has worked for you. It's okay. First of all, I was really, the fact that it was economic space really did appeal. And I think that it was very helpful at the beginning because I was, first of all, I'll say that it took me, I spent like a whole month trying to figure out how it worked and trying to understand how it worked. And I got to the point where I could explain it to people. And I think that was valuable and put together a standard story for to explain to clients what it was saying to them, what the messages were to them. And so that for me, what was really interesting was I had become persuaded that it was really important to do a financial plan before giving investment advice. So I was doing that. And three or four years, but I was really focused on the investment management that I saw financial planning as a very technical business. It was all about getting the right portfolio for people and then just managing that portfolio for them. And that was really where the value was, I thought. And two, three, four years in, people began to call clients and they'd say, I saw how we doing. And I'd say, oh, we're doing great. Just like I said, we moved you to index funds, we've saved you all this money, we're matching market performance. And they'd say, but that's not what I mean. Well, you did a financial plan for us. How are we doing against the financial plan? Are we on track? And the first few times it was, I don't know, but come on in, we'll look, right? But I began to realize that that was what most people really cared about. Most people came to a financial advisor and they might have thought that it was about investment management because most people still, when you say financial planning to them, they think investment management. But
Speaker 2
my
Speaker 1
experience is quite different. My experience is that people really are concerned about, I have enough money to retire. Can I buy a bigger house? Can I send my kids to college? And how does that all fit together?
Speaker 2
What happens if it's divorced?
Speaker 1
People don't usually ask that, but that does happen. And so that really transformed the business because it, we began to really focus on the, people's progress against their financial plan and updating their financial plan.
Speaker 2
And just so, because not everybody's that kind of burst in economics versus conventional planning, how would you characterize the difference to, since you, I mean, I could do it, but-
Speaker 1
Yeah, I think that the, my sense of it is that it's, first of all, it's solving the problem as an economist would solve it, which means that it, financial planning is an example of what's called a dynamic programming problem, where the decisions that you make today influence the choices that you have tomorrow and the choices, and the decisions you make tomorrow influence the choices that you have the next year. And so the right way to solve that problem is in effect to go to the end and work back. So you go to the end and you say, given the choices that I have for the last year of my life, what decision would I make? And then you can, in effect, value based on that. You can value the choices that you have at that last year. And then you can work backward so that at the, at the point where we're advising people, we're valuing the choices that they can make now. Okay. And- All the, everything that may happen in the future, yeah. That's right. And people, and the sort of more traditional approach, not doing that. And it's advising people fundamentally based on the assets, the probability of various asset levels at the end of life. And that's not the way that most people think about. So yeah, I think,
Speaker 2
yeah, I guess I would supplement what you're just saying by saying economics is trying to, to solve the problem of a squirrel. A squirrel has to gather acorns in, when it's not winter, spring, summer, fall, so that they can keep consuming at the same level inside their nest in the tree, in the winter or not starve. So the idea of, of just trying to have a smooth living standard, not just in the winter versus the summer and the other months, but when you're young and working versus when you're retired, that's the basic thing of economics and do it within your resources, not to not pretend that you can spend at some level that you would like to spend independent of what you can afford to spend. So starting with what you can afford lifetime budget. There is that too, but I
Speaker 1
think it's, it is, the traditional, not the traditional approach, but the approach that many advisors use, which is that goal-based approach, that they're also planning not to run out of money, but it's that approach places more, I think it provides clients with a lot less information
Speaker 2
than the economics. The goal is being said initially, so in our, with our software, we don't ask anybody about their goal, because my goal for retirement spending would be a billion dollars a day, which is obviously heavily infeasible. Your goal should be a smooth living standard, and that's really dictated by your resources, which can be adjusted. You can work longer and have more resources, but for any business, I'll say decision about how long you're gonna work and what you've gotten in assets and forgetting and assuming some conservative return on your assets, it's really a matter, a sophisticated arithmetic, but a sophisticated arithmetic because it's not an easy calculation, has to be done taking account all the taxes and the interaction of everything while we call simultaneity, but
Speaker 1
there is a finite answer to how you're gonna have the same number of acorns every year through the rest of your life. That's true, but I would also say, Larry, that we have some clients who don't find that the idea of smoothing to be consistent with what they're trying to do, and but we can still, if we can get them to describe what they're trying to do, we can still use the something. Well, one person that I can think of had a goal of a certain living standard that was somewhat different than what they were doing, but we were able to get to that and say, here's how you, here are three different ways you could get there.

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