Proving a Dissonant Concept

By the late 1970s, the institutional market for professional money management services (e.g., corporate and public retirement funds and non-profit organization endowments) had become saturated with offerings from broker-dealers, Registered Investment Advisors (RIAs), and national and regional banks. The then under-served segment of the financial services marketplace was the taxable individual high net worth (HNW) portion, ignored by financial services institutions to that point because it was thought to be too diverse for a scalable and profitable business model. To some, that spelled opportunity if one had the patience and foresight to package and implement a comprehensive approach based upon client-centric strategic personal financial planning.

As part of the revolution already underway in the personal financial services market in the US in the early 1980s, the idea that such personal financial planning assistance should be obtainable for a fee when it was being offered "free" by one's friendly broker, fostered the kind of creative dissonance which breeds new and useful opportunities for both client and provider. Into that melee in the winter of 1980 went five individuals of distinctly differing professional backgrounds to form The Financial Collaborative (today TFC Financial Management, Inc., or TFC) in an office on Union Wharf overlooking Boston Harbor. Six years later in its cover article, Financial Planning Magazine termed our combination "a merger of mavens" - journalistic license to be sure, but the idea of a trusted personal financial advisor had arrived in the form of an unbiased, multi-disciplined resource for HNW individuals to turn to for help in navigating life's many transitional financial events.

As the notion of fee-based personal financial planning continued to gain credence in the early 1980s, TFC introduced the concept of replacing individually selected common stocks with no-load mutual funds (later ETFs) for client liquid investment portfolios. These were selected to fill out an agreed-to portfolio asset class mix with a core of passively structured funds as the foundation. Although not conventional at the time, the passive (or indexed) approach, focusing on fund managers instead of attempting to pick individual companies or stocks, seemed a more efficient use of the firm's talents. The history of TFC which follows documents how our study of investment market data and finance fundamentals led us to an understanding of the benefits of the passive approach and covers the significant role that many of Boston's other money managers and institutions played in the development of our approach.

Material to all this was the firm's long-term association with Vanguard's founder, Jack Bogle. TFC's vision matches Jack's sense of a fiduciary's duty of stewardship, his concern about cost, and his understanding of financial market history and its statistical implications (prompted in many instances by Paul Samuelson's early research). For TFC, these principles form the ethical compass that guides investment managers acting on behalf of their clients. A few of Jack's interactions with our clients and events sponsored by TFC in the Boston financial service community are recounted in the pages ahead.

As TFC's clientele has grown and the firm expanded its service model, the comfortable and productive use of information technology became essential. In the early 1980s, the firm's personal financial planning techniques became the domain model for one of the nation's most robust Artificial Intelligence (AI) Expert Systems (viz., 6,600 "if, then" algorithmic rules) implemented by an MIT-associated Kendall Square software development and consulting firm named Applied Expert Systems (APEX).

In 1991, TFC began to work closely with Charles Schwab and its electronic mutual fund order execution network and custodial services. Also, in the early 1990s, Dimensional Funds Advisors (DFA) selected TFC as one of its early participants. Having a reputation as an early IT adopter, TFC later engaged the Tamarac fully integrated portfolio accounting and financial planning system which today most would agree is on the leading edge of its field.

As individuals and families have signed on, our clientele base has become more varied. Of today's 340 client relationships, a large proportion are professionals, many are from the medical community and academia, some are business owners, and we also count a few Nobel Laureates. During the past ten years, we have mounted a series of client events in informal locations (open to all clients and their guests) with presentations aimed at expanding horizons and relationships. At each session the goal has been to inform, entertain, and socialize while exploring subjects useful to clients contemplating their own and their family's financial futures. A description and photos of some of these occasions in the Client Events chapter may be of interest.

So today, as was the case in the late 1970s for many institutional investment portfolio management companies, firms like TFC find themselves confronted with a similarly crowded competitive market for personal financial advisory services. Now, as then, virtually all providers claim to offer uniquely targeted personal planning as the teaser to attract HNW prospects. Most of such assistance is offered via an "implementation-fee" platform (inside code for commission-based compensation), some firms charge annual retainer fees while others employ an assets-under-management-based fee formula. "Wealth Management," a pretentious, presumptuous, and affected term adopted by the larger players in the field, is today on the business cards of those representing investment management and brokerage firms, as well as banks. Other sales job descriptions, such as Wealth Counselor, High Net Worth Recruiter, and Implementation Specialist have been coined, all portraying the extent to which those in marketing have debased the currency of the field's business terminology.

And "Robo Planning" is now accessed via the World Wide Web through which the individual interacts with an AI bot (of varying sophistication) which then advises the participant through a series of algorithms designed by the sponsoring offerer. The on-line participant today should remember "buyer beware" since these exchanges are driven by algorithms based on unknown assumptions, business objectives, and ethical biases. These AI bots are currently aimed at the lower strata of the HNW market, but as the software inevitably reaches sentience, "natural language" AI-based interaction and thinking-machine-generated advice will work its way up the wealth ladder. But TFC's assumption is that because of the personal and financial complexities faced by our HNW clients, a face-to-face relationship with an experienced personal advisor is the much-preferred mode.

The challenge for TFC is to remain on track, true to its original vision of relevant personal service focused upon a limited clientele base, providing unbiased advice rendered in a proactive fashion. Aware of TFC's origins and history, in the text ahead the reader will have a greater understanding of the planning method and investment philosophy driving the firm's interaction with its clients.

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