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FAQ


 

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How do I Open a New Account?

Opening a new account with Orcam Financial Group is fast and easy.

Contact us to arrange an initial consult so we can explain our services and assess your risk tolerance.  We believe this is the most important step of the entire portfolio construction process.  If we can’t get on the same page then we can’t properly manage your assets for you.  Our ability to assess your risk tolerance and goals is crucial to understanding how to apply the best approach to your personal portfolio.  You can contact us in several ways:

Online Sign-up: If you don’t want to call or email you can simply fill out our online contact form and someone will contact you shortly to schedule the initial consult.

Give us a Call: You can always reach us at 858-220-5383 if you’d prefer to expedite the process and get things started immediately.  We are available from 8-6 PST Monday-Saturday.

Send us an Email: You can always contact us via email at info AT orcamgroup.com or by clicking here.  Just send us any questions or the appropriate contact info and we will follow-up with you as quickly as we can.

If you already have a Charles Schwab account you can simply contact us to become your designated wealth manager.  OR, if you want to get started with Orcam on your own you can open a new account here and then notify us here to become your designated wealth manager via the Schwab platform.

How Does the Process Work?

At Orcam we believe it’s important to have a sound process for financial advisory services. This involves several specific steps:

Step 1 – Free Initial Consult. The initial consult is a chance for the client to ask questions and better understand the Orcam process. The goal of this call is to ensure that Orcam is a good fit for you.

Step 2 – Risk Profiling Call.  If you feel that Orcam is a good fit for you then we move on to the profiling process. The profiling process involves a comprehensive review of your current financial picture so that we can better gauge your goals, risks and how your financial picture fits together.

Step 3 – Plan Implementation.  After we’ve properly profiled the client we will implement any necessary financial planning needs and construct the portfolio that is appropriate for you. Depending on your profile we apply one of our three simple and low fee macro portfolio strategies including our Conservative Countercyclical approach, Moderate Countercyclical and Aggressive Countercyclical.

Step 4 – Maintain and Review.  Once the plan is implemented we regularly review the progress and ensure that you are on the right path to financial success. We update the portfolio annually and rebalance or shift only when necessary. We do all the heavy lifting so you can go about living your life knowing that professionals are managing your assets 365 days a year.

How Do You Manage Assets?

We know that indexing is the ideal way to allocate assets in a diversified, low fee and tax efficient manner. However, when we were constructing our own personal portfolios we always felt uneasy with the idea of a static “passive” portfolio like a 60/40 stock/bond allocation. We felt uncomfortable allocating our personal assets in this type of approach due to multiple deficiencies:

  1. The 40% bond portion is likely to generate very low returns in the future given the low interest rate environment.
  2. The 60% stock portion is likely to generate more of the volatility in the total return of a 60/40 and will therefore increase our risk to permanent loss at points during the market cycle. This will be particularly true later in the market cycle when stocks tend to become more risky and events like 2008 and 2002 occur.
  3. Our risk profiles and the financial markets are dynamic, however, a static portfolio doesn’t accurately reflect this reality of our financial lives.

We felt that these flaws could be resolved through tweaking the standard static passive portfolio to create greater parity between our risk profiles and that of the underlying markets over the course of the cycle.  We achieve this by implementing a Countercyclical Indexing™ strategy. This strategy is based on 5 crucial elements:

1.  Your portfolio is not actually an “investment portfolio”, it’s a “savings portfolio”.  We focus intensely on understanding the financial world for what it is and not what we want it to be.  This means understanding the financial world at an operational level. Our unique understanding of the monetary system helped us develop the concept of the “Total Portfolio” which focuses on thinking of your portfolio as a “savings portfolio” instead of the high risk and sexy “get rich quick” or “beat the market” concept that is often touted on Wall Street.  This unique approach allows us to construct a portfolio management process that aligns the way clients perceive risk with the way their portfolios are ultimately constructed resulting in portfolios that seek to outpace inflation, reduce downside exposure and create a more predictable and stable savings portfolio.

2.  Countercyclical Indexing™ can resolve many issues in a static passive indexing strategy. Traditional portfolio theory says we should rebalance back to a static or fixed asset allocation.  We believe this is flawed as relative asset class risks are dynamic. For instance, a 60/40 stock/bond portfolio is much riskier late in the business cycle than it is early in the business cycle because the primary driver of returns (the 60% stock portion) will tend to become riskier as the business cycle unfolds. Therefore, we rebalance client portfolios on a cyclical basis to account for changing relative asset class risk.  This adaptive approach helps us keep the risk profiles of our clients better aligned with our portfolio management style as the business cycle evolves.

3.  Our process is based on a “top down” global macro approach. We’ve leveraged our vast understanding of the financial system and the global monetary system to create portfolios that reflect the growing macro nature of the global economy. This means that we look at big trends from a 30,000 foot perspective in order to establish probable outcomes. We use our sophisticated understanding of the macroeconomic system as well as the capital structure to implement customized portfolios that help clients better achieve their financial goals.

4.  All of our portfolios are very low fee, tax efficient and systematic.  Our broad asset allocation approach allows us to maintain a very low fee structure.  Although we rebalance on a cyclical basis to account for relative asset class risk, we can do this without creating excessive tax inefficiencies, charging high fees or creating other portfolio frictions that degrade performance.  Our average portfolio costs 0.17%-0.42% including all of the underlying expense ratios. Most importantly we avoid many of the most destructive behavioral biases in portfolio management by maintaining a systematic approach.

5. We use diversified ETFs and index funds exclusively. Diversification is crucial to any well balanced portfolio. We don’t know exactly what the financial markets will do over time, but we can substantially improve our odds of financial success by spreading our assets out over many different types of instruments. This is best achieved by using low fee ETFs.  This allows us to keep our fees very low while maintaining diverse and efficient portfolios.

Please see our Asset Management page or the Research tab on the front page for a more detailed description.

 

What Is Countercyclical Indexing™?

Simple. Systematic. Low Fee.  Tax Efficient.  

Countercyclical Indexing™ is a low fee, tax efficient and globally diversified indexing strategy that systematically rebalances a portfolio so that it reduces exposure to volatility in the financial markets across the market cycle.  In doing so we are reducing the portfolio’s exposure to downside when high risk assets become riskier late in the cycle and adding to high risk assets during downturns when they become less risky.  This better controls for the portfolio’s exposure to permanent loss risk and reduces drawdowns thereby better balancing an asset allocator’s portfolio between generating returns and hedging against downside loss.  This helps create better alignment between an investor’s risk profile and their exposure to the financial markets as opposed to most indexing strategies which involve a very high correlation to the stock market and its inevitable large drawdowns.  Most importantly, this is done in a passive, low fee and tax efficient manner.  That’s the short version.

Countercyclical Indexing™ is a smarter way to implement a low cost indexing strategy.

Now for the nerdy version.  Most indexing strategies are procyclical which leaves them inherently imbalanced and flawed at times. This means they are market cap weighted strategies that move with the broader financial markets. In general these strategies are overweight stocks which means that their exposure to the risk of permanent loss is assumed to be static. We know, however, that the stock market’s exposure to permanent loss risk is not static. It tends to increase as the market cycle matures and it tends to decline as the market cycle contracts. In essence, stocks often become more risky when they rise in value and less risky when they decline in value. This leaves investors overweight stocks when they are riskiest (late in the cycle) and underweight stocks early in the cycle when they are less risky.  This results in an imbalance in the investor’s risk profile and the way they perceive their exposure to permanent loss risk.

Rebalancing a portfolio over the course of the business cycle is part of any good portfolio plan.  But traditional portfolio theory says that we should rebalance a portfolio back to our initial nominal asset weightings.  For instance, a 60/40 stock/bond portfolio is cyclically adjusted at times to rebalance back to a 60/40 weighting as stocks tend to become overweighted relative to bonds due to outperformance.  But this procyclical or static portfolio allocation will expose investors to high levels of risk at the riskiest points in the business cycle because a 60/40 stock/bond portfolio is actually less risky early in the cycle and more risky late in the business cycle. In other words, traditional portfolio theory does not account for the dynamism of the business cycle which results in portfolios that do not properly account for changing risks during the course of the cycle. This leaves your risk profile misaligned with asset class exposure at various points in the business cycle.  We can quantify this empirically, for instance, because stocks have historically performed better in the first half of the business cycle than they have in the second half of the business cycle when accounting for relative risks and returns.¹

relative_risk

Many investors also don’t understand that most portfolios are far more weighted for returns than downside loss protection.  For instance, a 60/40 portfolio is more like a 90/10 portfolio in terms of its balance between permanent loss protection and purchasing power protection.  This is due to the fact that the equity portion of the 60/40 is generating the vast majority of the volatility and downside loss potential.  As a result most “balanced” investors really aren’t very balanced at all.  They are always overweight risk in exchange for the higher potential of downside loss.  This means that even a “balanced” portfolio like a 60/40 can experience 30%+ losses as it did in the 70’s and 2000’s.

We start the portfolio construction process with the simple understanding that investors are allocating their savings.  And within their savings portfolio they are trying to protect their assets against the risk of permanent loss and the risk of inflation.  Modern Portfolio Theory doesn’t account for the fact that a stock heavy portfolio is always underweight permanent loss risk protection and becomes even more risky as the market cycle matures.  By using a Countercyclical Indexing approach we can create a portfolio that is more in-line with our savings by establishing an asset allocation that generates purchasing power protection, but does not do so in such an unbalanced manner as a traditional indexing portfolio. This results in an asset allocation that is more in-line with the way most investors actually perceive risk.

sps-1

Although our approach is passive we do tilt portfolios on a cyclical basis as relative risks evolve.  We rebalance to adjust for risk because we know that our clients have perceptions of risk that are just as dynamic as the financial markets.  Most investors tend to chase performance as assets increase in value.  But what they’re really chasing is not performance, but risk.  This is why so many investors tend to buy high and sell low.  Our approach is designed to counterbalance this response.  We adjust for risk as the cycle evolves thereby helping to keep our client’s risk tolerance in-line with that of the various asset classes we hold in underlying portfolios.  This can be done systematically because we can quantify where are are in the market cycle based on the relative values of net financial assets.

retail_oops

This approach is grounded in global macro understandings, but is also derived from two time tested approaches – Ray Dalio’s Risk Parity approach² and William Sharpe’s Adaptive Asset Allocation approach³.  However, unlike Dalio’s Risk Parity approach we don’t seek to create parity across risks in the portfolio.  Instead, we utilize an adaptive methodology similar to William Sharpe’s adaptive Asset Allocation style based on the understanding that market values and risks are dynamic.  Therefore, it is logical to rebalance portfolios over the course of the business cycle to account for these changing risks.  Although the investor’s risk profile is generally static over the course of the business cycle, the investor’s portfolio will actually change over the course of the business cycle and expose them to varying degrees of risk. Our Countercyclical Indexing approach establishes a portfolio management approach that is more consistent with the way investors actually perceive risk over the course of the business cycle and increases the probability of improving risk adjusted returns.

¹ – Roche, Cullen.  2014.   Countercyclical Indexing & Roche, 2016. Understanding Modern Portfolio Construction

² –  Dalio, Ray, 2010.  Engineering Targeted Returns & Risks.

³ – Sharpe, William, 2009.  Adaptive Asset Allocation Policies.

 

How Do You Account for Bond Risk?

We know that investors are confronted with two big risks these days:

  1. Stocks are highly valued.
  2. Bonds yield close to nothing.

In this sort of environment it is not merely enough to underweight stocks and call it a day because this is reducing the risk in one asset class (stocks) and potentially exposing you to more interest rate risk in bonds. To account for this we actually manage our portfolios using a multi-strategy approach. This means that our equity portfolios are rebalanced in a countercyclical manner AND the bond piece is rebalanced to account for interest rate risk. This duration rebalancing approach helps to account for the high degree of interest rate risk that an investor is exposed to due to low rates.

We know that your standard 60/40 stock/bond approach will not generate the same types of returns that many investors are used to because the 40% bond piece cannot mathematically provide the returns that the bond bull market of the last 40 years has generated. Bond investors must expect lower future returns and potentially much higher risk in the case that rates rise. To mitigate this risk we rebalance our bond portfolios to account for how risky the bond piece is at times during the interest rate cycle.

In doing so, we are helping to manage the two biggest risks that investors currently face. And it’s all done in a low fee and tax efficient manner.

Why Should I Invest With Orcam?

We believe there are six primary reasons to consider Orcam:

1.  We are truly different from the standard Wall Street financial management firm.  We are very low fee at just 0.17%-0.35%. We use truly outside the box thinking in all of our economic and portfolio modeling. We are a client first, profits second business.

2.  You can obtain access to our unique financial and monetary expertise for one of the lowest fees in the asset management business. The average management fee in the asset management business is 1% relative to our extremely low fee of 0.35%. This low fee is likely to add tens of thousands and perhaps even hundreds of thousands to your portfolio relative to similar alternative approaches over long time periods.

3.  Our approach is unique in that we personalize portfolios to account for the dynamic risk landscape of the adaptations in the business cycle in order to create parity between your perception of risk and the underlying risk of the financial markets. We call this countercyclical indexing because it helps to maintain the way you actually perceive risk with the portfolio’s underlying exposure to asset class risk. This allows us to adjust portfolios on a cyclical basis to account for the changing relative risks of different asset classes. This results in a high probability that your perception of risk will be aligned with the actual riskiness of your portfolio throughout the ups and downs of the business cycle.

4. We run sophisticated, but tax and fee efficient portfolios providing you with the confidence that an expert is optimizing every aspect of your money.  We do the heavy lifting and obsessing over your portfolio so you don’t have to.  This gives you the ability to focus on what you’re an expert in so you can rest easy knowing an expert is watching over your portfolio over the course of the changes in the business cycle.

5.  We treat your portfolio as though it is our own.  We align our risks with those of the client in a way that forces us to manage the assets as though they were our own.  Not to mention, we eat our own cooking so our personal assets are invested in the same types of strategies that we provide for clients.

6. We are human advisors customizing and organizing your financial life.  Vanguard has found that the value add of a human advisor is as much as 3% per year.¹ This is due to the fact that most retail investors don’t profile themselves correctly, pay high fees, fail to rebalance, don’t properly diversify, don’t withdraw funds efficiently, don’t tax minimize and succumb to a laundry list of behavioral biases. We help optimize every component of these potential inefficiencies.

Additionally, study² after study³ has shown how biased investors are. We are not properly equipped to handle complex systems like financial markets. All of these biases leave us selling low, buying high, chasing performance, biased by recent history. Orcam’s approach is designed to alleviate this problem.  Not only is our approach extremely systematic, but the use of an outside advisor helps to reduce the risk of biased portfolio intervention. In many ways we act like a personal trainer for your portfolio. We help keep you on track, avoid succumbing to bad temptations and help you intelligently navigate the many tough decisions that our financial lives entail.

Sources:

¹ – Quantifying Vanguard Advisor’s Alpha, Vanguard, March 2014

2 – Nagel, Mimendier, Investor Biases, http://www.econ.yale.edu/~shiller/behmacro/2007-11/malmendier.pdf

3 – Shiller, Robert, From Efficient Markets to Behavioral Finance.

Is Orcam’s Approach Right For You?

Orcam’s services are customized to each individual client. Because of this it’s difficult to say whether we will be a perfect fit for your needs. Here are some common questions that might help you decide whether Orcam is a good fit:

1) Are you paying high fees and looking to reduce your fees? At .01%-0.35% Orcam has one of the most competitive fee structures in the asset management business.  In addition, any financial advisory services are wrapped in this low fee.

2) Are you skeptical about “active management”, Modern Portfolio Theory and “passive” indexing approaches? Orcam’s approach is different from the standard high fee “market beating” sales pitches that consistently fail to live up to expectations.  Our indexing approach is more akin to a low fee Vanguard style indexing approach, however, unlike a static indexing approach we create portfolios that are countercyclical and therefore better align the investor’s risk profile with the relative risks of the underlying assets in the portfolio.

3)  Are you too busy to manage your own investments?  Many people are simply too busy with life to manage their portfolios year-round.  Our low fee indexing approach provides clients with a tax efficient and low fee approach that is systematically managed year-round so that the investor can focus on their lives and work without the hassle of portfolio management.

4) Do you tend to be overly emotional and reactive to your portfolio?  Research has shown that the most valuable aspect of having a financial advisor is helping you establish a plan and stick to that plan. In many ways an advisor is like hiring a personal trainer. They’re not going to turn you into the next Arnold Schwarzenegger, but they will establish a plan, help to maintain that plan and help you avoid making many of the big mistakes that would otherwise result in you being worse off without the trainer.

5) Are you a patient and cyclical investor? Our approaches can take years to play out because of their inherently cyclical nature. If you’re looking for short-term “market beating” returns our cyclical approach might not be ideal for you.  Our portfolios are designed around a minimum of 3-5 year time horizons and require some degree of patience without the unrealistic idea of the “long-term” that is necessary for so many indexing strategies.

6) Are you concerned about your risk profile and your current asset allocation? Our alternative approach to risk profiling and asset allocation can create much greater stability in portfolios relative to the traditional advisory approach which tends to be much more aggressive than what we often find to be appropriate.

7) Are you looking for financial planning without the 1% fees? Our 0.1%-0.35% fee is a comprehensive wrap fee that covers asset management fees, financial planning fees and a comprehensive review of outside financial accounts (such as 401k plans, etc).

What Differentiates Your Approach?

1)  We have a very low asset management fee of 0.35% and lower depending on your account. Meanwhile, the average asset management fee in the investment industry is 1% and often times much higher.

2)  We understand the big picture like few do.  Our focus on the macro picture has helped us make countless accurate predictions over the years by focusing on understanding the complexities of the financial system at its operational level.  This helps us avoid many of the pitfalls and myths that hurt so many investors.

3)  We understand risk.  We don’t view risk in the sense that practitioners of Modern Portfolio Theory do (as standard deviation or volatility).  We perceive risk as the potential that you won’t meet your financial goals.  And we customize that view to your goals and needs based on the understanding that portfolio risk is primarily derived from the risk of purchasing power loss and the risk of permanent loss.  These risks are perceived in a dynamic nature by all investors and so portfolios must account for this dynamic risk environment.  We apply our unique understanding of risk to client portfolios resulting in a form of diversification that is uniquely customized for our clients.

4)  We understand that the financial asset world is dynamic and cyclical.  Most asset allocation strategies rebalance portfolios back to some static allocation as the business cycle expands.  For instance, a 60/40 stock bond portfolio will tend to become unbalanced as equities outperform fixed income.  Traditional portfolio management says we should rebalance the portfolio on a nominal basis back to its prior 60/40 weighting.  But this doesn’t account for the fact that, as equities rise, they tend to become more risky relative to bonds and other asset classes.  In other words, the risk of the 60/40 is not the same in the early part of the business cycle as it is in the latter portion of the business cycle.  To adjust for this, we weight portfolios on a cyclical basis to rebalance for risk. This approach helps to create parity between your actual risk profile and its exposure to asset classes at times in the business cycle. This helps us align our underlying portfolios with the way our clients actually perceive risk.

How Are Your Asset Management Fees so Low?

Our fee of 0.35% is among the lowest in the asset management business. We charge low fees because we think that clients deserve sophisticated asset management without being charged “2 & 20” or even the industry average of 1%.

Most importantly, we know that high fees can have a devastating impact on the long-term performance of client portfolios. For instance, if you invested $100,000 in two portfolios that earned 7% per year, the industry average of a 1% fee will result in a balance that is $127,000 less than Orcam’s 0.35% fee structure over a 30 year period. In other words, paying a high fee for asset management reduces your total balance by 20%!

 

orcam_fees

 (The impact of the industry average 1% fee vs the 0.35% Orcam fee structure over 30 years at 7% growth*)

Our Countercyclical Indexing approach is a very low maintenance and systematic approach that doesn’t result in a large amount of “active” management. This allows us to be very tax and fee efficient within these portfolios.

We’re able to achieve this low fee because we maintain very low overhead and quite frankly, we’re happy charging less knowing that you get to keep more. Most importantly, as a small start-up and independent advisory firm we aren’t shackled by the profit centric model that dominates most financial firms.  We don’t answer to shareholders or investors.  We answer only to our clients so putting their interests ahead of the firm’s interest is crucial to our success.

* This hypothetical assumes a quarterly fee withdrawal and 7% growth. For illustrative purposes only. Figures will not reflect exact real-world performance. 

 

Your Portfolios Are Very Simple. Why is That?

Investment managers are masters at making things look more complex than they need to be in order to justify charging their high fees.  One of the biggest red flags in a portfolio is the quantity of holdings you have. If you hold more than 10 positions there’s a strong possibility that you are a victim of high fee DIWORSIFICATION.  That is, diversification that actually makes performance worse by making things appear more complex than they really need to be.

The reality is that a portfolio can be diversified without having 10 or 20 holdings. Most of Orcam’s portfolios have fewer than 5 holdings because simplicity makes management more efficient over time and substantially reduces the overall taxes and fees. You don’t need a complex looking portfolio in order for it to work for you. Our approach focuses on getting your risk profile right and maintaining it over the course of the business cycle so that it doesn’t deviate too far from the market risks.  This is all done in a simple, low fee and tax efficient manner.

What Kind of Portfolio Performance Can I Expect?

If you’re looking for an advertisement about investment miracles, “market beating returns” and Warren Buffett type performance then you’ve come to the wrong place.  Our approach doesn’t focus on nominal returns because we view your portfolio as a “savings portfolio”.  This means that we focus on risk and generating high risk adjusted returns. But don’t confuse our approach for promising alpha or excess return. No, we focus on building the appropriate portfolio for you as opposed to selling the hope of market beating returns in exchange for high fees, as is so common in this industry.

Our approach is designed to maintain parity between your risk profile and its underlying asset holdings over the course of the changes in the business cycle. In doing so, we focus on growing your savings and protecting it from inflation while also protecting it from the risk of permanent loss. This approach smooths returns and helps to establish stability in your portfolio so you can more easily plan for the unpredictable future. Most importantly, we focus on maintaining parity between your risk profile and the relative risks of the underlying asset classes. That is, while your risk profile will remain the same over the course of the business cycle, the risk exposure will actually change as various asset classes change in price and expose you to different degrees of risk.

Because of this approach we expect to underperform the stock market at points in the cycle on a nominal basis.  Over the course of the business cycle, however, we hope to generate a risk adjusted return that is superior to a benchmark portfolio.  The Countercyclical Indexing strategy is not a “beat the market” strategy.  Instead, it is designed to create a portfolio return that is more appropriate for a specific investor’s risk profile than what Modern Portfolio Theory might output.  This approach is designed to smooth out the performance of a portfolio over the course of the business cycle and match your need for financial stability with the way your portfolio of savings actually performs.

Your actual performance will depend on your personal needs and which strategy we implement for you, but this approach helps to align the client’s perception of risk with that of the underlying portfolio over the course of the changing business cycle.

* Past performance is not indicative of future returns and this data should not be misconstrued as future performance.  This is merely a hypothetical designed to provide perspective on what the cyclically adjusted approach is designed to achieve.  Please do not misconstrue this as actual performance or an accurate representation of actual performance.  

Will You Create Portfolios that “Beat the Market”?

We don’t build portfolios that are designed to “beat the market”. In fact, industry wide research has shown that trying to beat the market is one of the primary causes of poor performance since this generally results in higher taxes and fees than a less active portfolio. Historically, 80%+ of pros fail to beat an average indexing strategy and individual investors perform even worse. The pursuit of “alpha” or market beating returns is in fact a highly destructive pursuit.

Our focus is not on building the best performing portfolios, but the most appropriate personalized portfolios. This means that we try to generate high risk adjusted returns within the parameters of someone’s personalized risk profile. Our research has found that the investor who reduces taxes and fees in a diversified portfolio while maintaining an asset allocation and plan that they can stick with through thick and thin, will on average outperform the investor who is consistently changing their plan in an attempt to “beat the market”.

Most importantly, “beating the market” is not a financial goal. Instead, most asset allocators should focus less on generating the highest return and more time on trying to achieve the appropriate return that will help them achieve their financial goals within the scope of their personal needs.

Are Your Accounts Transparent and Liquid?

Everything Orcam does is 100% transparent.  We custody all assets and accounts through Charles Schwab, one of the largest independent broker dealers in the world.  Through this partnership we establish the client as the account owner with full transparency and full liquidity.  Orcam has trading authority within the accounts so we can manage the assets, but the account is 100% yours and the assets are not accessible on our end.

Orcam Financial Group has no affiliation with Charles Schwab and only partners with them because we feel that they are one of the safest and most fee effective brokers in the world.  In addition, they are one of the lowest fee brokers in the world which allows us to keep our costs (and yours) very low.  This unique relationship creates one of the most transparent, liquid and fee efficient account arrangements possible.

 

Do You Manage Your Personal Assets This Way?

Yes.  We believe it’s important for an asset manager to “eat their own cooking”.  We believe our methodology is based on a sound and sophisticated understanding of the monetary and financial system.  We believe in this methodology so much that we have significant assets invested in portfolios using the same methodology we utilize for our clients.  More importantly, studies have shown that managers who align their interests with those of their clients tend to perform better than managers who have no “skin in the game”.¹ We think it’s crucial to do everything in our power to align the interests of our clients with the way we manage assets. Managing our personal assets in the same strategies we use for our clients is crucial to this goal.

¹ – Why You Should Invest With Managers Who Eat Their Own Cooking“, Morningstar, 2015

Do you Believe in “Buy and Hold” and “Stocks for the long run”?

The concepts of “buy and hold” and “stocks for the long-run” are often sold to investors based on completely unrealistic precepts.  Our financial lives are not one clean linear event that starts when we’re 25 and ends when we’re 65.  Our lives happen all the time and our savings represents a repository that must be allocated properly to meet our changing needs.  That means not only that it must grow, but it must grow in a manner that doesn’t expose us to excessive permanent loss risk.  The concepts of “buy and hold” and “stocks for the long run” are nice in theory, but buying and holding a portfolio of stocks exposes us to the rollercoaster ride of the stock market without accounting for the reality that our financial lives require greater stability than this rollercoaster can offer.  

With this in mind, we construct portfolios that are multi-temporal.  They are not merely for “the long-run” or the short-run.  They are customized to meet the specific needs of clients in order to create a portfolio that actually reflects your life and not some textbook theory about “the long-run”.

More importantly, we reject many of the ideas that formulate the basis for Modern Portfolio Theory.  Concepts like the Efficient Markets Hypothesis, the Efficient Frontier and rational expectations are simplifications of a complex world that imply that a static portfolio of ex-post financial assets can help us achieve our financial goals.  The reality is that the financial world is dynamic with changing relative asset risks and changing personal needs over time.  This requires a certain degree of dynamism within portfolio managements and our management style seeks to evolve over time with the changing risks of the market and the changing needs of our clients.

See also:

Is Countercyclical Indexing “Active” Investing?

The words “active” and “passive” investing have become muddled in a world where more and more people are indexing.  Most indexing advocates don’t mimic anything close to the global financial asset portfolio nor should they as this portfolio is not always weighted appropriately for all investors (for instance, at present, it is roughly a 40/60 stock/bond portfolio).¹  The problem is, by deviating from this global cap weighted index, we are all, by definition, actively choosing an asset allocation that deviates from the one true passive “market” index.  As Cliff Asness of AQR once said:

“You can believe your strategy works because you’re taking extra risk or because others make mistakes, but if it deviates from cap weighting, you don’t get to call it “passive” and, in turn, disparage “active” investing.”²

Countercyclical Indexing™ is just an alternative form of low fee, tax efficient and diversified indexing.  However, unlike a static procyclical index fund we don’t always rebalance back to a static risk assumption.  We rebalance to account for the fact that the markets move in a procyclical fashion.  In its simplest form, Countercyclical Indexing is just a different form of rebalancing that tends to better align an investor’s risk profile with the actual riskiness of the financial markets over the course of the market cycle.

Most importantly, Countercyclical Indexing is a low fee and tax efficient form of asset allocation that tries to capture the market return given an appropriate level of risk over the course of the business cycle.

¹ Ronald Doeswijk, Trevin Lam, & Laurens Swinkels. 2014. The Global Multi-Asset Market Portfolio 1959-2012

² Asness, Clifford. 2014.  My Top 10 Pet Peeves.  

See also:

Why Do You Use Index Funds?

Using low fee index funds allows us to maintain a highly efficient and diverse portfolio.  This means that you reduce your risks and your fees while giving you access to a sophisticated set of underlying assets.  Our portfolios hold thousands of underlying instruments while maintaining a very low fee structure.  Using index funds and ETFs allow us to better serve the needs of our clients.

Do You Offer Financial Planning Services?

Our process involves a comprehensive financial review. This requires an in-depth balance sheet review and financial audit. Although we are not Certified Financial Planners we do have a background in financial advisory and offer financial planning services as part of our services.  If you have questions about 401Ks, 529 plans, annuities, insurance products, etc. we are happy to help provide our planning services as part of the asset management fee.

Are You a Fiduciary?

Yes, we adhere to a strict fiduciary standard. This means that we are always looking out for the best interests of our clients. Our transparent, liquid and third party custodian arrangement leaves us independent of the conflicts of interest that plague so many other financial firms. We only utilize products that we ourselves would buy for our personal accounts and we have no ties to any third party that requires us to sell their products or benefit from the sale of those products. In addition, we eat our own cooking so we maintain a management style that leaves the performance of our accounts in-line with the way our clients are actually invested. Our independence and conflict free approach allows us to better serve our clients by aligning the interests of our firm with those of the client.

Why Doesn’t Orcam use Robo-Advisor Services?

It’s become very popular in recent years to automate your investment services through the various “Robo-Advisor” services. Orcam’s clients have access to Schwab’s Institutional Intelligent Portfolios which means that the other Robo Advisors can’t do anything that we can’t do. In fact, Schwab’s platform is customizable which means that we have an advantage over the fixed portfolios that the other Robos are creating. So, for Orcam’s low 0.35% fee you could get all the benefits of a real human advisor PLUS the automated portfolio option.

While much of our process is systematic and there are many advantages to automating an investment process (such as eliminating behavioral biases) we have several concerns with this style of investment management:

1) Robots can’t assess and maintain your personal risk profile correctly. We find the risk profiling by all the major Robo Advisors to be woefully (even frighteningly) inadequate. After a series of short questions the robot places the investor in a pool based on their version of “risk”. However, financial risk is a very dynamic and personal concept. What’s risky to one risk averse investor might be much riskier to another risk averse investor. A robot simply cannot assess all of the personal factors that go into proper risk profiling because risk is little more than a number to a robot. The Robo Advisors forego this very personal process in order to save on costs. And in doing so they actually add to the costs of the investor by profiling you incorrectly.

We feel that risk profiling is THE most important thing that a human advisor can provide and a robot simply cannot properly assess your understanding of risk and maintain it consistently.

2) The Robo-Advisors all use Modern Portfolio Theory (MPT) to determine portfolio allocations. The problem with MPT is that it is a nice textbook theory of portfolio construction, but bears little resemblance to our actual financial lives. It relies on concepts such as “the long run”, “standard deviation” and linear financial markets to construct portfolios, however, these concepts don’t apply in the way that MPT theorizes.

For instance, most people’s financial lives are not a “long-term” at all, yet MPT implies that most investors can ride out the stock market’s ups and downs because the data shows that the stock market tends to rise over multi-decade periods. While this might be true it is not relevant to most investors whose financial needs are often much less than a multi-decade period.

Your financial life is dynamic. Your risk profile will change over the course of your life and the markets are constantly in flux. While we believe in a tax and fee efficient approach, we also know how important it is to keep one’s risk profile updated to account for changes in the markets and your personal life. MPT doesn’t account for this as it’s a static equilibrium based model of the financial world. This often results in a cookie cutter asset allocation that doesn’t properly manage the risks in the portfolio at times.

MPT assesses “risk” as “standard deviation” or volatility. This results in a portfolio construction process that doesn’t generate portfolios that properly view risk in the same way that an investor sees risk. In reality, risk is much more than just volatility. In fact, volatility might be a very good thing in a portfolio (for instance, when all the volatility is positive). But a robot doesn’t properly account for these factors.

All of this results in poor performance. As we saw in 2014, the Robo Advisors all generated performance that was sub-par relative to a basic 60/40 portfolio or the Global Financial Asset Portfolio. In my opinion, it’s largely due to a flawed methodology for asset allocation.

3)  Lastly, we feel as though much of the Robo Advisor business is predicated on good marketing. Slogans like “passive indexing” and “tax loss harvesting” are powerful marketing terms that don’t bear much weight. The poor performance in 2014 showed that Robo’s are ultimately active asset pickers just like everyone else (and not very good ones). And tax loss harvesting ultimately comes down to being tax deferral and, in many cases, market timing. The Robo firms are very good at marketing their ideas in exchange for higher fees, but at the end of the day they are selling a “passive” approach that is really not much better than a simple Vanguard allocation. There is simply no reason to pay a premium for such a thing.  If you want passive indexing then buy a simple 3 or 4 fund Vanguard approach, save the added fees and rebalance once a year.  It’s that simple! You don’t have to pay an advisor or a Robo Advisor to do things that may or may not help you, but will certainly help THEM.

Conclusion – The Robo Advisors are likely fine for someone with fairly basic financial needs who can’t afford to work with an advisor full-time or is very comfortable as a do-it-yourself investor, however, financial advisory fees are becoming highly competitive. Orcam’s asset management service is LESS expensive than many of the Robo Advisors and provides a more personal and comprehensive overall service. As much as we like automation, robots have their own weaknesses and I personally would never invest my own assets in a purely automated service.

See also:

Why Do You Use a % of Assets Under Management Fee Structure?

We feel that a AUM % fee structure best aligns our interests with those of the client without having to charge performance based fees like high fee hedge funds. That is, we are incentivized to generate high returns for our investors because the firm benefits from growth in assets. Likewise, poor performance hurts the firm’s revenues because assets will decline.

Further, we manage assets on behalf of individuals as well as institutions.  Unfortunately, the flat fee model doesn’t work well across all clients because some clients with substantially larger portfolios require much more service and maintenance than other clients.  This makes the flat fee structure very cost ineffective for us given that a $250,000 retail account requires far less maintenance and customer service than a $100 million institutional account.

One of the reasons we are able to maintain a low fee structure is because we account for this reality in our cost structure.  While we do believe that a flat fee structure can make sense in some circumstances the % of AUM model helps us effectively manage our time and costs by aligning costs with customer service needs.  By maintaining this fee structure across all of our accounts it helps us to better manage overhead, time and service all clients more efficiently.  More importantly, it helps us keep our interests aligned with those of the client without charging high performance fees like many hedge funds do.

Who Is the Portfolio Manager of my Account?

Cullen Roche oversees all portfolio management decisions.  A relationship with Orcam Financial Group gives you direct personal access to his expertise.

Do You Have a Minimum Account Size?

As a boutique firm we maintain a minimum account size of $500,000 in order to maintain personal relationships with our clients.  This allows us to better service our clients and spread more of our time across our client base.  We pride ourselves on having close relationships with our clients and ensuring that we can manage their assets as though they’re our own.  Having account minimums allows us to better achieve this goal.

How Do I Access My Account?

You can access your account through the Charles Schwab platform including their mobile application.  This will give you real-time access to your Orcam account so you can stay on track with the markets and any changes in your portfolio.

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