015: The Future of Retail Wealth Management: A Conversation with John Morrison

John Morrison [00:00:00]:

The skills that it takes to get wealthy and the skills that it takes to stay wealthy are often different. Don't risk what you have and need for what you don't have and don't need. Set yourself up with some base level of financial security. Once you have that, have at it. Buy that property or do that angel investment. But don't risk what you have and need to set your life up for something that you don't necessarily need.

Christopher Nelson [00:00:33]:

Welcome to Tech. Careerism money talk. My name is Christopher Nelson, I am your host. I've been in the tech industry for 20 plus years, and after climbing my way to the C suite, working for three companies that have been through IPO and investing my way to financial independence, I'm here to share with you everything that I've learned and introduce you to people along the way that can help you on your journey. Today I want to introduce you to John Morrison. John Morrison is the head of portfolio management at Secfy. SecFi is a company that helps technology employees plan out their equity compensation and helps them finance stock options as well as wealth management. Now for people that know, know wealth managers and myself have not always got along because I haven't really understood the value. But one of the things that I try to show people is what good looks like. What does it look like to meet people who are experts in their industry? John and I have had a couple conversations offline before we've had this because I really wanted to understand who he was, what kind of wealth advisor he was. And I'm excited to introduce you to him today because I think he's going to open your mind and help you understand what great looks like. So John and I today are going to spend the first half of the show. We're going to really talk about his origin story. I really want to hear a lot about that. The other thing I want to dig into is his strategy around portfolio management and getting to know him. I understand some of these things and I really want to spend some time with you today digging in, asking the hard questions. So stick around because I am going to be asking him questions around what are the values that wealth managers can really bring to the table to technology employees when a lot of these things we can buy off the shelf today. And I think that you're going to be very interested in what you hear. So stick around for that. I'm excited to introduce you to John. Let's meet him right now. All right, welcome. I'm excited to introduce everybody today to John Morrison. John Morrison is the head of portfolio management at SecFi. SecFi is a company that helps technology employees just like us, with equity planning, stock option financing, and now wealth management. This is a practice that John is starting there and he's come from seven years working at investment strategy, helping large institutions invest at dimensional fund advisors. And so we're excited to introduce everybody today to John Morrison.

John Morrison [00:03:07]:

Hi everyone. Happy to be here.

Christopher Nelson [00:03:11]:

Well, yeah, thanks for coming on, John. I think that for technology employees today who are getting equity compensation and are coming from no knowledge to some knowledge, this is so complex and I think being able to spend some time and ask you some questions, I'm excited to get into that. But before that, I love to understand people's origin stories. So how did you actually get to this moment where you were building out this wealth management function for SecFi? Where did it start for you?

John Morrison [00:03:45]:

Sure, so I've always been kind of a science. You know, growing up, I won the science fair in my high school. I took all the science courses. My undergrad was in neuroscience. And really that was all about trying to understand the world, frankly, and that's what drives me and my curiosity. But I took an economics course as part of my undergrad and it just came so naturally to me and gave me another perspective on how to understand why the world is the way it is and why do people behave the way they behave. And so I just sort of fell in love with economics and finance and markets and then layering on top of that, my childhood, I grew up in a house that wasn't a household, that wasn't super well off. Things were volatile and that was stressful. And so when I started to understand economics and understand money, I sort of became obsessed with how to optimize those decisions around money to avoid sort of the situation that I grew up in and kind of change my future. And now I hope to continue to help people to change their futures as well.

Christopher Nelson [00:05:07]:

Yeah, there's a common thread there that I understand and I think it goes either two ways. Like there was a lot of economic uncertainty and so people really pursue personal finance to be able to find stability. Or it could be the scenario like myself where we weren't thinking about what happened in the next meal and not that we had a lot, but we had enough, but it was more of I wanted to know more of how the system worked and how it worked, like how did money flow? And so it sounds like this drive you have this science degree coming out of undergrad. Where did that sort of take you for your next step?

John Morrison [00:05:51]:

Yeah, so my first job out of undergrad was in credit risk and it was 2008. So the summer of eight, I joined Goldman Sachs in their risk management group right before the financial crisis really kicked off with the failure of Lehman Brothers and all the other institutions that were in big trouble at that time. So it wasn't a great time to be looking for employment in 2008. But where I landed was probably the only place where people were getting jobs at the time. Right. And so I was coming from a science background but I received quite the crash course in finance, economics, banking, capital markets and risk. And that early career, early job where the emphasis was on sort of what could happen and what was likely to happen and how to protect yourself from the downside was really influential to how I view the world and invest to this day. So one of the things I think about is how do you define risk? And there's lots of different ways to define risk. Risk to one person might be different from risk to another person, but one of the ways to think about it is more things can happen than will happen and that's risk. So positioning yourself for the most likely outcome while understanding the full range of possibilities is really what investing is all about. And my scientific background and sort of affinity for science and empirical thinking lead me to a very probabilistic view of the world and an empirical approach to managing people's money and to how to think about doing the right thing. X ante given all the information that we have and sticking to that for the long run because the noise will wash out eventually.

Christopher Nelson [00:07:58]:

So I do want to go back. So 2008, Goldman Sachs. You walk in there, I have to expect that there was a lot of angst, there was a lot of nervousness in that environment. At the same time for yourself, coming in out of school, your first job, digging in, walking us through, what was that experience like? Because that had to be on the job. NBA like you probably got enough from and you were there for two years, three years.

John Morrison [00:08:33]:

I stuck around at Goldman for four years. So the next step in my career was going to business school at U Chicago.

Christopher Nelson [00:08:39]:

So from eight to 2012, right in the heart of this, you're doing risk management at Goldman Sachs. Looking at what would you say that you saw a lot of the worst case scenarios play out?

John Morrison [00:08:54]:

Yeah, for sure. You definitely saw a lot of worst case scenarios and a lot of things that people didn't think were possible. Right, right. That's one thing. Things that have never happened happen all the time. You have to be ready and understand what's possible so you can make the right decision to protect yourself and to benefit too. It goes both ways. Both things that have never happened that are negative happen all the time and things that have never happened that are positive also happen all the time. So you really got to understand the full breadth. But yeah, the Goldman four years at Goldman kicking off my career really wasn't an eye opening experience. I didn't come from the backgrounds that a lot of other folks that go to Goldman come from. People were asking me, I grew up in the Seattle area. I remember one experience early on when someone asked me, they found out where I was from, and they asked me, So, do you sail? Sail? Like what? No, I don't sail. My family didn't have a sailboat. What? Are you crazy? So that was sort of the world I was stepping into.

Christopher Nelson [00:10:12]:

And.

John Morrison [00:10:14]:

Both socially it was different. And then everything that was going on in the economy was obviously intense, and I learned a lot. One of the things that I found quickly was that I was going to need to be able to prove myself like an undergrad degree in an unrelated field. While it sounds impressive, it's not going to cut it. You need to actually then dive into the field that you're working in and really prove yourself. So I did the CFA program right away. CFA is a chartered financial analyst. It's a two to three year self study exam, taking three different exams that are very rigorous, very difficult to pass. And that was the way that I gave myself a credential, the way that I gave myself some credibility of some minimum understanding of what's important. The CFA isn't a guarantee of success, but it is a signal that you have some minimum understanding and some ability to be disciplined and interested in the field.

Christopher Nelson [00:11:30]:

Yeah, I talk about that with people all the time, as if you're in a space and it's new for you, getting an education. And education doesn't have to be, oh, I'm going to a four year university or Master's program. You can go get very reputable certificates that allow you. Basically, they're saying, okay, I have studied and I understand, sort of know what fits into this bubble on the Venn diagram, at least what's known today, so that then I can be conversant, I can actually execute a few things. And it sounds like that CFA, and then this on the ground sort of risk management started then putting inside you this focus that said, okay, now I understand a lot more. Now you leave at the end of four years with all this knowledge, the CFA, what was the impetus that said, I'm ready to go to Grad?

John Morrison [00:12:24]:

Just sort of a lot of my responsibility was to manage the risk associated with Goldman's investment fund clients. So talking hedge funds, talking private funds, talking mutual funds, like any sort of investment fund client of Goldman Sachs that we had a trading relationship with or lending relationship with. Part of my responsibility was to evaluate those firms and come up with what was reasonable from a risk taking perspective, from Goldman's perspective. And I had to do due diligence right, with all these fund managers. And one of the common threads was a lot of prestigious graduate degrees. So it was really eye opening to be on the sell side, as they call it, at the investment bank, and talk to the buy side, which are the people actually allocating money for clients and see the difference there. And like a lot of people on the sell side, the buy side looked really appealing. From a career standpoint, from an interest standpoint. It's just more interesting to allocate, you know, one of the common threads was a lot of prestigious grad schools. So I wanted to do that too. So I made it a goal to get, now, a top MBA program and Chicago was on my short list. And after visiting a bunch of schools, it was the one for most. Has a reputation for being very quantitative, has a reputation for being sort of like the nerdy empirical business school contrasted with sort of the other side of the coin where people have a perception of MBAs as being kind of superficial and socially driven. Chicago is kind of the exact opposite, which fits me perfectly.

Christopher Nelson [00:14:30]:

Right? I was speaking to somebody recently where they talked about an MBA. The education gave them some push forward, but it was really about the network. Like it was really more about, okay, who's there? Who's doing what in the future? Versus this sounds like the education, the rigor that you got out of it had much more weight to it than, let's say that social aspect.

John Morrison [00:14:56]:

Yeah, I would say so, for me at least personally. Not that other people couldn't, not that the network is invaluable. Of course it is. But I really dove into the academic side of it and I was very interested in digging deeper into the science of finance and investing and there's lots of different approaches to investing. So the traditional approach is kind of bottom up stock picking, know the companies really well, forecast what's going to happen, get really smart on channel checks and building models and getting really detailed there. I did that. I did that sort of at Goldman. That style of sort of analysis was in my job at Goldman. But then I got an internship doing that style of investing and as I was exposed to the academic research on this stuff and dove really deep into the real evidence about how to invest, it just wasn't for me. It's not that you can't do that and be successful at it. It's just not the approach that I take. I just couldn't stand not knowing if I was lucky or good.

Christopher Nelson [00:16:21]:

Right. You want the data because of the statistics.

John Morrison [00:16:26]:

Are such that you can get lucky and be lucky for a decade and think you're good but not really be good and vice versa so you can get a bad draw and be unlucky. And none of that was very satisfying to me. So I wanted something that was a little bit more robust, evidence based and empirical. So that was like my quantitative shift in my mindset was like, let's look at this from a more systematic research perspective rather than individual stock picking.

Christopher Nelson [00:17:08]:

And it sounds like this is trying to pursue data, understanding fundamentally what happens. Again, this goes back into that mindset of where it's like, I want to try and understand how things work, to try and find to reduce as much risk as possible and try and find stability. Right. I mean, that's part of this whole John Morrison origin story.

John Morrison [00:17:33]:

Totally. You're exactly right. It's like how do you make the best decision given an uncertain world? And really you think I have a probabilistic view of things. So in math, the first moment, as they call it, is the mean or the average or the expected value of a probability distribution. And that's important because the average is what you should expect, right. That is the sort of baseline. But you can't really make decisions just based on averages. You also have to understand the second moment, as they call it in math, which is sort of the range of outcomes that are possible. And that's what I've been talking about, is sort of a risk. And then there's third and fourth moments which are about skewness and kurtosis statistical terms. But the main point I'm trying to make is like, you've got to understand the whole sort of distribution to really make good decisions. And what I find is a lot of people don't even understand what the averages are. Not only is it they're not thinking about the other additional things like the variance or the range of outcomes, but they're also not even clear on what is to be expected or what is the average return. So I think it's just really important to understand deeply what it looks like to be an investor in stocks versus bonds versus a portfolio versus a portfolio mix of stocks, bonds, private real estate, private equity, venture capital. You really have to have a deep understanding of how it works in concert with all the other things in your portfolio and going on in your life in order to build a portfolio that's robust right.

Christopher Nelson [00:19:36]:

That can weather any type of economic conditions. I mean, it truly is understanding all of those pieces. And then how do you as an individual manage that, right. With partners, with the right partners in the right areas? And so I'm excited to get to that. Let's move on this story in the sense that, sure, you got through Booth and then I think you did consulting for a little bit and said yes.

John Morrison [00:20:03]:

So I decided not to go down the stock picking traditional investment route. I had an offer, it was great money, it was really attractive, but I just sort of had that existential, like, hey, do I really believe this is the right way to do it? And I couldn't answer that question affirmatively. So I did what a lot of people do when they don't know what they want to do, which is consult. So I became a consultant. And consulting is great in a lot of ways because you get exposure to a lot of different industries and you see a whole bunch of different companies. I did it for a brief period of time. I was there for just over a year. I learned pretty quickly that that was not like the long term for me. I am really determined, like, hey, I want to be a quantitative investor. And so I took that year while I was a consultant. I learned a lot, but I was also trying to break into the investment industry and then I did. So that's how I wound up at Dimensional, which where I was prior to joining SecFi. I stayed there for seven years. And for those that don't know Dimensional Fund Advisors, it's a pretty big firm, but it's not very well known among the public because they don't really advertise. So a lot of their funds have been exclusive and only accessible through approved advisors and institutions. But dimensional. It was founded by David Booth. Who's? The namesake of the Chicago Booth School of Business. They're kind of the original quants, started in the early 80s. They've got deep roots in the University of Chicago. Multiple Nobel Prize winners have been involved in the firm or are still involved in the firm. Dozens of PhDs on staff. Really just an interesting place to work and an investment approach that really resonates with me as a sort of empirical kind of guy.

Christopher Nelson [00:22:15]:

Yeah. How many sizes of assets are under management?

John Morrison [00:22:20]:

I think currently it's about 650,000,000,000, give or take. So significant. It's not BlackRock, but it's a large firm.

Christopher Nelson [00:22:31]:

Yeah, it's a large firm. It has some weight. And so you're there, you're spending time and this is where you're placing millions, if not billions of dollars and managing very large portfolios over your career there, right?

John Morrison [00:22:47]:

Yeah, and it was wonderful. I progressed in my career. I was associate portfolio manager when I joined. I was a vice president and senior investment strategist. So I was promoted and moved up in my career. But it was a big company and it still felt like I was a cog in a wheel. And I've always wanted to do something more entrepreneurial with my life. I've always wanted to sort of take that risk at some point. I wanted to build something. And I always feel motivated when I build stuff, whether it's a bench for the backyard to sit around the fire pit or it's a company. So the building sort of bug was a motivator. But one thing that you point out all the time, I think, in your podcast, is you kind of have to be an owner to achieve economic independence in this world. Like, working a W2-job probably isn't going to cut it. Not that it can't, but you need more than that, frankly. You need to save and invest and have a W2-job, at least sometimes to make it to a place where you're financially secure and independent and have the freedom to do things.

Christopher Nelson [00:24:11]:

It's true. And this is where I try to encourage everyone. And this is again, why companies like SecFi that help technology employees, employees that have equity compensation, understand it is so important as we're starting to get more educated on the value and how it all works. But being a W two employee and also a part owner in the company will compound your career compensation. And I'm working on some models, now, we're sharing now in the podcast live, I'm going to have you look these things over. But as you know, salaries of people who started, let's say with Microsoft and then they got that equity compensation, I've done some historical research on that over time. And then you take away that equity compensation, even for low risk, low reward working for public companies, I'm finding that people are making in 30 years what normally would take you 50 years to make that's impactful. And guess what? Again, time, value of money. You're getting the money up front, you're also getting it where you're also getting a salary and bonus so you can invest all that. That's really powerful.

John Morrison [00:25:27]:

Totally. And to be clear, it is a risk like you're concentrating in the stock of a company in some way, which has a lot of risk associated with it. But at least in this situation, you have some control, 100% part of it depends on you, which is a better risk to take than just one where you're putting money on black at the roulette wheel and hoping you get right.

Christopher Nelson [00:25:58]:

And actually my model is dictating that you're actually taking the dollars off the table every year. So you're liquidating, you're not concentrating. But what you bring up though, I think is very important. And this is where people fantasize over being the founder of a company or a CEO of the company. Their options for liquidity aren't the same as those of us who were, like myself, the Director, senior Director, VP, CIO, I am not the founder. I have different expectations of myself. So if I'm regularly taking things off the table, nobody cares. I can deconcentrate, right?

John Morrison [00:26:37]:

Yeah, exactly.

Christopher Nelson [00:26:41]:

So then let's get to the point, because I think you touched on it a bit, but you made the decision, you have this entrepreneurial spirit, I think we just talked about. I think there's an opportunity to get some skin into the game. You can be a part owner. You decided to make the move and go build out a wealth management function that is less going to institutions, but is now going to individuals.

John Morrison [00:27:05]:

Yes. And that's SecFi wealth. So SecFi as a company we've been around for six ish years, I think, founded in 2017. And the original product and idea was a financing solution for people to exercise their options. Sometimes the costs are prohibitive, especially if you've waited and there's a big tax bill associated with it. So SecFi stepped into the market to try to solve this problem. Because exercising early, even with the cost of financing, when you've got a company and you work at a company that's going to go public, the Impact can be hundreds of thousands, even millions of dollars in net take home if you exercise earlier rather Than later. Given the differences in tax rates for long term and short term gains and whatnot. So that was the problem that SecFi originally set out to solve. And we've been the category leader in that kind of niche business of financing employee exercises. But in that journey, SecFi found that a lot of people were asking what they should do with this money and asking for advice on should they exercise or how much should they exercise. And so it was a natural extension to expand into advice and wealth management, given where we were and who we were talking to and the questions we were getting. So SecFi hired a lead advisor who's one of my business partners here at SecFi, and then they hired me and then we kicked off Secfi Wealth Management at the end of September last year. So we've been officially launched for a year now. And it's been just a really fun journey. I really enjoy directly connecting with individuals to help them with their finances. It's really fun.

Christopher Nelson [00:29:10]:

So what are the principles that are driving wealth management at SecFi?

John Morrison [00:29:17]:

I'll say clients first. There's a saying I like, which is we do the right thing the right way right now. And if we do that, I just think that we're going to succeed. Wealth management is a business where it's highly trust based. Like, you hire a wealth manager because you don't want to think about this stuff and you don't have the expertise, and you believe that they do. But how do you even evaluate if they do if you don't have the expertise in the first place? It's pretty hard, right? So there is some level of trust that needs to come into it. And in my opinion, if we do right by our clients, that word of mouth of like, hey, these guys really do know what they're doing and you can trust them, is going to spread and we're going to be successful in that way. So I always put the client first in sort of how we think about building our business, and serve the client well.

Christopher Nelson [00:30:21]:

And this is where I want to double click into this for a second because the wealth management business, the traditional wealth management, all wealth management, traditional, all alternatives are frustrating. They're frustrating because I think that you can trust people. You can learn to trust people, but you can find out that you're trusting people that don't know what they're doing, right. And this is the conversation I want to take a minute and have because I had had some very bad experiences right after my IPO with some wealth managers that I felt were just trying to earn my trust. But at that point, because I had been doing a lot of my own stock investing for ten or eleven years preceding, they knew less than I did, and I was unimpressed with the result. And John and I met for coffee because I was like, can we even have this interview? Like, who is this guy? And one of the things that's so important to me for technology employees that I'm trying to educate is I want to show them what good looks like. I want to show them what that looks like. The thing that I've come to understand a lot is that when there are professionals that operate at an institutional level, they're getting the trust of companies and they're moving millions and billions of dollars. And then they feel a drive to go help individuals, and they go from B to B to B to C. You're dealing with something that's completely different. And this is why I like taking time and walking through people's stories because it became apparent to know that I'm talking to somebody completely different. And John and I have had a couple conversations since then. We had to stop and start trying to do this live in a studio. That's a whole other story. But I'm spending time and I'm articulating this because you're different John. You're different. And I think one of the things is that it's not just trust. There is a level of competency in understanding things. And I think your story is so profound because it's driven out of a kid who's like, I'm in this financially strange circumstance. I have this love of math, this love of learning and now you've gone this full circle to go to these heights to say I now want to serve people with this superpower that I've developed.

John Morrison [00:33:08]:

That's high praise. Thank you for that compliment. That's awesome. The financial advice and financial advisory and wealth management industry, it's super fragmented. There are thousands of firms and at DFA, at dimensional. One of my main responsibilities was to help financial advisors build portfolios for their clients. And I've met with hundreds of advisors and there's a lot of really wonderful advisors out there, but there are also a lot that leave something to be desired. Unfortunately, the barrier to entry in this business is fairly low and there's a lot of quote unquote advisors out there that really have no business holding themselves out as experts. So as I was seeing that play out and seeing that fact in the industry, I was like, well if these guys can do it, I should be able to do it much better. That's part of why I decided to pursue this was because it feels like there's a big gap, frankly, in what kind of access to expertise regular individuals have. It starts with expertise. And to be clear, wealth management is not just about investing. It's also about tax planning, estate planning, structuring your financial life. And we've got expertise in everything. Those areas. So we're serving a niche of people with startup stock options that's a pretty complex niche that a lot of advisors and CPAs frankly just don't have. So that expertise is a differentiator and then you get additional institutional level expertise at the investment level and I think.

Christopher Nelson [00:35:13]:

That'S a winning combination and that to me is the value that you can really add to the tech employees in our community, quite frankly because we need the expertise around the stock options and the planning period. It's complicated, it's complex and being able to sit down with strategists that can help us think a few years ahead is critical. I also think on the investment side so many people that I talk to are just frustrated with what I call this fast food wealth management that's fed to us by some of these larger shops. And so I think I want to encourage you. I'm flying off the cuff here but I think you're fine with this John. But call into John in their office as you meet with them. Ask them all the questions because the one thing that I've come to understand and I'd be interested in is for you John, to tell me what are some questions that you would ask to know financial advisors, wealth advisors. But when I went into our first conversation I said I want to go deep down the rabbit hole and understand broad things, risk alternatives. And we I think planned like a half an hour meeting and went for like an hour and a half and could have gone further. And I say this because you realize immediately when I know enough as somebody who I consider myself a professional only because I'm living off of my own income right now that I've created from my investment portfolio. But I've studied this a lot and when you have somebody who is then teaching you in advancing that, I haven't found that a lot in the wealth management industry. And I know technology employees love to get into details, love to get into the math, love to answer this. So this is why I'm advocating for people to just have conversations, have communications and make their own decisions.

John Morrison [00:37:15]:

Totally. I welcome it. We always try to lead with education. I sometimes promise people I don't know where the market's going, I don't pretend to know but I can promise that there is a reason for every decision we've made in your portfolio. And that reason is either based on returns and returns informed by evidence and empirical study. Risk is a risk reason or it's a cost reason. Those are the three reasons why we would make some decisions in the portfolio. And I am happy to dive as deep as someone wants to go on any of those to justify why we've made a decision that we've made. And that's sort of the promise is that there is deep thought and expertise behind every little thing inside the portfolio. I can't dive deep into every little aspect on this call. Maybe I can give a couple of.

Christopher Nelson [00:38:32]:

Examples of hold on because we're going to take a quick break and then when we come back, this is where we're going to get into the second half and we're going to go the deep dive into portfolio management. And I want to spend the next half really asking as many good questions as we can to try and help people again, get more visibility into where you live and play every day. John, we'll be right back. Okay, welcome back. We're here with John Morrison. We had a great first half of the show where we got to know John and what he's building at SecFi with the team there. And now we want to spend the second half, and we want to double click into portfolio management, and portfolio management with technology employees. My experience has been that it can be challenging right? There's challenges that technology employees face, and I really want you to help us understand what you see, but to tee it up. Technology Employees. Many of us may understand a little bit about stock investing. May have a small portfolio of.

John Morrison [00:39:42]:

Some.

Christopher Nelson [00:39:42]:

Stocks or some index funds. Have something in our four hundred and one K. And then all of a sudden we go to work for a company and we start getting a volume of equity. We start getting some things before the company goes IPO. After the company goes IPO. And then we're so busy at work and trying to grow our career that we take these issues and we walk into John's office and what do you really see sitting across your desk for technology employees? What are some of the key challenges they have in their portfolios?

John Morrison [00:40:16]:

I mean, the obvious and big one is that many of our clients typically have a very concentrated portion of their wealth tied up in an illiquid private company stock, and they're waiting for an exit. And usually it's a fast growing, high valuation, not generating a lot of profits yet. It's got to grow into its valuation, and that's a risk. A lot of our potential clients are coming to us with 80 plus percent of their net worth in their company that they work for, at least the earlier employees or the younger employees, and diversification can help manage that risk and smooth out that ride. And so when we build a portfolio, we're considering their exposure to their private company, and we're building a portfolio that's complementary to that. We don't want to double up on the same risks that they're already taking. They can do that on their own. They've got plenty of exposure. They don't hire us to do the things to speculate for them. They hire us to increase their expected returns, lower their risk and help them save money. That's what we're here for. And so we build portfolios that are consciously diversifying that risk without giving up expected returns. So that's the main thing about the portfolio management side of our clients that is unique. And the other thing that happens is when that windfall occurs, the company goes public, they get acquired. Now you got to decide what to do with that chunk of money. One, if it goes public, how do you sell it down? You don't want to go press one button to liquidate $10 million worth of stock. I promise you, you'll get a bad price on at least a portion of it. So you have to trade it intelligently, because once you're talking about these big numbers, even 0.1% is a lot of money. So you have to be smart about it. So how do you sell it down? There are trading strategies to make sure that you're not going to get run over by the professionals who are out there cherry picking you right.

Christopher Nelson [00:43:07]:

I want to pause right there for a second, because that was one of the most frustrating things for me, is that when I was charged by the fast food wealth managers is the thing they planted in my head. That I had to just realize, like I knew better than them, which was I had learned early in my investing career the concept of dollar cost averaging. When you buy stock right, you just want to average that. I also then became aware that executives, VP and above, had sort of access to these different plans. I can't remember the number, the name of it, but where they can actually pardon ten.

John Morrison [00:43:54]:

B five plans, the ten B five.

Christopher Nelson [00:43:56]:

Plan, where they can actually then dollar cost average out of a stock. And I realized that. So I actually learned a couple things. Number one is I learned that with our particular stock agreement, as I had it reviewed by a lawyer, that I could actually set up my own automatic divesting if it was managed by Schwab, a third party company. And I provided evidence to our stock team. And so I realized I could do the same thing. I just had to do a little bit more work, number one. And number two is I had to educate myself that, oh, this is a viable strategy that nobody is talking about, because you're right, the fast food wealth managers are going to come in and say, okay, sell half of it immediately, give it to us, and then we'll figure out what to do with the rest later. But when I looked at the tax bill, that was the thing too, that made me want to vomit a little bit, because there was no tax planning that went with that right. Which I know is really key to this whole plan too.

John Morrison [00:44:56]:

Yeah, I think there's some things you can do to mitigate that tax bill in the year when you have a liquidity event, one potential way to help soften that blow is to spread it out like you're talking about especially maybe your company goes IPO in like September, or let's say IPO is in the summer. You have a six month lockup. Well, sell some in December when your lockup expires, but then spread it out into the next tax year too. So you can mitigate the blow a little bit. Also, you can aggressively tax losses. Once you have a decently sized portfolio, the opportunities for customizing and creating strategies that are more custom to you customizing just grow exponentially. So one use case or one situation is, rather than owning funds, you can set up a tax managed account that owns securities directly. And in the year where you have your liquidity event, you aggressively tax loss harvest in that account to offset the gain on your recent IPO stock. And then once you're through that year, then you ratchet it back down to normal tax sensitivity or something like that. So there's a lot of tools that you can use to kind of mitigate the blow. And it's really about talking to someone, explaining the different strategies and the trade offs and making an informed recommendation so that they can then say, yeah, that is actually a really good strategy. That's what I want.

Christopher Nelson [00:46:52]:

So keeping on the topic of diversification, because I think I have found that many technology employees struggle with diversification, and I think that it boils down to two main reasons. I'd be curious to see what you see or what you've observed as well. Number one is their best thinking has got them to this point where they have now all of a sudden, they've come from nothing. They have this big wealth equity, and they're like, my best thinking got me here. I should not rock this boat. I believe that's flawed logic, but I believe that's their logic. I believe the second thing is they don't know who to trust and or they don't know what to do with the money. So then it goes back to, well, my best thinking got me here, I'm just going to leave it here. But I think because you know so much about the market and how it operates, you rattled off a stat that said, what is it? Three years after an IPO, there's usually then a considerable drop in the value of the stock.

John Morrison [00:48:04]:

Yeah, the data is clear. Like most IPOs have a pop on the first day, everyone sort of expects that because that's been average experience in the past. Empirically, that number is 19%. A lot of volatility around it. But the average first day pop of a recent IPO newly IPOed stock is 19% on that first day. But once you look at the buy and hold returns thereafter, they're pretty terrible, frankly. More than half of IPOs underperform the market over the next three years, you lose money on more than half of them. And this is the same phenomenon that venture capitalists are very aware of. And you hear them talk about how they expect to lose money on nine out of ten investments and then there's one that carries the portfolio. That phenomenon is still true in public markets. The majority of stocks, individual stocks underperform the overall market and the reason is because there's a small number of stocks that just have stellar returns and carry the market. That's always true. You hear this year people talking about the Magnificent Seven, the big tech companies that are powering the market return this year. It's not weird, that happens all the time. Maybe it's a little bit more concentrated than usual this year but it's not outside of the ordinary. There's always a small number of stocks that do really really well and power the market. Now of course you would love to be able to pick those in advance but come on, that's not realistic. Anyone who's selling that is in my opinion, selling you a bridge. I got a bridge to sell you kind of thing. So you touched on something that I think is important. The skills that it takes to get wealthy and the skills that it takes to stay wealthy are often different. So you probably shouldn't say your best thinking got you here, let's keep doing like yeah, it might work. You might end up incredibly like that of the - One of my favorite investment quotes from Buffett is don't risk what you have and need for what you don't have and don't need. So set yourself up with some base level of financial security, a reliable portfolio that's diversified, that makes sense, that's structured to outperform, that's built by a professional who knows what they're doing. And once you have that, have at it. Go ahead, buy that property or do that angel investment or whatnot, but don't risk what you have and need to set your life up for something that you don't necessarily need.

Christopher Nelson [00:51:27]:

That's huge. And I think the other thing that you said that I think is really important is this mindset of well my best thinking got me here. Well that's to build wealth. That's not a wealthy skill. That is a different skill set. And that is something that I've come to understand too is that the journey to building and keeping that wealth after you've made it is a whole different exercise, completely different exercise and involves a whole new set of people right. Bringing a nice team around you. Because as you mentioned before, investment is one aspect. There is estate planning and tax planning. I mean it's huge.

John Morrison [00:52:12]:

Massive. So on the portfolio side we're trying to add basis points. Once you get to a sizable amount of financial capital your returns are what power your portfolio prior to getting there. It's how much you save, right? But once you get there the calculus sort of shifts and it becomes much more important to optimize and get the best returns you can get given your risk tolerance and all that stuff and knowing how to do that requires a lot of expertise. Thankfully, you can do some stuff on your own now, which is wonderful, but you can do better than indexing if you're thoughtful about it. If you have the right people in your corner and you're paying a wealth manager, the value is in both the investment side and all the planning and structuring that can save you tens of thousands or even hundreds of thousands of dollars.

Christopher Nelson [00:53:28]:

Well, let's speak into that because that was a good conversation that you and I had. And again, this is where when I was marking that to market, when I stood across from these gentlemen back in 2012 from an unnamed shop, I'll leave it unnamed, but it was a big company, and they were telling me that it was going to be 2% for them to manage my portfolio in a way that I was already managing it today. That was really the question: if I'm doing some individual stocks, some mutual funds, et cetera, the value didn't seem to be there to me. There didn't seem to be any value because I felt like I knew more than them. I was already doing it. Today I'm basically paying somebody to do what I'm doing, number one. And number two is they didn't tell me about everything else that I needed. I thought that their concept of liquidating it give me a big tax bill didn't make sense to me. Now you have robo advisors that are out there doing some stuff. You also have index, investing, and this is why I really enjoy having conversations with you, because you are fearless in the way that you answer them. And I have ultimate respect for that, is how do you compete in this asset under management environment and what are the values that you bring to the table to garner that?

John Morrison [00:55:00]:

Yeah, it's a great question. So it is a very competitive field. I think volatility is the defining characteristic of finance. So I hinted at this earlier, but you can make a good decision and get a bad outcome. You can make a bad decision, get a good outcome, especially in the short run. Luck plays a big role. So how do you tell if someone was good or lucky? That problem still persists. Even though I'm using more reliable approaches than predicting the future, luck is always going to play a role. So in my opinion, when someone is evaluating, is this thing worth it? Is the fee I'm paying to these guys like, am I getting more value out of this than what I'm putting in? It's manifold and sometimes the value is chunky. So there might be another famous investing quote that I really like, it's like, it's years of boredom punctuated by moments of sheer terror. Sometimes nothing is going on in your financial life and in your portfolio in its steady state. But having someone in your corner who's an expert, who knows what to do when something happens, like when you have a liquidity event, when the market tanks 20% in a couple of weeks, when these big stakes decisions have to be made in a short amount of time, having an expert more than makes up their fee 99% of the time. But they got to be an expert. They got to really know and do the right thing. It is challenging to kind of quantitatively prove it out. I could show expected returns and tracking error of our strategies relative to the market and show you what I expect and compare it to the fee and say what we expect is greater than the fee, therefore you should hire us. All that is true but it's uncertain over any given period of time. So you've really got to trust in the manager, in the wealth advisor that what they're pursuing really is going to pan out like they are saying it will and then you also have to get value out of the structuring and planning side. Quick story, one of our clients is a salesperson at a tech company, a private tech company doing really well from an income standpoint and financial standpoint but not a lot of liquid wealth right now because most of it's tied up in this private company. We looked at his tax returns and found 60 grand in tax savings for him that pays our fees for a long, long time. We've already generated more value than we're going to extract from him in fees in a few meetings. So everyone is different I guess is what I'm saying. So the value might be different for you than it is for someone else but the fees you were getting charged 2% man, that is a high hurdle to overcome.

Christopher Nelson [00:58:53]:

Well, I would have been. I mean the thing is the question that I asked at the end of that because I felt like it was very high if I said well so then you don't get paid if the market goes down. And they said no and I said incentives aren't aligned and I said that because I felt like they wanted to get my money and put it on cruise control. And I'd heard stories, I've heard these stories since then too of people that have retired and their financial manager had everything like they put it in a dimensional fund and they just left it there and that was it and they kept we're paying for that and there was no tax, real planning or other things too. And so this is where I think everyone's situation is different. But when I think about technology employees and I think about the services that we need, it is very complex. And I think that when you combine strategic stock planning and wealth management and tax planning, I think there is a lot of value to be delivered that can be done in a way that is managed through some fees and not pay as you go. But I think it's important that value is read back. I think it needs to be very clear that people understand where they're getting the value because otherwise I think my personal opinion is the market has been tainted by some of these big shops that I honestly think want to keep people middle class.

John Morrison [01:00:41]:

Yeah, I mean, the amount of value that is extracted by, frankly, charlatans in this industry is just absurd. You do have to pay for people's expertise like yes, that is true and and you're not going to get away from that. But one thing that's happening in this industry is there's a bit of fee pressure on wealth managers just in aggregate, because of things like robo advisors and because of things like people getting smarter about what is the value of this. There's a bit of fee pressure, but the fees haven't really declined that much relative to history. But what has changed is the breadth of services that you get with a wealth manager has expanded a lot. So a wealth manager 30 years ago was just picking stocks for you. They weren't doing tax planning, they weren't doing financial planning, they weren't doing the structuring. And now you have to find one that is doing that. But that is becoming more of the norm. And that is what SecFi is comprehensive. It's tax planning. It's structuring your financial life. It's saving strategies. It's all of these things, including investing. And it's a pretty reasonable fee when it comes down to it.

Christopher Nelson [01:02:19]:

Well, and that's the thing. I think it needs to be seen in the broader light. Number one, and the other point though, that you brought up that I think is really important is you need to understand expertise. You have to understand that. And I know that when one of the conversations that you and I mentioned before is having a wealth advisor, having a portfolio where somebody is looking at it and saying, how do we maximize even the Bps out of it? And I know excuse me, you started going down a little bit where you talk about, okay, here's an index fund and people are looking at its particular fee. They look at this and they think it's overweight. But actually some of these things can actually deliver more Bps.

John Morrison [01:03:04]:

Oh, yeah. Indexing is generally, I think, it's one of the best financial innovations that have happened. It allows just very inexpensive diversification, and gives regular people a chance to own the market. It's a wonderful thing in general, but there are some drawbacks. So one of the frameworks I think about when I think about how to select a fund or a strategy for a particular person or situation, you have to understand the total cost of ownership of that investment vehicle or strategy. And there's a sticker price. That's what's known as the expense ratio and expense ratios on index funds rock bottom generally. I mean, you can find expensive index funds and if you have an advisor and they've put you in one of those, you should fire them immediately. But most index funds are very inexpensive when you look at the sticker price. But what you're missing is a bunch of stuff that is not captured by that sticker price. So, for example, there's a well known phenomenon called the index rebalance effect. And the reason it exists is because an index is just a list of stocks in their proportional weights. And every fund that tracks that index has to trade in the exact quantities at the exact time that the list changes, that the index changes. And many of these indexes only rebalance once a quarter or even once a year. So while they may not trade much overall, all of the trading they do is on one day. And not only on one day, but at one particular minute, on one day. And everybody that is a professional managing money knows this. We would take advantage of this dimensional, like we knew when indexes were being rebalanced, what stocks were being dropped, what stocks were being added, what is the likely aggregate demand or supply of stock at that time. And we would trade around. You know, you see it in the empirical evidence, too. There's tons of studies. Go look on SSRN and find a bunch of papers on how large the index rebalance effect is. It's there. And that ain't in the expense ratio. That's just a lower return that you get because you wanted the certainty of tracking an index. Now, not tracking the index expense ratio is probably going to be higher because it's a harder strategy to do. You don't just follow the index, but then you have to think about, okay, rather than trading in that way, how are they trading? And does that make sense, and does that add value? And is the difference between the expense ratio worth it? And you can add value over an index simply by not trading in a concentrated way, in a telegraphed way. So there's one. How large is it? Depends. Some asset classes have larger trading costs than others, but estimates range from 0.1% to a full percentage point. It's not nothing. So something to be conscious of, and it's all trade offs. You get a lower sticker price, but you have this invisible sort of drag on your returns from index rebalance effect. Is that worth it? Depends, right?

Christopher Nelson [01:07:01]:

Yeah, it depends on your portfolio. And that's where I think we can start taking the conversation, is when you have a nice traditional portfolio, what you mentioned before is you can start exploring other holdings. And I'm an advocate practitioner of alternative investments. What do you think are some of the questions? Where do you think somebody needs to be with their portfolio when they start considering alternatives and questions that they would ask?

John Morrison [01:07:33]:

Yeah, so alternatives can be great. So there's a lot of studies out there that show that private equity, venture capital, especially, and even some private real estate has outperformed. And there are plausible explanations as to why that's the case. But it doesn't mean that you should just go full bore with all alternatives, right? Like, there's trade offs, principally liquidity. So a lot of these funds you can't get out of, and even if you could, you have to get out at a substantial discount. They're expensive, so the sticker price is often high. Private equity sometimes is two and 22% management fee, 20% performance fee. That's not nothing. That's a pretty high hurdle. And then on top of that is, is it real diversification? That's the question that I think sometimes gets overlooked because the way I think about just from first principles is it giving you something you can't get elsewhere. So if it's just repackaging something you can get elsewhere, that's not true diversification. For instance, if you run a correlation, simple correlation on the SP 500 daily returns and the SP 500 quarterly returns, they'll look uncorrelated. They're not perfectly correlated, even though they're literally the exact same thing. It's just the way math works. It looks uncorrelated. So you really have to be careful because there are a lot of people selling you diversification that isn't real diversification. So alternatives can be a wonderful part of the portfolio. Start with what is the proportional representation of this asset class in the world market? That's your starting point. And then deviate from there based on expected returns, risk your preferences, what you like, and that's how you go about it. How much money do you need? I would say it really depends on you and your lifestyle and what's going to secure your future. Personally, I wouldn't start looking at illiquid private opportunities until I had three, 4 million plus. Maybe then I allocate a little bit. And the reason is minifold one is the minimum ticket sizes to invest in these things are often pretty high. So while you might want exposure to the asset class, you can't really get it unless you have a pretty big portfolio. But yeah, I think alts are great. Many of the largest investors in the world have a significant portion of their portfolio in alts. The Yale endowment is one of the most famous for alternative investing, and they have quite a large part of their portfolio in alternatives that can really be meaningful, but it's not without its trade offs. And you just got to understand them.

Christopher Nelson [01:11:12]:

No, that's good. So what do you think about the 4% rule? Right. I mean, I know that there's a lot of when people start thinking about getting to financial independence. Right. The clear message today is, I think, in a lot of media is, okay, you need to build a portfolio, and then you're going to be taking these 4% distributions annually, and the market should outgrow that.

John Morrison [01:11:41]:

Yeah, I mean, the 4% rule, the bottom line is just too simplistic to really rely on. The rule was. Really conceived of in a different world and for a different purpose. It's really not meant to be a perpetual withdrawal rate. It was designed with traditional retirees in mind. It's not a bad place to start from. How much can I draw on my portfolio and be financially secure? But it's not a slam dunk either. The size of your portfolio matters. Your goals and your time horizon matters. If you've got to live off your portfolio for 50 years, 4% is probably too aggressive. If you've got to live off your portfolio for 20 years, it might be appropriate. It depends. Interest rates matter, the composition of your portfolio matters. If you have a more diversified portfolio, you have more certainty of what the future is going to be than if you have a more concentrated portfolio. That means you might be able to increase your withdrawal rate. But if you've got more concentrated bets in your portfolio, you've got to account for the fact that those could go awry. And therefore you might need to have a lower withdrawal rate to compensate or to control for that potential risk. So ultimately, there's always uncertainty in investing. So whatever the rate is for you, whatever the safe withdrawal rate is for you and your circumstances, you've also got to understand the things that can occur that might mean you need to adjust it up or down. And so I don't like hard and fast. Like it's always going to be 4%, right? One, it depends, and two, it could change because the world changes. So something that you always got to keep on top of. I will say, though, that a lot of folks that we talk to are surprised by how little they need to secure their financial future. I don't know, I'm speculating a little bit here, but I think part of that is sort of like the instagram world that we live in, where people are always posting pictures of this imaginary life, where they're on yachts and driving Bentleys and people think that that's what they need to be financially secure. And then when it comes down to it, and we talk about their values, they're like, yeah, I don't need any of that stuff. And we're like, well, if you don't need that stuff, then here's what you need. And they're like, that's it. Right. So sometimes it's a pleasant surprise in that direction in terms of how large the portfolio needs to be and what is the safe withdrawal rate for you?

Christopher Nelson [01:14:37]:

Yeah, and I think to just put a bow on this section is technology employees. We have the great benefit of being able to work for equity. And I think when you find good partners, you understand how to vet them and you're getting the services that work with you. Right. Tax planning, investment planning. I think it is on us as the investors, as the people that are generating the income, to really have a clear vision of what we want our life to be? Like many people, they want the freedom and the time with their family more than they want to know. I want to take a very modest trip, let's say, to Europe, not staying at five star hotels, but have a cross-cultural experience with my wife or with my family over the deluxe resort. And when we get honest with those things and we align that with the right professionals that we're working with, we can get there a lot sooner. That, to me, is the exciting part of this.

John Morrison [01:15:51]:

Yeah. And I'm a big math nerd and science nerd. I love data. But the longer I'm in this industry and the longer I've invested, the more I realize how psychological a lot of this stuff is and how emotion plays such a big role in not only how you invest, but how you live. And part of our role as advisors is to kind of be armchair psychologists sometimes and prevent people from making what might be devastating decisions when they're being emotional and also helping them envision what is truly valuable to them. What do they care about? You'd be surprised how many people get to a place where they've had a windfall and they don't know what they care about, so they don't know what to do.

Christopher Nelson [01:16:52]:

Right.

John Morrison [01:16:53]:

Part of it is helping people think through what's important to them and then building a plan to achieve that.

Christopher Nelson [01:17:04]:

It is.

John Morrison [01:17:05]:

It's different for every person. But I guess my point is that the math matters, the numbers matter, but the emotion and the psychology and the intangible stuff about what do you want your life to be? Plays a big role in the advice that you get from your advisor and your advisor can also help you understand what those things know is you can't really put a number on that.

Christopher Nelson [01:17:36]:

It's very true. Well, thank you so much, John. We are at the point where we're going to get to the fire round. I'm going to hit you with five questions that you can answer to just be able to help people with some good tactics. So how do you keep learning?

John Morrison [01:17:55]:

I love learning. If I had my druthers, I would just be like a perpetual student at a university. I think it's just so much fun what I do. I listen to books on Audible, I listen to podcasts, I read books, I read the news, I read a lot. A lot of my job is reading, frankly, reading and writing in addition to doing some math on the side. But it's a lot of reading. I can't overstate how important it is to just be curious and read. You have to be careful about the sources. So make sure that you're reading stuff that is reliable and written by experts and all that, but read. I think that's one of the biggest. And the second thing is to have a diverse group of people around you. My wife is an artist. She paints. This is her painting here. That's one of her. Wow. I have a pretty diverse group of friends that are quantitative finance nerds and then a bunch of artists and creative people too. And that's awesome. I love to get to know people that are different from me and those are some of the most enriching relationships. You just grow so much more as a person when you hang out with people that are different from you rather than people that are virtual clones of you.

Christopher Nelson [01:19:30]:

Definitely.

John Morrison [01:19:31]:

So say those two things, read a lot and get to know people that are yeah.

Christopher Nelson [01:19:36]:

And have a diverse group of people around you. Diverse way of thinking and stuff. What do you do to recharge?

John Morrison [01:19:42]:

So this might come as a bit of a surprise, but I grew up skateboarding. I still do it to this day. I'm pushing 40 years old, so I don't try to do anything crazy. But I still love the sort of feeling of freedom and creativity that it gives me. So I like to skate. I have a half pipe in my backyard. I go to the skate park. It's another way that I get exposed to a lot of different cultures, a different culture and attitude than the one that I get in my profession day to day, which is nice too. So I like to skateboard.

Christopher Nelson [01:20:17]:

That's great. What would the advice that you would give your younger self for working in technology.

John Morrison [01:20:26]:

Earlier? So I waited a while. I've been pretty risk averse in my career. Like, I've worked for these gigantic institutions pretty much nearly my whole career until I came to SecFi. Probably informed by my upbringing of a bit of financial volatility. But the upside to creating something new and successful is so big, I would have told myself to go work in tech and try to build something earlier in my career.

Christopher Nelson [01:21:01]:

No, that's great.

John Morrison [01:21:02]:

Yeah.

Christopher Nelson [01:21:03]:

Working for Equity, it's definitely a game changer. What soft skill has helped your career the most?

John Morrison [01:21:12]:

I'd say empathy. I think you have to try to see things from other people's perspective. I think everyone is sort of a hero in their own story. I don't believe that there are many intentionally malicious actors out there. I think most people are trying to do what they think is right most of the time. And so I try to give people the benefit of the doubt and don't jump to conclusions, don't jump to conclusions. So just have some empathy, try to see it from their perspective and give people the benefit of the doubt. There is a risk here. You might get taken advantage of by a malicious actor who is intentionally malicious. That's possible. But overall, I think that risk is worth it. It just gives you just such a better view of humanity. If you think the best of people, I think it's just worth it. So have some empathy.

Christopher Nelson [01:22:12]:

And this one I'm excited to hear you answer this is what's the worst money or investing advice you ever received?

John Morrison [01:22:22]:

Okay, this one is fun. It's a quote that sticks with me to this day. It's not risky if you know what you're doing. That's not true at all. So you cannot remove risk. Like, risk is inherent in investing in life. All you can do is manage it and understand it, but you can't get rid of it. You can maybe shift it around. You can mitigate it through different strategies, but you can't get rid of it. It's not risky if you know what you're doing. It's sort of a saying that gets you to take some reckless risks, right? And it's not good advice, so avoid that one.

Christopher Nelson [01:23:06]:

So where can people find out more about you?

John Morrison [01:23:10]:

Go to secfi.com. Explore our website. Click on the Wealth Management tab. You'll see some stuff there. Welcome to schedule intro calls with us. We're happy to talk. We do free intro call, of course, and we even do a free insights call, which is where we sort of surface some initial insights into someone's financial situation to kind of give them a taste of what it's like. To work with us and work with an advisor. Allow them to vet us and see if it's going to be a good fit or not. So if you're curious about this, I encourage you to go check it out. I love just nerding out over anything investment related, so if you've got questions about how to build a portfolio or what you should be doing, set one of those calls up and I'd be happy to talk to you.

Christopher Nelson [01:24:04]:

We'll put all that stuff in the show notes so we'll have that there. So that as you're scrolling through this episode, you just have to click down below. And thank you so much, John. I know that this is a thank you. Super excited that we had the opportunity to have this conversation for everybody, and thank you so much for listening today. Tech, Careers and Money Talk, we're a new podcast, so please listen where you can Apple, Google, Spotify. We would please ask that you leave us a review. We want to understand what you find valuable here and tell somebody else. We are having this conversation about career and money. This can be challenging, but now we're here to have the conversation with you. Thank you so much. Bye.