Investing

Meet the Dream Team: How a Company You’ve Never Heard of is Changing the Way You Invest

How a Company You've Never Heard of is Changing the Way You Invest

Far below the radar of the average investor, an X-Men-style dream team is assembling.

They work for a company you’ve probably never heard of and will probably never have any personal contact with. But they may have already affected how you invest.

I first became aware of this not-so-secret cadre a few weeks ago while reading a blog post by Tim Maurer.

“It is absolutely possible to beat the market,” writes Maurer, “just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.”

Maurer is a financial advisor, frequent CNBC guest, and author of two personal finance books, most recently The Ultimate Financial Plan.

His blog post surprised me, because I knew Maurer had recommended actively managed, beat-the-market mutual funds in the past.

Then I noticed that Maurer had been hired by Buckingham Asset Management (BAM).

The big BAM

BAM is a wealth management firm based in St. Louis, with over $6 billion under management.

Its best-known investment analyst is research director Larry Swedroe, who has written over a dozen books on investing.

His latest, Reducing the Risk of Black Swans, is out this month.

Swedroe and his firm have a consistent message: the best research shows that trying to beat the market is futile, so it’s better to take a passive buy-hold-rebalance approach with index funds, bond ladders, and similar vehicles.

Swedroe has a Bronx accent and likes to say things like, “The battles are won in the preparation stage, not on the battlefield in the middle of a financial crisis.”

His books have brought BAM a lot of business.

“We can identify, we think, over half of the business one way or another is related to people who read my books or my articles, or the other authors now in our stable,” he says.

Most money managers, from the big investment banks to storefront advisors, tell you they can beat the market.

“I’m one of the many, many advisors out there who envisioned their role in client interaction, or one of their primary roles, being putting portfolios together that would outperform,” says Maurer. “That was part of our job description, almost.”

That’s no longer part of Maurer’s job description, and it’s a relief. “There’s the slight euphoria of being able to acknowledge, hey, you know what? I was wrong, and I’m okay with that.”

Building the team

Since BAM doesn’t pick stocks or time the market, they couldn’t bring in customers with the false promise of world-beating returns and little risk.

They’d have to try a different approach. So in the last few years they’ve been hiring “thought leaders,” as Swedroe calls them.

Maurer joined BAM in February as its Director of Personal Finance.

“It took about 16 years, the entirety of my career to date, to come to the belief that there are really two types of advisors and money managers in this world,” he says.

He continues, “There are those who’ve concluded that active pursuit of alpha is fruitless, and those who are destined to prove it.”

And he’s only the most recent hire.

You know Carl Richards, the guy who does the napkin drawings for the New York Times (and, once, for my column)?

He works for BAM, focusing on behavioral finance. Recently he wrote a piece called The Illogic of Active Trading.

“We were talking to Carl because we liked his work,” says Swedroe, and we said, ‘Hey, Carl, why don’t you let us be your advisor and take over that business, free you up to do what you do really well.’”

It was good timing. Richards learned a lot about himself during the financial crisis.

“In 2008, it became clear to me that I just didn’t have the emotional makeup to continue to walk people in off the ledge when they needed it,” he says.

Now, he’s able to focus on drawing, writing, and speaking.

Add to the mix Dan Solin, author of the Smartest personal finance series, including the Mint-branded The Smartest Money Book You’ll Ever Read.

(Disclaimer: I’m quoted in the book.) Yep, he works for BAM, too.

The wider world

I don’t mean to make this a free advertisement for some wealth management company.

Swedroe is totally upfront about what BAM is trying to do by hiring these great communicators: attract new customers.

Yawn.

What interests me is how unusual this strategy is, and what it says about the way people invest today.

The idea of beating the market is slowly losing its appeal.

Sure, most money is still in actively managed funds. Between 1998 and 2013, however, the market share of stock market index funds doubled, from 8.7% to 17.4%, according to the Investment Company Institute.

“Robo-advisor” companies like Wealthfront, Betterment, and FutureAdvisor build simple portfolios based on index funds and ETFs, and warn customers that active trading usually leads to poor performance.

All of these companies, including BAM, are small fry compared to the big player, Vanguard.

The mutual fund giant’s $323.7 billion dollar Total Stock Market Index Fund is the biggest mutual fund in the world. And it’s passively managed.

Invest like the dream team

I talk to a lot of people about their investments. Even in the four years that I’ve been writing this column, I’ve noticed that I spend a lot less time explaining the evidence for passive investing.

That’s because they’ve heard it before. They’ve heard it from people like Larry Swedroe, Carl Richards, Dan Solin, and Tim Maurer.

They’ve heard it, too, from writers like Burton Malkiel, Allan Roth, Richard Ferri, William Bernstein, and Vanguard founder Jack Bogle, none of whom work for BAM.

Investing like these folks is simple, and the evidence is overwhelming that it’s better than buying individual stocks or trying to choose the rare advisor or fund manager who won’t underperform.

I wrote a three-part investing guide last month, and I didn’t invent any of it: it’s all based on what I learned from the Dream Team and their allies.

As Richards put it, “I kept thinking, if the average investor dramatically underperforms the average investment, I’m just not smart enough to find the best investments.”

Smart has little to do with it, says Maurer.

“Some mistake this brand of ‘passive’ investors for those who can’t compete intellectually or strategically with active investors, but you know better (and I’ve learned better),” he tells me. “Some of the brightest minds in the business fall into this camp.”

Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.