2016 Third Quarter Report1

If MCS clients’ investments were treated as one large portfolio including their cash, on average clients gained 4.71% after fees this year through September 30, 2016. The range of individual client returns was from 1.80% to 7.61%. For comparison purposes, the S&P 500 Total Return Stock index earned 7.84%, and the Barclays Aggregate Bond Index was up 5.80% through September 30th. Clients with the lowest returns were negatively impacted by more concentrated exposure to cash (as new clients) and exposure to inherited low-basis stock positions. The clients with the highest returns benefited from either no equity exposure or concentrated low-basis stock positions that outperformed. In general, client returns were lower than index returns because clients hold significant cash and one year bonds. Indexes used for comparison hold no cash.
Last quarter’s newsletter covered, in depth, my stance about the current investment environment:

In a nutshell, whether it is stocks, bonds or real estate, investors are being poorly compensated
for the risks they are taking.

As a result, I am building cash across most client portfolios and investing that cash in bonds, most of which mature in 2017. So long as the market returns on stock and bond indexes are positive, we will underperform those indexes because short term bonds and cash barely yield 1%. Indexes are always 100% invested in the asset they track, holding no cash. This does not mean we are out of the stock and bond markets. It means we are reducing our exposure to them. The hope is that better opportunities will come along in due course, and that having patience and discipline to not be fully invested will eventually be rewarded by avoiding losses and by exploiting much better buying opportunities.

This quarter, I want to turn my attention to a topic that has been on the minds of several clients, and one that has certainly been on my mind for the past few years. It can be sum marized with the question:

Michael, when are you going to retire?

I’d like to explore this question with you. But before I address the ‘when’ part of the question, I want to talk about what ‘going to retire’ means to me. For those of you now retired or contemplating it, you will immediately appreciate the many permutations that ‘retiring’ can take. And before I give you my definition, we need to take a little side journey. Connected to retirement, for me, is a simple and deep desire to leave this place better than I found it. I feel fortunate to have been in a positon to improve people’s lives in a measurable way. Decades of client outcomes and comments tell me that I have made a difference. It feels good. I will never ‘retire’ from trying to make a difference, although the tasks to accomplish this will change. Making a difference is simply about having a positive influence in the lives of others. This requires me to shift some of my roles to allow me to make the most of the experience and wisdom I’ve accumulated, use that insight to help others, and seek out new challenges and people to further understand how the world works. Given what I know, where might I get the biggest bang for my buck from the next phase of my life? I am interested in pushing away from the easy and familiar aspects of my work in order to explore new areas while taking more personal time to experience the beauty of this world.

How do your plans affect your clients?

I have the honor of serving multiple generations of client families; in one case, I’ve served four generations of family members! I want for my children the same thing that those client families want for theirs: to maintain and if possible improve on our family’s long term prosperity. Obviously, I can’t do that forever. At some point, I need to identify someone to manage my family’s and my extended family’s (clients) money. By ‘someone’, I mean an organization rather than a single individual. To that end, for the past two- plus years, I have been interview ing potential merger partners. My ‘best fit’ merger criteria has evolved with this experience – and a formative experience it’s been, from both an intrapersonal and extrapersonal standpoint. In seeking a merger, I have prioritized the three roles I expect to play in a merger partner, in order of importance:

  1. I am your client, and I want to know how well the prospective partner has managed their clients’ money so I
    can have confidence that my family and clients’ money will be well managed whether I am there or not.
  2. I am a minority owner / board member and want to influence the strategic direction of the business and hold
    management accountable for the results.
  3. I am an employee / investment committee member and I want to in fluence the investment strategy and its

The first criteria is actually a significant filter for many firms. Few firms track, let alone publish, their client results as MCS does. I want to know what the potential merger partner’s client experience has been. How did they perform in bad years and good years, and how does that compare to my clients’ experience? Answering these questions will help identify compatible portfolio managers. I expect to pay asset management fees just like any other client.
The second criteria reflects my desire to continue to have a significant personal investment in the firm that I merge with. In my business dealings, I prefer whenever possible to work with owners; they care most and usually adapt quickly because they have more at stake.
The third criteria recognizes that I need to replace myself as a portfolio manager with day to day investment responsibility, while maintaining oversight of the investment strategy.
Finally, I should mention my own financial position, since that significantly influences how any owner approaches their business succession. I have applied all the financial advice to my own life that I give to clients, and I have enough to be comfortable for two lifetimes (without including the value of my business). This puts me in an exceptionally strong negotiating position (I have consulted with owners whose retirement plan was the sale of their business, and it’s a tough position to be in – fraught with competing needs and emotions that often sabotage their effort because they must concentrate on how much money they get rather than creating long term value for all stakeholders).

Your role as a client /stakeholder

Recently a client asked about my plans for retirement. His ‘cut to the chase’ question was, “Michael, I know that at some point things will change. When they do, will I be able to call you if I have any questions or concerns?”
My answer is, “Of course!” In fact, I consider our ongoing communication critical to the success of any merger. The role changes I envision would have me seeing clients more often.
Taking it a step further, I welcome any client interested in this transition process to participate with me.
To start, I invite anyone to call, mail or email me any questions you have about the succession process. I will provide your question and my response to all clients via email or regular mail. Please indicate ‘MCS succession question’ in the subject line if sending an email. This will allow me to quickly organize these questions for response.

Would you like to be part of my succession committee?

One of my key insights from my years of both using consultants and providing consulting services to others is to involve those affected by upcoming change in the process. I am blessed with terrifically talented clients from a variety of disciplines. Including your insights and questions could better ensure success for all stakeholders.
If there is sufficient interest, establishing a client succession committee is an option. The committee’s role would be as a sounding and advisory board for my talks with potential merger partners. Once I have a serious candidate, I could report on the status of any talks and ask for your feedback. Since neither I nor you (perhaps) have ever done this before, we would need to approach this idea with a sense of openness and a willingness to evaluate the effectiveness of it as we go along. If this interests you, contact me regarding the succession committee.


In summary, I have been preparing for this journey for about four years and have periodically met with interested suitors over the last two-plus years. It’s enabled me to get a clearer idea on how to best proceed, what will work and what won’t. Rest assured that I am taking a very thoughtful approach to this transition. I’m opening up the process to your questions. What’s important to you? I’ll apply my experience to date in answering your questions and look forward to the insights your comments or questions provide.
The prospect of change makes most people uneasy. I love it. I love the potential that change offers to learn and to do even more. There has been a lot of interest in my business, so fear not. I am determined to make this transition as smooth and as painless as possible for all of us. The goal is to create something even better.

1 MCS Family Wealth Advisors (MCS) consolidated client returns are dollar-weighted, net of investment management fees unless stated otherwise, include reinvestment of dividends and capital gains and represent all clients with fully discretionary accounts under management for at least one full month in 2016. Individual client returns represent client discretionary accounts under management for the entire period – starting on 12/31/2015 and ending on 09/30/2016. These accounts represent 100% of MCS’s discretionary assets under management as of 09/30/2016 and were invested primarily in US stocks and bonds (17.5% of client assets on 09/30/2016 were invested in tax-exempt municipal bonds). The Stock Index values are based on the S&P 500 Total Return Index, which measures the large-capitalization US equity market. The Bond Index values are based on the Barclays Capital US Aggregate Bond Index, which measures the US investment-grade bond market. Index values are for comparison purposes only. The report is for information purposes only and does not consider the specific investment objective, financial situation, or particular needs of any recipient, nor is it to be construed as an offer to sell or solicit investment management or any other services. Past performance is not indicative of future results.