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How Value Added Indexing began...

In our early days, we told anyone who would listen that we were going to implement financial plans using funds that tracked the market’s performance – not beat it. 

Boy did we get a lot of grief!

“People are going to pay you to pick funds that won’t do better than the market?”

“Boring… what will I talk about at the club?”

Really, they were asking, how are you going to add value if you don’t try to beat the market?

The implication was that, certainly, financial advisors add value by picking winning stocks, or picking people who could pick winning stocks, or something like that.

But we had done our research and were confident that conventional thinking was wrong.  The logical starting point in adding value seemed to be not destroying value.  And “active” managers, the stock pickers who tried to beat the market, and charged high fees for their efforts, seemed to destroy value.   Because they mostly failed at their jobs.  They underperformed the market.

We were going to apply a basic principal of medical ethics to investing:  First, do no harm.  Still, our approach was contrarian and not always easy to explain.  

Then, early on, I met with a close friend who would become one of our first clients.  I went into my well-rehearsed pitch.  

Here’s what I said:

“We’re using index funds and portfolios that closely track the markets.  But not just in a random fashion.  We’re using them in a disciplined approach that allows us to tailor a portfolio to a client’s individual situation.  

We’ll use U.S funds, International and Emerging Markets stocks too.  Including large cap and small cap in all these areas.  Indexed bond portfolios too.  Rebalance and tax trade when needed.  

We’re taking this investing approach because it is the most efficient and effective way to implement our long-term financial plans. We’ll act as our clients’ personal CFO, coordinating our work with our clients’ other professional advisors.  

Oh, and did I mention we will be fiduciaries?”  

I rambled on.  And on.  Here’s what he heard:

“Blah blah blah”

He was pretty blunt with me.  “No one wants to listen to all that.  You need a simple way to explain what you’re doing.  You’re not just indexing, anyone can do that, you are value added indexing!”

I can’t thank him enough for coming up with it. We trademarked the phrase right away.