As fees across the world of financial services have decreased over the last few years, the former quotas and commission-based model under which investment advisors operated sounds like a relic of a bygone era. Back then, advisors were not in the business of providing services such as estate or tax planning, let alone financial education.

Mike Hirthler, of Jacobi Capital, was a pioneer and an innovator. When he left the commissions-based job he got just out of college to launch a fee-based advisory firm, there was no shortage of skeptics telling him he would never make it under this new model. But it didn’t take long for the industry itself to follow suit.

After almost 35 years in the business, Mike recounts the difficulties of the early years and how the important decision of remaining independent ultimately contributed to the firm’s success. A student of behavioral finance and the psychology of markets, he remains passionate about financial literacy – both for the younger generations that he supports in local colleges (and mentors at the office), as well as the ‘boomer’ generation (many of whom have been his clients for decades) that are currently dealing with the challenges of retirement.

Following the teachings and lectures of Charlie Munger over many years introduced him to the concept of mental models and combining disciplines to improve problem-solving, which led to an interesting “encounter” with his “mentor-at-a-distance”. It was also through one of his lectures that Mike came across the work of German mathematician Carl Jacobi – who inspired his firm’s name – and one of his most important lessons: “Think through your major problems backwards; invert, always invert”.

– Lessons on Elementary Worldly Wisdom (Charlie Munger) – Jacobi website: http://www.jacobiwealth.com/p/other-readings

Mike Hirthler Podcast

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Mike Hirthler

Michael J. Hirthler
Founder & Chief Investment Officer,
Jacobi Capital Management

Michael has over 30 years of investment experience, beginning in 1985 with Thompson McKinnon Securities. In 1992, he became fully independent and opened a Wilkes-Barre branch office of LPL Financial. Over the years, he successfully built his investment practice, and in 2008 founded Jacobi Capital Management, a Registered Investment Adviser.

Michael’s commitment to focusing on the individual extends to the community through his philanthropy and active and former involvement with various Boards including the Catholic Youth Center, YMCA Board of Trustees, Volunteers in Medicine, Luzerne Foundation, Salvation Army, Junior Achievement NEPA, Kirby Center for the Performing Arts and Geisinger Wyoming Valley Medical Center Advisory Board. In 2012, Michael received one of Luzerne County’s top community service awards for his commitment to improving the community.

Michael earned his bachelor’s degree in Economics from Dickinson College. He lives in Jackson Township, Pennsylvania with his wife Kathleen and together they have two grown children.

Transcript

Rodrigo G.:             00:06           Welcome to Gestalt University hosted by the team of ReSolve Asset Management where evidence inspires confidence. This podcast will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media. Covering topics that appeal to left brain robots, right brain poets and everyone in between. All with the goal of helping you reach excellence. Welcome to the journey.

Speaker 2:               00:28           Mike Philbrick, Adam Butler, Rodrigo Gordillo and Jason Russell are principals of ReSolve Asset Management. Due to industry regulations they will not discuss any of ReSolve’s funds on this podcast. All opinions expressed by the principals are solely their own opinion and do not express the opinion of ReSolve Asset Management. This podcast is for information purposes only and should not be relied upon as a basis for investment decisions. For more information, visit investresolve.com

Rodrigo G.:             00:54           Hello everyone it’s Rodrigo Gordillo here welcoming you to another episode of Gestalt University. Today we have the pleasure of welcoming Mike Hirthler of Jacobi Capital, a large RIA firm based out of Pennsylvania. Mike’s story is truly fascinating. He’s a 35 year veteran in the financial services space and a true trailblazer that was way ahead of his time for better or for worse. He came up during the heyday of the broker commission based advisory model where providing services such as estate planning, financial education and flat fee portfolio management was completely outlandish. When he finally left the commission-based job that he got straight out of college, he did run a fee based advisory firm. There were a ton of skeptics telling him that he would never make it under this new model, but of course it didn’t take long for the industry itself to follow suit.

Rodrigo G.:             01:40           Yet after almost four decades in the business, Mike tells us about the difficulties of the early years and how important the decision of remaining independent ultimately contributed to the firm’s success. A student of behavioral finance and the psychology of markets, he remains passionate about financial literacy, both for younger generations that he supports through local colleges as well as the boomer generation, many of whom are his clients, that are currently dealing with the challenges of retirement. In the podcast, he takes the time to talk a little bit about Charlie Munger who introduced him to the concept of mental models and combining disciplines to improve problem solving. This ultimately led to an interesting encounter with his mentor at a distance that is worth the price of admission alone.

Rodrigo G.:             02:22           It was through these lectures that Mike got introduced to the work of German mathematician, Carl Jacobi, who inspired the firm’s name and one of the most important lessons that he took away from it, which is – think through your major problems backwards. Invert, always invert. We love this concept, as you guys may know. This is a great interview and we hope that you enjoy it as much as we did.

Mike Philbrick:       02:46           Hi, Mike Philbrick from ReSolve Asset Management and today I have the pleasure and am excited about the opportunity to sit and chat with Mike Hirthler from Jacobi Capital Management. What city we in Mike?

Mike Hirthler:        03:00           We’re in Wilkes-Barre, Pennsylvania.

Mike Philbrick:       03:01           Wilkes-Barre, Pennsylvania.

Mike Hirthler:        03:03           A lot of people know Scranton. So Wilkes-Barre Scranton

Mike Philbrick:       03:07           Oh, so we are just outside of Scranton. So we’re sitting down today to talk about a few things. Talk about the world of wealth management, the world of asset management, the world of investor behavior, financial literacy. So we’re going to tackle a bunch of topics. If you’ve never heard of Jacobi Capital Management, you can Google it and search a very successful RIA here just outside of Scranton, Pennsylvania. In Wilkes-Barre, Pennsylvania? Did I get that correct?.

Mike Hirthler:        03:29           Wilkes-Barre, correct.

Mike Philbrick:       03:30           Wilkes-Barre. See? I’m catching on. Crazy Canadian here in Wilkes-Barre, Pennsylvania.

Mike Hirthler:        03:34           Yep.

Mike Philbrick:       03:35           And so we want to talk today about your journey, Mike. You’ve been in this business for a long time. You’ve seen many, many transitions come and go. You’ve kind of been on the cutting edge much of the time and give us the journey of Mike Hirthler and the journey of Jacobi and where you are now, where you started from.

Mike Hirthler:        03:53           Sure. So when I got out of college, which was 1985, I started out as what was called then a stockbroker with the firm called Thomson McKinnon securities in Wilkes-Barre. I was with Thompson McKinnon till 1990 and I believe they were the fourth largest, what was called “wirehouse” firms then in the country. And one Friday we went home. And we came into work Monday and they were gone much like a Lehman moment back then in 1990. The principals had made some leverage mistakes and every broker in the office, there was about 15, had to go to either it was called Prudential Bache securities or Dean Witter was each side of the block from us. So, half went to Prudential-Bache and half went to Dean Witter. I went to Dean Witter.

Mike Philbrick:       04:35           Oh nice. So tell me, what was that like? Where were you? Were you were married? Did you have kids? What was going on here.

Mike Hirthler:        04:40           Yeah I got married and in the business at 22 years old, so I started at both, relatively young. So yeah, it was a difficult time period. I really didn’t like the business. As a matter of fact, in that time period I told my wife that I just wanted to go back to school and get my teaching certificate and teach and coach. I wasn’t very interested in meeting sales quotas for financial products, et cetera. So..

Mike Philbrick:       05:02           That was 1985 to 1990. So, back in those times it was a commission-driven type business then? Where it was sales quotas regularly?

Mike Hirthler:        05:10           A hundred percent commission in quotas. Yeah, it was pretty aggressive. It really didn’t suit my temperament at the time and doing some, back then there wasn’t the internet or Twitter, but in one of the financial magazines I saw an ad for you could be basically an NRIA type investor with a firm called LPL Financial. And I called them up in 1991 to ask if I could join and basically they said, “No”. I think you needed five or $10 million of assets and I didn’t have it at the time. We’d just gone through the Persian Gulf war, et cetera and business was bad. So, I just kept the pressure on them and they let me open an office.

Mike Philbrick:       05:46           Nice. So you just, persistence.

Mike Hirthler:        05:48           Correct. Yeah

Mike Philbrick:       05:49           Oh that sounds like sales to me.

Mike Hirthler:        05:50           Yeah, begging. It was begging.

Mike Philbrick:       05:53           Begging. I love it. So we’re in 1991 you go for a cup of coffee, at Dean Witter, but then you get the opportunity to actually start your own RIA at that point in 1991 with LPL, or was it a slightly different structure? How is it?

Mike Hirthler:        06:06           Slightly different. So, by RIA, I mean they had a framework where you could act as what’s called an IAR, Investment Advisor Rep of their corporate RIA. But what appealed to me is the ability to charge a fee as opposed to sales quotas for commissions, et cetera.

Mike Hirthler:        06:21           As an IRA (IAR?)at the time, you wouldn’t have embedded commissions in anything that you were selling. Basically, you were a fee only advisor at that point. Yes. Yes. Fee only. Yes. So that’s an early adopter of that particular model, I would say. I know that people in town used to call us the broker in a box. You can’t do that. You can’t make a living off of not turning people’s money over, et cetera.

Mike Hirthler:        06:42           But yeah, that was kind of rare there. I think. I believe LPL now has like 17,000 advisors some way shape or form affiliated with them. And I think there were 200 then.

Mike Philbrick:       06:52           Wow.

Mike Hirthler:        06:53           And they were the largest independent firm with 200 advisors.

Mike Philbrick:       06:57           Amazing. So what was it like going out into the community with this sort of very different approach? Did you find that here you are more in a fiduciary role than probably 99% of anybody else in your community. Did you find that it was just a matter of getting in front of folks and saying, Hey, the system’s got a lot of embedded costs that maybe you don’t know about it. I’m just going to be upfront about it. Were people coming over the walls to join or were they a little bit more hesitant? What was your experience back then?

Mike Hirthler:        07:23           No. People were very hesitant. Obviously it was long before Bernie Madoff, but still, even without the brand names, it was difficult to get people outside of your network. So you kind of had to give up on. We have a big Procter and Gamble plant about 30-40 miles from here and I used to go out there and people that worked there from the time they were 18 years old and they became millionaires in their stock plan, like hundreds and hundreds of them. We could never get a client from a place like that –  40 miles. It was mostly just your inner circle that you could go to then.

Mike Philbrick:       07:53           And so how did you grow the business?

Mike Hirthler:        07:54           Yeah, that’s a good point. Pure luck, really. I had some friends that were successful and they trusted us to bring some business to us. My wife is a nurse, worked at the local hospital and got in with a few of the doctors there and was able to start to build a business.

Mike Hirthler:        08:08           Then in the mid 90s just started working, getting involved in the community, doing what you could do, keeping it really simple, basic stocks and bonds. Avoid it. Fortunately for us, a lot of the product sales of the 80s then were starting to, we used the term blow up, so it helped us with being able to go out and say, “We don’t represent any product. We don’t manufacture any products.” So, we were able to use that to our advantage for awhile there and gain some traction.

Mike Philbrickr:     08:31           Well, that’s great. And the name Jacobi, there’s some depth to that. Tell me more about that.

Mike Hirthler:        08:35           In 2007 the firm we were with, remember we worked under their RIA, so that firm is LPL. So as the industry, as we all know how dramatically it’s been changing over the last 10 or 15 years, the last year, three years. So if we fast forward to that period, 2007, there was a movement called “the breakaway”.

Mike Hirthler:        08:55           Like people coming from brokerage firms and doing their own RIA’s are going independent. So LPL, the firm that we were was our custodian. They wanted to open up what’s called a hybrid division. So you become your own RIA. So we always market it just under the name LPL, you could call it whatever you wanted. But we chose to keep it simple. So we had to come up with a name for the RIA because we had to become our own RIA and that was, we came up with the name Jacobi Capital Management. So Carl Jacobi was an algebraist 200 years ago. The long story is, back in 1994 I read a lecture, there used to be this publication called Outstanding Investor Digest, OID, published out of New York and it was interesting. This fellow did interviews with these people. In one week, he went out and he listened to Charlie Munger do a lecture at USC law school graduation, and the title of the lecture was Worldly Wisdom.

Mike Hirthler:        09:48           Charlie Munger in there talked about a latticework of mental models, how you have to combine various disciplines. And he said, “Look, if you want to raise your IQ 50 or 60 points in life without having to be very bright..” He said, “Do two things. Follow the wisdom of Carl Jacobi. Think your major problems through backwards. Invert, always invert.” He said, “That’s a real simple process.” What does that mean? Charlie always said, “I just want to know where I’m going to die so I don’t go there.” Or we always say like, if you want to lose 10 pounds a year from now, put yourself out to September 25th or whatever, 2020, why didn’t I lose 10 pounds? Well, I ate those cookies every night. Well, don’t eat the cookies. He said, “Secondly, avoid extreme ideologies.” So, and then he talked about adding psychology to your investment process, trying to, you know, the whole behavioral stuff that we talk about today.

Mike Hirthler:        10:36           And again that just resonated strongly with us, that lecture, and we kept it. It’s must reading for every body that comes to our office. As far as workers, interns. To this day, there was actually two parts of it. I have a funny story with that. When we needed to come up with a name, all the names were taken. So then one day somebody said, “We always sit in this office.” Did you Jacobi that? Did you think it through backwards? And somebody said, “What about that Jacobi?” We looked, the name wasn’t taken so we grabbed it.

Mike Philbrick:       10:59           So you grabbed it.

Mike Hirthler:        11:00           Yeah.

Mike Philbrick:       11:00           And so the Jacobi. Jacobi’ing the problem is thinking it through backwards. Can you give me an investment application about or something that diet when I got… So, what would be a problem that you would Jacobi in the office?

Mike Hirthler:        11:13           We’re in the money management business side, but also the wealth advisory. So we get a lot of clients and they come in with a say, a prospectus, that they received somewhere else and it might have a lot of these partnerships. If I recall back in the 80s when I got in this business, the guys in the brokerage firms used to sell these things and then they would use the term, “Oh don’t blow up your book. I blew up my book” and I say, “Just read the prospectus.” So if it seems too good to be true or too difficult to overcome these eight or 10% annual fees. So when a client comes in and we think it through backwards, say for a some type of high yield business development company, we read the prospectus, we say, well, you know with high yield bonds, 5% and the fact that the annual fees are eight if you think this through backwards, you’re losing 3% a year, you’re probably going to have a problem.

Mike Hirthler:        11:59           So we don’t know what the future is. We don’t. Right? We don’t know what companies are going to be disrupted or not, but I think trying to invert, helps us understand what not to do.

Mike Philbrick:       12:11           Right. A big part of winning longer term seems to be not making those major mistakes.

Mike Hirthler:        12:16           Correct.

Mike Philbrick:       12:17           What do they call that? A war of attrition, almost. Let everybody else blow themselves up and you just keep that steady pace going. And, how do you keep the clients behaviorally on track with that? Because it’s so distracting. As an individual investor. You’ve got all these shiny new buttons being produced with a prospectus this and my buddy’s got that. How do you and Jacobi Asset Management help the individual investors sort of stay the course?

Mike Hirthler:        12:40           Well, I like you. We wish we had the answer to that. That’s the magic formula. We actually, back in the 90s we started looking at, there’s certain research firms out there.

Mike Hirthler:        12:51           We use Ned Davis research a lot for various sentiment polls and it’s interesting because when everybody’s fearful, we have fear. When everybody’s greedy, we feel the same greed. It’s and we let our clients know that we’re human and we make the same mistakes and more and worse than you sometimes. So if you allow us to try to quantify as much as possible and we try to preempt their decisions. For example, we say, “Look, when this happens and things are really bad, I’m going to come to you and say, ‘Here’s where we are.'” Remember I told you when people feel Buffet’s teacher, Ben Graham taught him be fearful when others are greedy and greedy, when they’re fearful? That is really hard to do. That’s a lie we all tell ourselves and people don’t do it, but if we could try to quantify in a little bit of follow some data information on it. Maybe we could turn a few people, they say, maybe now’s not the time to liquidate. It’s the time to add. We like you. We do our best efforts there, but it’s really difficult.

Mike Philbrick:       13:45           You point out, I think one of the very important points in thinking fast and slow, it’s Tversky and Kahneman. And one thing Kahneman points out that just because you now know about these phenomenon, these behavioral vulnerabilities, does not mean you’re immunized against them.

Mike Hirthler:        14:02           No.

Mike Philbrick:       14:03           In fact it’s just the opposite that you may feel emboldened that they don’t now apply to you because you know about them and I think you really succinctly and humbly put that, no, they apply more to us. We’re sitting there with other people’s monies and their behaviors coming at us and we’re trying to do optimal decision making and it’s hard.

Mike Hirthler:        14:22           I think Kahneman and was asked in a lecture when he wrote that book and I would highly recommend that all of Kahneman’s writings. Somebody said to him, “So I’m in the financial advisory business, what should I do?” And he deadpanned him and he said “Nothing.”

Mike Hirthler:        14:37           [Laughter]It’s perfect.

Mike Hirthler:        14:37           It’s impossible. Right.

Mike Philbrick:       14:39           It’s perfect. And you mentioned some Charlie Munger lectures earlier. I just want to make sure we get those so people can refer to them. I know he’s since written a book and sort of that stuff’s was probably in his new book, but is there a video?

Mike Hirthler:        14:49           No, it’s not. But we have on our website where we, put it up. But it’s an interesting story. So these lectures were done at USC in 1994 and again, they were called Lessons on Elementary Worldly Wisdom. He talked about his latticework of mental models. He used the quote, “If you only have one discipline in life, you go through life like a one legged man in an ass kicking contest.” So, as only Mr. Munger could do it, he’s brilliant. So back in 2008 when we had to get the name Jacobi and I needed to get permission from him, we were doing a website to put his lecture on the website.

Mike Hirthler:        15:26           So we called out to Berkshire Hathaway and asked if they could connect us not to Mr. Munger, but to somebody and to who we would write to, to get permission. So the lady that answered the phone said, “Hold on a second”, and I heard, “Hello. And I’m like, “Oh, who’s this?” And he’s like, “Who’s this?” And I said, “Well, this is Mike.” “What do you want?” And I said, “Well, I’m looking for someone to get permission from Mr. Munger. He said, “What do you want?” And I said, “Well, Mr. Munger did a lecture at USC and I’d like to put it on my website at Jacobi Capital Management.” He said, send me a letter, tell me what you want to know and I’ll take care of it. I said, “Well, who are you?” He said, “It’s Charlie.” I started to probably for about three or four minutes thinking I’m talking to the guy, my mentor have you will, you know that doesn’t know this. And it wasn’t until a couple minutes went by that I realized he had hung up on me.

Mike Hirthler:        16:12           So we sent him the note and we have it in our office now in the note, “Please feel free. Good luck to you, Charlie.” So.

Mike Philbrick:       16:20           Oh fantastic.

Mike Hirthler:        16:21           So this guy, he and I don’t know about Buffet, but Charlie Munger. I don’t know. We should be saying this public, but he answers his phone.

Mike Philbrick:       16:28           That’s right. So let’s get on that level. Yeah, that’s going to change after this.

Mike Hirthler:        16:33           Now he was only 87 then. So maybe he stopped.

Mike Philbrick:       16:37           He stopped. I love it. Well, they say Buffet. He’s got an open schedule all day long. So we should just start lobbing calls into them. That is amazing. So you started in 85 you go from brokerage house to IRA.

Mike Hirthler:        16:51           IAR. Yeah.

Mike Philbrick:       16:51           IAR, rather. And then you set up your own shop in 08 to RIA.

Mike Hirthler:        16:57           Mm-hmm (affirmative).

Mike Philbrick:       16:58           What happens next? What happens in the last 11 years or any further groundbreaking advancements for business and yourself?

Mike Hirthler:        17:05           We’re thinking about partnerships with firms like yours to try to scale a little larger. We’re in a small town. We opened an office outside of Philadelphia. If we could continue to find quality people at such as at ReSolve Asset Management. I told you one or two other partnerships that we formed. I think we could continue to add value to people’s lives and therefore hopefully continue to grow. I think there’s been some, as I said, “We’re a money manager slash wealth advisory firm,” and there has been some wealth advisors in the last couple of years that have joined us and there’s a few more, a lot more kind of that want to join us now. So that could be the next level of growth.

Mike Philbrick:       17:40           Right. So you’ve opened the office just outside of Philly. So when you’re talking to these other wealth advisors, what is it that’s missing in their life when they come to Jacobi? What is it that they’re hoping to achieve? What role does Jacobi help fill for them?

Mike Hirthler:        17:55           Yeah, so our saying here, and it’s always been, if you work here, we have 30 – 32 people now between the two offices is it’s a safe place to work. By a safe place to work, everybody’s free to grow. Everybody. We have seven or eight licensed people that all now are in the six figures of earnings that started out at 25 – $26,000 operations people. By safe, you’re free to grow here. Nobody could stop you, nobody will stop your ideas. It’s a very open minded place and you’re free to grow how you want to grow. And we’ve been really fortunate and lucky. We have no turnover. You met our receptionists, they’re 83 and 80 years old. We have a 21 year old. We now have a 22 year old just started. We have six people 30 and below. So that’s been really refreshing and rejuvenating and these younger people have just been so almost inspirational with their ideas, their thoughts, and they want to grow.

Mike Philbrick:       18:49           That’s great. And how do you mentor them? What’s your role? I maybe you don’t even know how you might be mentoring them. I mean I’ve had some interactions with you and I just, you ooze credibility and honesty. So how do you feel your interaction is with those folks?

Mike Hirthler:        19:03           I think it’s pretty in depth. It’s, I don’t want to say that this is an easy place to work. Like I said, I use the term safe. I mean we’re fast paced, we’re trying to keep up with the digital world and all the competition that’s out there. I mean the competition’s at every corner. So we always say that in here it’s again, we’re going to provide, it’s going to be safe on all realms. But on the other hand you have to work hard and produce. By produce, not produce revenues or business what your operations job, you’re this. We’re right now under advisement and management, we’re $1.2B or so. So, I mean there’s like a lot of responsibility and we take that responsibility seriously.

Mike Philbrick:       19:42           That’s a lot of lives that you’re touching and impacting.

Mike Hirthler:        19:45           Yeah. I told you not to talk about what we have a complex model in the sense that after 34 this is my 35th year. I think we have the audit, we just did 15-1600 families that count on us in one way, shape or form. So we take that very, very seriously.

Mike Philbrick:       20:01           I love it. So when you’re dealing with individual investors, how do you start that out? How do you keep them on that track? So you’ve got a model, you’ve got some ways in which you approach the investing problem to make sure that you can keep a reasonable return. But tell me what you do when you walk through you. So I’m a new guy, I’ve just sold a business or have a package or looking to review what is my interaction like.

Mike Hirthler:        20:24           So usually we start out talking as everybody knows about your risk tolerance, capacity and need, right? Like how much can you tolerate volatility? What’s your capacity? How much capital do you have for that? And then what’s your need? So somebody that has $1 million and needs $130,000 and has zero risk tolerance, they’ve got a problem. Right. So we have to that conversation with them, but after that we construct a portfolio of recommendations for them. Right. And you’ve got a number of proprietary models that you’re using and you’re in your systems and have been pretty successful. I understand. To brag a little bit, I think one thing I’m proud of is that if anybody came to us and I could say this and followed our models and were with us at least 18 months, they would have never left with less capital.

Mike Philbrick:       21:11           Right. Okay.

Mike Hirthler:        21:11           If that makes sense. And that was the January, 2008 till 18 months later. So after 35 years of I think not hurting anybody, that makes you feel better than like things just happen. Okay, yeah.

Mike Philbrick:       21:22           I’m sure you’ve at 35 years, do you have clients for 35 years at this point?

Mike Hirthler:        21:26           Yeah, actually we just went through an audit from the SEC and they asked us what our average client age is and I said, well I’m 56 and I’ve been doing this since I’m so there’s and when I was 22 they are all somewhat older than me so there’s somewhat older than 56 but we’ll get you that number.

Mike Philbrick:       21:43           That’s great. That’s great. The long term relationships that grow out of this business are, I think one of the benefits of being in a business that has such long life relationships. It’s pretty neat.

Mike Hirthler:        21:54           The biggest benefit by far. Yeah.

Mike Philbrick:       21:56           I think you mentioned to me you still had some 40 year Muni’s on the books that were rolling off from when you first got in the business.

Mike Hirthler:        22:03           Yes. Yeah, yeah. I did. Back then I said you would have to cold call people. You were just given a desk and a phone book and Mr. Mike, we have this bond that pays 10% and interestingly people didn’t want 10% 40 year bonds then because they are waiting for rates to go back to 14 or 15 cause they had just come down from 15 – 16% to 10.

Mike Philbrick:       22:21           That is the behavioral monster again. It’s just what everybody wants to do. Maybe it may not be the thing to do anyway. That will be something that I think if you’re in this business that you’ll be dealing with, I’ll be dealing, we’ll be dealing with forever.

Mike Hirthler:        22:36           Who would ever thought those rates would go to 1.5%.

Mike Philbrick:       22:37           Oh yeah. Exactly. And I read, in Denmark you can get a mortgage with a negative yield on your mortgage.

Mike Hirthler:        22:44           Is that right?

Mike Philbrick:       22:45           Yeah.

Mike Hirthler:        22:45           Wow.

Mike Philbrick:       22:46           It’s staggering moment in time. What we’ll see how it all works out. It’s going to be a, it’ll be an interesting next 10 years.

Mike Philbrick:       22:52           So you think about when you got in the business in 85 that was one version of the business and then you fast forward 10 years to 95 you’ve moved the business. You fast forward again to 2000 – 2005 what do you think the business is going to look like in the next 10 years?

Mike Hirthler:        23:08           Well, everybody knows that there’s going to be more fee compression that we’re talking about that right? The markets, the Vanguards, I-Shares, et cetera, are pushing that and which is good. I think the FinTech space that is so prevalent now in growing is obviously growing the tools. I think if a wealth advisor, even a money management firm isn’t reinvesting back into their business a pretty large amount, you’re probably a dinosaur. I would guess how we’re speaking to people, how we’re communicating with people, how we’re advising our clients 10 years from now, what we’re presenting to them and how we’re giving to them is going to be a lot different than it is today.

Mike Philbrick:       23:47           So communicating with them, I know you’re a big proponent of financial literacy. What are your thoughts there? So we’re going to communicate with them differently. There’s, I mean, I observe it, there’s a pretty significant gap between what the average individual sort of understands about investing and investing itself. So maybe you could help. What do you think the key sort of pillars are in the fight for financial literacy? What do we need to do as an industry? What do we need to do as professionals in this industry? How do we help?

Mike Hirthler:        24:15           There are a lot of financial literacy programs out there now because we’ve actually sponsored three colleges, two locally here in Wilkes-Barre, Wilkes at Kings and Dickinson college in Carlisle, Pennsylvania, where I’m a grad. We’re about two years into it. We’re trying to build up their programs. We go, we speak, we make sure everybody has that. We pay for subscriptions to the Wall Street Journal, Barron’s. We run trips to New York city to Dow Jones for them to meet the editors and the writers for Dow Jones. They have the stock picking software, which if, Oh, you pick these stocks. Which ones when we were trying to do come out more with valuing businesses. And then interestingly, we just hired a millennial to run those programs for us and her first blog post should come out pretty soon, but it’s on how to basically budget.

Mike Hirthler:        25:01           One of her first pieces is going to be on subscription creep, your subscriptions that you have your cell phones, it’s all the great businesses that we invest in the companies, we want them to have a subscription model. All those businesses, they want you to be a subscriber and you have to watch those fees creep up on you pretty quickly.

Mike Philbrick:       25:18           That’s interesting. And so you started a couple of years ago, so getting that base basal sort of budget mentality going and so how does it work? Does it go into the schools and grabs the college kids at sort of that level to teach them that? Does it  encourage enrollment in the business of finance as well?

Mike Hirthler:        25:35           No, it goes into the school and tries to encourage them. We set up booths and tables to make sure they sign up for their subscriptions, free. Right now we’re building out a portal and we hope for it to be interactive and behavioral. Behavioral in the sense, you know, gamification, you get badges, et cetera, for debt repayments, improving your credit scores. It’s interesting. We have a couple of, Geisinger Hospital is here in town and there’s a, a lot of new residents and they come out and they have obviously a lifetime of huge earnings power, but they have a lot of debts, medical school, undergrad. And we’re trying to get these 18, 19, 20, 21 year old’s when they’re in undergrad and start teaching them about credit scores. How to improve your credit score. 1% interest rate costs you over time, how to repay your debt.

Mike Hirthler:        26:24           And when I say about how we communicate, what software tools I was reading this morning, SoFi is a website you could go to certain in the software programs that are tools that allow you to average up, you know, you go get a Starbucks, it’s $4, put five, a dollar towards your debt just to again behaviorally get people thinking about the long term ramifications.

Mike Hirthler:        26:44           And we’ll show the charts what that cost over time. It’s the basic, Hey, save money and pay off your debt. It just doesn’t behaviorally work. You have to get in their lives now and you have to have with the kids peer pressure, like they gamification. Other kids, youngsters are doing better by saving, etc. And that works.

Mike Philbrick:       27:00           It’s amazing how it’s the old eat less, exercise more, everyone should be,

Mike Hirthler:        27:04           Yeah, it’s simple.

Mike Philbrick:       27:04           ..in fantastic shape. It’s so easy. It actually reminds me of Adam, my business partner and many people know Adam. His dad is a dentist and retired dentist now, but I remember him telling us a story of the most important financial advice that he had received and that was from a financial professional and sat down with Mr. and Mrs. Butler at the dinner table one evening and he just graduated from dental school. So we had all of the debt that comes with that had launched the practice. So he has the debt that comes with that. He also has the entitlement that so many highly educated individuals have where they feel that I deserve this. I’ve made it. I have my license now and it’s a license to print a pretty good living for a long period of time and so often they’ll unleash an absolute fury of consumption because they’ve suffered through an extra four, eight years of school. The expense that comes with that and they want to actually enjoy life a little bit, and the advisor told him, just wait one year, take all the income from this first year and pay off all of the things. Just wait one year. Just continue to live like a student for one year and don’t unleash the consumption until the debt’s gone. And he said that advice made all the difference.

Mike Hirthler:        28:25           Yeah, that’s very good advice. Solid. Solid. Yeah. I’ve seen things like that where people say lottery winners don’t do anything for six months, or else you’ll spend it all.

Mike Philbrick:       28:34           But it’s just interesting that that one moment in time the advice was offered and taken so, so many times. As you say, it’s got to come with something you said the game of education aspect, or the group getting the group together so that you’ve got the peer pressure. Career pressure is a motivator. It is something that is very unique in the behavioral side of that is brilliant.

Mike Hirthler:        28:55           I think what I may add, and it’s important to try to attract people at a young age into good behavior, financial behavior. What’s really interesting is we all say we’re going to educate our clients and we know behavioral, et cetera. That’s really difficult because it’s complex projects, complex problems and solutions. So I think we’re also trying to work on our portal now for, if you will, like education for the baby boomers because we’re the country United States is in this experiment now, the 401k’s are 25 years old. So this is the first time people are hitting retirement age where they’re responsible for their pension and their pension payments. And one of the first, I know subjects that we’re going to approach a sequence of return risk. And we know there’s this huge movement to Hey, just put money in US stocks and you’re fine. And there are many periods where there’s been really not so good sequences and the industry shows people these hundred year charts and we do these hundred year Monte Carlo simulations and we say everything’s going to be just fine.

Mike Hirthler:        29:57           And the reality is there are these 15 to 17 year periods, and I have found in my career, people invest in probably about two 15 year periods. So when you hit in your 50s if you start at young like you did as far as your children, they might be in college now, you may have saved, had that college paid for, you’re in your prime earnings years. So you save some money, 50 to 65, 66, 65, 66, 67, 70 you retire, you stop. So then you have this deep cumulation phase and that’s a 15 year period. If this experiment that we’re in right now with the boomers, et cetera going through that are responsible for their own pensions, there are two 15 year periods that if we get either one of them wrong, we don’t have a chance to do this over. And I think like we can’t forget about the literacy, the financial literacy that needs to be given to people to understand what they’re invested in, what are those risks and rewards.

Mike Hirthler:        30:55           What, and we’ve just had this wonderful 10 year run and the large cap US stocks. So I tell a little story here of, if I retired in 1990 bought those S and P 500 took out 8% paid my advisor 2% 10 years later, everybody’s happy. I got my 80,000 a year, they’ve, my account’s worth a million four. You come in, same advisor say, give me the same things that Mike Hirthler had. They’re wonderful. You walk in 10 years later he says, what are you doing here?

Mike Philbrick:       31:21           Money is gone.

Mike Hirthler:        31:23           I say, well, isn’t that 400 no, it’s gone. They’re the same great guy. And I think there’s potentially, we’re at all time high valuations not to get in this on stocks, bonds, everything in the world. So there’s a potential sequence of return risk that I’m not so sure the average person understands.

Mike Philbrick:       31:38           Yeah, we would concur. So when you go through the sequence of returns, there’s that high risk zone five years before retirement and five years after retirement where large losses in a portfolio have significant impact to the portfolio because you’re going to be taking money out, ie: the portfolio is in de- cumulation and so the volatility of the portfolio becomes as important as the returns of the portfolio. If you’ve got lots of volatility and you’re taking money out, while in the extreme example, you’re taking out 10% let’s say, which is way too high, but the portfolio goes down by 50% well then you’ve got to take your income out. Let’s say you take out 10% so 5% comes out, 45% doubles the next year. Well that’s $90. That volatility gremlin eats away at the potentiality of your returns and as you’ve said, we have a period of time where if anyone goes back and looks at the financial tables that we print, which show the 10 year return, they’re going to see a really good 10 year return because there has been no correction in the last 10 years in equity markets.

Mike Philbrick:       32:41           And then they’re going to extrapolate that we’ve got a couple of behavioral biases happening, we’re extrapolating into the future and we’ve got over confidence in those numbers. And it’s a dangerous mix, especially for 10,000 baby boomers a day that are flipping into retirement. I think it’s very challenging. The 4% rule. Another example of, well you could take out 4% but what was the average interest rate over the last hundred years at that 4% rule is based on,

Mike Hirthler:        33:07           yeah, that’d be six. Seven,

Mike Philbrick:       33:07           Seven? What is it today?

Mike Hirthler:        33:11           One and a half.

Mike Philbrick:       33:11           One and a half. That’s 40% of the portfolio. And so I think it’s interesting, right? So if you’re going to go market cap based portfolios with very low fees with one and a half percent starting yields and very high valuations, I wonder about what the outcome, I think you have to try harder. I think you have to do other things. And to your point, financial literacy is probably most important for baby boomers whose lifestyle depends on them funding it via those savings.

Mike Hirthler:        33:42           Yeah, they’re not going to get a mulligan in golf, like there’s no do overs here. Again, we don’t know the future, but perhaps it’s good to think about a range of possible outcomes and I don’t think people do a good job of thinking about ranges of outcomes and what they have to do differently and defensively, et cetera.

Mike Philbrick:       33:58           Probabilistic thinking that should be a course taught as maybe that’s a 301 financial literacy course. The cones of probability.

Mike Hirthler:        34:07           I think something that you taught me is look at the key is, what you tried to do at ReSolve is a realized returns and that’s so important. People talk about track records and this notes. What did you make and keep?

Mike Philbrick:       34:19           Right? What was the stat from Peter Lynch?

Mike Hirthler:        34:22           Yeah. You’d said that it is 10 year period where you made 23 or 24% in his first book per year. The average investor in his fund lost money. That being said, the person that did a complete round trip, bought and sold, lost money.

Mike Philbrick:       34:36           Wow. And so again, it’s about, we always say at ReSolve. We want to be in the hall of fame of realized risk adjusted returns because they have to be realized by the individuals who are investing.

Mike Hirthler:        34:46           Yeah.

Mike Philbrick:       34:47           And I think as I speak with you, you have the very same view. I mean it doesn’t help if you’ve got a track record that nobody participated in. You know, truly if the tree falls in the forest and there’s nobody there to hear it, it didn’t fall in the world of investing. If you have a great track record and no one participated, and no one participated.

Mike Hirthler:        35:04           We always say if the industry would be a little more honest and nice as far as when they present something and say, “By the way, we didn’t have that and you didn’t have that track record.” Like right now they present whatever large cap U.S. Stocks. But 10 years ago they had hedge funds, they didn’t have youth large. So a lot that’s sold at the present time is something that nobody had.

Mike Philbrick:       35:26           Very much people buy a lot of time of investors invest looking at the return as though they had it when they buy it and they said, “Well that’s the return I want to experience.” Well that’s the past return. It’s not the forward return, so it’s going to be, I think it’s going to be challenging times. I think that those who succeed are going to probably succeed with some degree of unconventionality in their portfolio. They’re going to have to do things that are a little bit different in order to try and meet their obligations retirement wise, or pensions and endowments from their constituent obligations. It’s going to be an interesting time over the next 10 years.

Mike Philbrick:       36:01           Any final thoughts you have?

Mike Hirthler:        36:03           Well, I agree. I appreciate your time and I have to say when thinking unconventionally outside the box, that latticework of mental models, a little differently than I think what you’re doing at ReSolve. We’re very interested in our partnership. It’s refreshing to find people like yourselves that are thinking about these problems and come up with solutions for people. We appreciate that.

Mike Philbrick:       36:22           That’s exciting. We’ll keep our nose to the grindstone on that and look forward to future chats.

Mike Hirthler:        36:26           Same.

Rodrigo G.:             36:28           Thank you for listening to the Gestalt University podcast. You will find all the information we highlighted in this episode in the show notes@ investresolve.com/blog. You can also learn more about ReSolve’s approach to investing by going to our website and research blog at investoresolve.com where you will find over 200 articles that cover a wide array of important topics in the area of investing. We also encourage you to engage with the whole team on Twitter by searching the handle @investresolve, and hitting the follow button. If you’re enjoying the series, please take the time to share us with your friends through email, social media, and if you really learn something new and believe that our podcast would be helpful to others, we would be incredibly grateful if you could leave us a review on iTunes. Thanks again and see you next time.