Can You Invest & Do Nothing? With Andrew Parrillo

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1:30Hello, I'm Anthony Scaramucci, and this is Open Book, where I talk with some of the brightest minds out there about everything surrounding the written word, from authors and historians to figures in entertainment, neuroscientists, political activists, and of course, Wall Street. Sorry, I can't resist. Before we get into today's episode, if you haven't already, please hit follow or subscribe wherever you get your podcast and leave us a review. We all love a review, even the bad ones. I want to hear the parts you're enjoying or how we can do better. You know, I can roll with the punches, so let me know.

2:04Anyways, let's get to it.

2:13How do we beat the wealth management hustle? My guest today, Andrew Perillo, is here to tell us. from investing independently to the value of doing absolutely nothing, Andrew has some great advice for us. So let's listen.

2:32Okay. So joining us now on Open Book is Andrew Perillo. He's a dear friend, institutional investor. He's an author and speaker, and he's out with a new book, Beat the Wealth Management hustle. Invest independently to grow savings faster with peace of mind. So, wow, that's a mouthful because you and I have been in wealth management. I think you and I are like Donald Trump and Joe Biden of wealth management. We're two ancient fossils in the industry. And there's a lot of things that are great about the industry, a lot of things not so great about the industry. You've written beautifully about all of this stuff.

3:08Let's start, Andrew, with your career. Tell us about your background, how you got started, why you've been doing this for so long. Okay, great. Thanks. First of all, thanks for having me on. This is really an honor to be with such an august host here. I appreciate it. August, yeah. Emphasis on the word august. An icon of inspiration, especially with your partner, Katie, or Caddy, I should say. But anyway, okay. How do I get started? Well, look, I went to Boston University. I'm from Rhode Island. Went to Boston University. Was in my military obligation, Air Force Navigator. got out went to a bank training program they put me in the investment department back in the early 70s because yeah I'm I'm really ancient you're just a child but um the um the um um yeah and then I just kind of it was yeah I I in those days investing was not a really popular uh career so I you know I didn't know any better I didn't know anything about stocks or bonds I learned and uh I guess I learned well enough because then I was attracted to eventually, at the age of 31, manage the largest department or pension investment department of the largest bank in Rhode Island, which ultimately became part of Bank of Market.

4:22And then in the early 80s, I went to an independent firm in Boston. And I had trouble with the ethics of that business. I then switched to having managed money and having met with investors and fiduciaries, always fiduciaries, and rarely individuals, although I did have some of the larger individual clients of the bank as clients. But it was an interesting time. I mean, in the early 70s, interest rates went crazy. Interest rates by 81 were 15, almost 16 % on 20-year treasuries. And they went down to 55 basis points in August of 2020. So we had the biggest bull market in history. Actually, not as big as the bull market in bonds in Japan before that.

5:11But anyway, so market history is fun for me. It's a big part of my life. I enjoy the competition. Anyway, in 1995, I found myself in a position where I really thought I could do a better job for clients on my own. So I started my own firm. And the name of the firm was Newport Capital Advisors. and I had endowment clients. They were referrals. They were referrals. I was charmed in my life. I never had to go out soliciting business. People came to me. They knew who I was. They liked me. And so they trusted me and they hired me. And why did they do that? Well, I can only attribute it to, and I talk about this in the book, I thought independently.

5:50I was different from the crowd. I wasn't on the well-worn institutional path of hiring the big, famous firms. I was like, now let me find the people who are poor, driven, and hungry. Kind of a Mario Gabelli thing. Although I never actually engaged Mario's firm. But anyway, another story. But we probably know a lot of the same people. We've had the same experiences. But the bottom line of this all is by the end of 2019, after 25 years of owning my own firm, and we had endowment clients and family offices as clients, and I had a small hedge fund of funds, a multi-strategy fund, Um, and, uh, which was interesting and a learning experience.

6:33Uh, and after, by the end of 19, I, I was getting a little tired of it. And, uh, I, so I closed the firm and I tried retirement for a couple of years and I got super bored. And in late 22, I was at a party, a holiday party. And, uh, I didn't know anybody. There was a friend of mine's house in New Hampshire, actually. And, um, I introduced myself and, you know, I said, well, I have three sons, three grandchildren. I retired from the investment business. And in December of 22, you may recall, I'm sure you do, that the market was down roughly 20 % that year and bonds were also down, depending on your duration, 15 % or more.

7:11People were a little bit concerned. What should I do with my portfolio? So thank you for asking. I said, but I'm not an advisor anymore. And do you have an advisor? Yeah, well, you probably should ask your advisor. I don't talk about investments casually in a social setting with people. But yeah, talk to your advisor. And then, well, what's the Fed going to do next week? Well, the Fed is probably going to do what it's been telling us since March of 22 that they're going to do, and that is raise interest rates until inflation begins to subside. But will it be enough of a change to change your portfolio strategy?

7:44I don't think so, but you should ask your advisor. All right. So that led me to an epiphany. It's like, wait a minute why are strangers asking somebody about what to do with their money don't they have advisors don't they talk to their advisors and i started asking friends you know do you have who had advisors yeah we have do you know how much you pay your advisor nope um and this was like a dozen people they didn't know what they were paying their advisor i'm so um okay and so that was my epiphany and that was my uh that's what really caused me to start to write the book and um what basically happens in the world and wealth so-called wealth management which is a term that i think is specious and you know pretentious frankly but uh it's uh it's investment management but anyway um the um let's let's face it people according to daniel coneman the late daniel coneman now He won a Nobel Prize in economics as a psychologist in 2002 and wrote a book, Thinking Fast, Thinking Slow, which I commend to everybody.

8:52People are two and a half times more likely to avoid risk than to embrace the opportunity for gain. Wall Street, I shouldn't say Wall Street, the so-called wealth management industry, has done an expert job of exploiting that phenomenon. and that tendency for people to avoid risk. And people go to wealth managers for comfort. They rarely ask them how much they charge. I think they have no idea of what compound interest is. And here are the numbers, Anthony. And there are no charts and graphs in my book. There are some numbers. The numbers are pretty – and my book is a simple book. It's a simple idea.

9:32There's nothing complicated about it. But we know that in the last 25 years, the world has changed so that accessibility of information, competition has increased. Prices in many cases have gone down a lot, especially driven by technology. And that's been true in the investment business, where now you can invest for little or no cost, really. And you could have a prudent portfolio with using the services of the major, you know, custodial brokerage firms and banks. for little or no cost. And so why are you paying somebody to do that? Because they don't think they're paying very much. Well, they know how much they pay their lawyer to put together a will and a trust and other agreements they need for their business or their family planning.

10:19They know how much they pay their CPA, but they don't have a clue about how much they're paying their advisors. And that's just a fact. And it's a multi-trillion dollar industry that's charging hundreds of billions of dollars a year in fees. And most people have no idea whether they're getting value from the fees that they pay. And that's as simple as I can put it. And so my book is about disclosure, transparency. It has some questions. It advocates to people that they look at their investment process the way institutions look at investing their own money. And that is to conduct due diligence.

10:55That's not rocket science. It's common sense questions. And I'm not that smart. I just have been around for a while and I've seen stuff. And you can't time the market. Let's go over some mistakes. Let's go over some mistakes. So that's one of them. You can't time the market. Number two, if you overly listen to people on the pundits, you may move your portfolio pursuant to Federal Reserve interest rates moves. That's also probably not a good idea. Fees matter, right? Lower fees, higher returns over long periods of time. Tell us some other mistakes that people make. So let's say you did run into somebody at one of these cocktail parties and you said, OK, here are five or six things you should do with your money, which will be better for you and your family.

11:40Tell us what those are. Well, five or six things is to first of all, understand what is important to you about money. That's the first thing. It's really like a value based, you know, query. You know, what's important to you about money? You know, one of the things I talk about in the book, firstly, is what is wealth? To me, wealth is health. And so does money convey some sense of security? Of course it does. And, you know, but just seeking money for money is not the answer. So you have to understand what's important to you about money. um do you um you know can you and then what what are your prospects for generating money uh what kind of uh time preferences have you selected do you want to save more or spend more do you understand have you thought through that so you have to think through that uh time purpose money is super important and the reality is and you know this very well um that if you start early you don't have to put a lot of money aside to have a whole bunch of money in 30 or 40 or 50 years.

12:48And you don't have to be a hedge fund manager to make a lot of money. You can do it just by investing in the market. When you were a kid, Andrew, did you ever read The Richest Man in Babylon? I have not, unfortunately. I'm not as well-read as you, Anthony. Your book is a lot like that. That's the reason why I was asking, because your book is a very, very straightforward thing. I've ordered a bunch of them, and I'm trying to get them into as many hands as possible because I just think it's a beautiful guidepost. But also, I'm going to bring you on the Wealthion Network, which is another show that I do called Speak Up, where registered investment advisors actually tune into this show.

13:33And so if you were a registered investment advisor, and they read your book, and a lot of people are cynical about wealth management and a lot of the stuff you say in the book is true, but how, put me in the seat of the registered investment advisor. How do I make myself valuable to somebody after reading your book? This episode is brought to you by Indeed. When your computer breaks, you don't wait for it to magically start working again. You fix the problem. So why wait to hire the people your company desperately needs? Use Indeed Sponsored Jobs to hire top talent fast. And even better, you only pay for results.

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14:49Minimum spending requirements and terms apply. Offer ends October 29th, 2025. Yeah, okay. Here's my approach. My approach, and this is what we use, what I used at my firm. First of all, behavioral finance is really a big deal, okay? Because human behavior changes over time, but the pattern is roughly similar. And so the reaction to market events, which are sometimes surprising and chaotic, tend to follow a path, tend to follow. I mean, the reality is that let's just talk about the standard of corporate performance for 100 years has been the standard of course 500. And it's gone up roughly 10 % a year.

15:28Three years during the depression, the Great Depression, it was down 85%. It was down 50 % for the two and a half years of dot-com decline. It was down a year and a half, but it was down 50 % for a year and a half during the great financial crisis. It was down, goodness, it was down 35 % in 30 days in the COVID crisis. But it's always come back. Why has it come back? It's because corporate management are incited to provide a return to their shareholders. and if they do not they're out of business and people will go on to the next you know company and and i don't expect that to change and yes inflation rates have changed the value of the dollar has been destroyed over the since particularly since we suspended the suspect convertibility of gold in 1971 and i'm not a gold bug i've never thought that gold was a good investment but anyway however i do think bitcoin is a different proposition it is a good investment But that's a different level of thing.

16:23What would I tell advisors? I would tell advisors, focus on allowing the client to determine his or her own tolerance for preference for risk and return. And I use something that's based on prospect theory, which is an objective way to determine somebody's tolerance for risk and return. So it asks a series of iterative questions. And the questions are, okay, how do you feel about possibly making, and this again is using what we know as mean variance analysis, but it's basically using history as a guide to what may happen in the future in the market, which has been pretty reliable. So looking over a six-month interval, would you be comfortable making 20 or losing 12?

17:08Well, I don't want to lose 12%, but how about making 15 and losing maybe eight? Well, that sounds a little better. And so you could actually quantify those preferences with a risk score. And for what it's worth, the Standard & Poor's 500 has a risk score of about 75 on a scale of 0 to 99. time. And so, and most people have a lot more risk in their lives and in their portfolios than they even know. So one of the things you could do as an advisor is say, let's take a look at your portfolio and see how it scores and see if it comports with your own preference for risk and return by using that score that we've just determined iteratively and objectively.

17:49So it's not like, well, you know, you're a 60-year-old man, Anthony, so you must be relatively conservative in your investing. The reality is that no, surveys have shown that the people who are under 30, half the people under 30 are just as conservative as people, half the people over 70. Okay. And that's just a fact. So it's a very subjective saying, well, I'm growth oriented, I'm risk oriented, you know, I'm conservative, I'm capital preservation oriented. That doesn't mean anything. Those are subjective terms. And I think that they should be, they should be quantified objectively. And therefore, you could review them and you could calibrate a portfolio to that risk score.

18:29And that's what I would suggest that advisors do. The other thing I would suggest that advisors do is be very transparent on how much they have charged their clients over what interval from beginning to end. One of the things that happens in our business is every minute you get a, or throughout the day, you'll get a notice on your mobile device that you have a charge against your card or your bank account or something, right? You get those notices. Do you get a notice every quarter when your advisor charges you their management fee? No. The fee comes out of the custody account. People don't even see it.

18:59They don't read the custody accounts anyway until and unless the market goes down a lot and they get freaked out. And where do the advisors make their money? They make their money by setting the appropriate strategy and risk profile for each client and then revisiting that on a systematic basis, probably at least a couple of times a year, but at least annually. And so that's what I would tell advisors to do. And I would also encourage advisors to charge their fees on a fair basis. Now, you and I both know that the margins in the investment management business are really high. What a great business.

19:41You get a client that has recurring fees. They're going to grow in line with the market, which again is roughly 10 % a year, call it 8%, you know, call it 7%, still doubles in 10 years. And so you have the stream of revenue that's growing at 7 % a year. You know, it's a value because it has a residual value because you could put a number on that and sell it to somebody, to a larger firm that wants to buy your book of business, so called. And it's a great business. And oh, by the way, it takes almost zero capital to be in the business, right? It's probably one of the most attractive businesses I can think of that's legal.

20:15And the only reason it's legal is because the SEC is so permissive. And people don't even know that fees by the SEC's mandate are negotiable. That doesn't mean the manager is going to lower the fees. But all management fees are negotiable. And people don't even know that. So it's trying to just enlighten people to look. I said before I have some numbers. And I know we don't have a lot of time left. But OK, so let's say you have a half million dollars and you have an advisor who makes 7 % a year for 20 years and they charge you 1 % a year, which is generally the management fee that people charge.

20:50It might be a little less. It might even be more. It frequently is. All right. So how much does that amount to? Well, that fee, that 1 % over 20 years amounts to$331 ,000. So if you want to put your half million out there to an advisor at 1 % and you don't mind paying them$331 ,000 over 20 years, great. That's your choice. But you should go into that with your eyes open. Could you do that yourself for almost no fee, for a few basis points, for a few one-hundredths of 1 %? The answer is yes. So all I'm saying is what Warren Buffett and the late Jack Bogle have said for years, and that is just invest in the S &P 500 and forget about it.

21:35You cannot deal with the noise of Wall Street on a day-to-day or week-to-week basis because it will drive you bananas. You won't know what to do. And you'll hear these talking heads. And that's another thing I talk about in the book. but there's not time to go into it here. But the people who get interviewed on the daily financial shows are talking about what's going to happen next week in the market. I don't know. You know and I know there are a few people who could actually time the market. But it's not me, Andrew. I can tell you that. No, no. Not you. Not you. But I'm saying there are some people who are good at that.

22:09But you can count them on maybe two hands. And they're not accessible. They're close to – they're brilliant investors. Absolutely. They're savants really is what they are. I'm going to say something to you and I want you to react to it. I feel I get paid as an investment advisor or as a manager to do nothing. And you say, well, what are you talking about? What do you mean to do nothing? Well, I have set up a portfolio. And if I can condition my clients to listen to me and take the long term approach with the portfolio that I have set up. I haven't met Warren Buffett many times, but he said something to me about 20 years ago that has rung true in my life and has rung true in investing for me.

22:54Sometimes the best thing to do is absolutely nothing. And we have all of these impulses on our personalities where, well, I'm getting paid this big fee. And so let me go out and do something for my clients as a result of this fee. So what's your reaction to that? because I really think that's it. When I talk to my clients, they're like, you know where you've added value, Anthony? You've kept me on the ledge. You kept me from jumping off the ledge, going to cash at the worst possible times, et cetera. And that is precisely the right way to look at it. And that's exactly the right. And look, I've been through a lot of crashes.

23:32I've been around this industry for 50 years. And I've been through it with real people. And I've seen how difficult it is. It's terrifying when you lose 50 % of the value of your money or more. But in every case, it's come back. And of course, the advice has been, yes, stay with the program. Do not sell at the bottom. Do not try to reduce risk. Because what you're really doing, if you sell out after you lose, you're not reducing risk. You're actually increasing the risk that you will not succeed. And so that advice about doing nothing is exactly the right advice. My point is, why are you paying somebody an annual asset-based fee?

24:07And you're paying them every day of the year. that fee, by the way, to tell you every time the market goes down, you know, 10 or 15 or 20 % or more to just stay the course, stay put, maybe we'll rebalance a little bit. But you know, does your advisor make changes on a daily basis to your portfolio? No. And if they do, they're probably not very tax efficient, or for that matter, investment efficient. It's just not necessary to do that. Warren Buffett's favorite holding period is forever. And that's good advice. Now, are you if you hold on to something that's fundamentally deteriorating, that's kind of dumb.

24:38You can't do that. But if you've spread your risk among, you know, say an index of stocks like the broad index that Vanguard has or the S &P 500, you know, yeah, you're going to get the decisions. And oh, by the way, many investment managers, and you know this as well as I do, have gotten rich underperforming the S &P 500. And they literally have gotten, why is that? Are they making money for themselves or are they making money for their clients? So I... Listen, I'm with you. That's why I wanted to bring you on. So we're at the point, in the podcast where my staff and I, we put together five words that are tied to your book.

25:14And so I'm going to say the word and then you're going to say to me what you think of. It could be a sentence, it could be a word, it could be a few thoughts. Okay, you ready? When I say the word money, Andrew, you think of what? I think of confusion. Okay, it's interesting. It's a good point. How about the word success?

25:37Achievement. How about when I say hustle? Let's see. Resolute energy. Wealth. Health. Well, isn't that the truth? When we're kids, we don't think of it that way, right? But what do we think about that as we get older, that it's really just the health of the wealth. Last word, investing. Joy. Well, it's been for me too. I mean, this has been the best business I could have gone into is this business. It's just the business of understanding other businesses. If you like business, what could be better than that? The title of the book is Beat the Wealth Management Hustle. Invest independently to grow savings faster with peace of mind.