Building Buckingham: Pursuing Passive Investing

In a previous article, I addressed one of the questions I’m commonly asked about Buckingham. Today, I’d like to tackle another, one that I’ve come to find even more foundational. Specifically, people like to ask: “Buckingham now seems so synonymous with a passive investing philosophy. Has that always been the case?” The answer is a qualified “Yes.” But let me explain.

In June of 1994, when Bert Schweizer, Steve Funk, Paul Forman and I were organizing our new Buckingham adventure, we divided our responsibilities.

Steve took charge of getting the office space ready for our planned September opening on the 4th floor of the building at 230 S. Bemiston in Clayton. While Steve was working on this project, Paul and I spent the summer searching for four outside capital investors to fund our new company. In addition, I worked on some up-front publicity about our new enterprise and managed to bring in our first actual investment clients. And it had been left to Bert and Steve to determine the best way to invest our new clients’ money.

From our experience as CPA wealth advisors and personal financial consultants, Bert and I knew we wanted to provide our firm’s clients with investment options organized around the same principles that we believed in: individualized and sensible asset allocation in low-cost investment vehicles, a tax-efficient buy-and-hold strategy and broad diversification to reduce risk. The questions we had to ask ourselves were: What’s the best way, what’s the right way, and what’s the responsible way to achieve these goals? Bert and Steve, both methodical planners and thinkers, set to work testing various theories compatible with our basic beliefs. As our first clients appeared, however, Bert and Steve were still in the midst of their due diligence.

Using Morningstar software, they had found low-cost mutual funds with good track records in various asset classes. But there was one problem that kept popping up. Whenever they back-tested the data, applying the same methodology as if they had invested the money years before, it always resulted in the recommendation of a different set of mutual funds. This initial option lacked reliability, so they asked for even more time to do their initial research.

But we had clients, and we needed to offer them investment services immediately. We agreed to begin with a basic buy-and-hold investment plan for these early clients and refine the process as we went along. So, in those first few months of operation, our clients were invested in a diversified set of mutual funds that all had good five-year track records, even though we knew that past performance was no guarantee of future performance.

Do you believe in fate? Or do you believe (as I mostly do) that we determine our own fate? One day in the fall of 1994, Bert was invited by a local St. Louis financial planner, whom both he and I knew and respected, to attend a special conference in Kansas City. The conference was focused on a relatively new investment approach. The rest, as they say, is history.

If memory serves, Bert gave me a call (this was way before the time of texting or tweeting) while still in Kansas City and said, “I’ve got it! I know what we’ll do. And we’ll never have to say we’re sorry.”

The conference Bert had attended was, in fact, an early Dimensional Fund Advisors (DFA) seminar. What Bert learned in that pivotal moment was how we could (and of course did) invest our clients’ life savings in academically based, low-cost and tax efficient asset class funds. By following this investment methodology, our clients would get the return (good or bad) of each asset class in which we and they chose to invest, less the low cost of these passive funds and our fees. As investment advisors, we would know what to expect based on the future return of each asset class, and we would explain all this information up-front to each of our Buckingham clients.

We converted those first few clients to our new strategy and all successive new clients immediately followed our new-found approach. Over the years, we’ve added passive asset class funds from other fund families and have never looked back.

1stBAMnewsletterIn November 1995, Buckingham sent out its first newsletter. In this issue, we celebrated our one-year anniversary by explaining Buckingham’s investment philosophy to our, at the time, 80 clients. We also announced we had added a new investment advisor to the firm, Ed Goldberg.

Now, more than 20 years later, that investment philosophy still stands as the bedrock upon which our firm was built. Buckingham and BAM Advisor Services have more than $24 billion of combined assets under management or administration (as of Dec. 31, 2014) and currently serve more than 18,000 families. Our clients know exactly what to expect: the returns of the markets they choose to be in, less modest costs. And we’ve never had to say we’re sorry.



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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2014, The BAM ALLIANCE

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