July 15, 2023
The very successful screenwriter William Goldman (“The Princess Bride,” “All the President’s Men,” “Butch Cassidy and The Sundance Kid”) once famously said “Nobody knows anything.” He was speaking about the conviction of those (writers, producers, directors, actors, and the rest) involved in a contemplated film production as to its ultimate success or lack thereof. No matter how much they may “know” about filmmaking, how illustrious their track records, or how grand their reputations, it turns out (according to Goldman) there is little or even no correlation between initial expert opinion as to the film’s potential success and the extent to which it actually succeeds or doesn’t.
The history of movie making is filled with stories of films made where all concerned were convinced they had a dud on their hands and it turned out to be wildly successful (“It Happened One Night,” for example). And the opposite is true, of course (“The Alamo,” for example). So, optimism or pessimism as to a film’s prospects on the part of people whose business it is to “know” turns out to be, if Goldman is right, non-predictive. Conditions in the marketplace when the film is released (competition or lack thereof, successful or unsuccessful marketing campaigns, a shift one way or another in the public’s taste, the state of the economy) all are determining factors.
Perhaps Goldman has exaggerated for dramatic effect. If he were brought down to earth (in both senses) he might say, “Well, all right. How about, ‘Nobody knows enough’? And particularly not enough to be confident that any complex plan can be expected to play out as designed without periodic modifications to reflect the current conditions.” As a practical matter, no one, no committee, no team can ever know enough to make the plan fully fireproof.
Is all this yet another exaggeration? I’m not so sure. Setting aside those cases where short-sightedness is an element of the plan (“I want this to be set in concrete however it plays out"), there are countless examples of unexpected and unpleasant consequences of plans set in concrete (irrevocable trusts that, it turned out, should not have been made irrevocable; weapons development programs that should not, it turned out, have been developed). If you put your mind to it you could come up with a very long list.
I have often thought that “No one knows anything” should be front of mind for those of us in the business of managing money and providing financial advisory services. It would maintain us in an appropriate state of humility just when we need it most: when we are certain … we have discovered a hidden gem of an idea; when we are convinced without a doubt that such and such an investment is a winner, or when we have, after much labor, put a complex financial or estate plan to bed with a sigh of relief (“Good job; I won’t have to worry about that anymore”).
It would also serve as a corrective in an environment where financial advisors of every stripe, financial journalists, news pundits, social media influencers, are constantly telling us that they know.
And it might also give us an opportunity to correct for our certainties. Suppose we at WEIL have just created a complex financial plan. We’re confident that we have made the best possible decisions based on a deep understanding of the issues involved. But because we recognize there is at least some truth to “Nobody knows anything” we add a written addendum to our plan. In the addendum we acknowledge that, even under the most favorable of circumstances, as our decisions and commitments are enacted over time, we cannot assume the “original conditions” which obtained at plan inception will remain constant. So we set calendar dates (semi-annual? annual?) for the next, say, ten years at which times we will review/amend/ revise the plan as needed.
When I tell you that in our firm we can and do schedule client reviews, perform frequent project analyses, and near continuously evaluate investment outcomes, will you think the above is a set-up? You might be right.
You may also think that for most people periodic financial planning reviews are routine. In fact, “one and done”/“set it and forget it” are often not the exception but the rule. People will buy a life insurance policy, put it away in a file and forget it, not realizing that some of its provisions will become obsolete over time. They set asset allocations for their profit sharing, 401(k) or 403(b) plans and never review them even though time and economic conditions have rendered the original allocations sub-optimal. They continue to hold assets in joint tenancy, appropriate when originally executed but wasteful years later. And in a real-life example, two parents included a provision in their living trust in which they allocated about 10% of their estate to a favorite grandchild at the second of their two deaths, the allocation to be equal to the estate tax exemption. The estate tax exemption at the time of drafting was $600,000 or about 10% of the estate value. Whoever drafted the trust “knew” that the estate tax exemption would never change. (Currently the federal estate tax exemption is $12,920,000 for an individual/$25,840,000 for a married couple and set to be cut in half and adjusted for inflation in 2026.) The parents never cottoned to the implications. I will not burden you with a description of the amount of time and arm wrestling it took to correct this years later after it was (finally) discovered by a new advisor. If the provision had not been amended virtually the entire estate would have gone to the grandchild. The other heirs, for whom 90% of the estate was intended, would have been left with nothing at the death of the dad had the current estate tax exemption then been in place. At the end of the day it took a probate court to intervene in a living trust that had become irrevocable upon the death of the mom, the bemused consent of the now adult grandchild, and $35,000 in legal fees.
What got me going on this subject? It was when I came across an astonishing example of setting and forgetting, with undesirable long-term consequences, in Niall Ferguson’s biography of Siegmund Warburg.
Warburg, as many of you know, was one of the most powerful and influential figures in 20th century investment banking. Investment banking (then called merchant banking) requires of its practitioners a high degree of flexibility, creativity, and negotiability.
Warburg had these attributes in spades. Except when it came to asset management. He “knew” about asset management and “knew” that flexibility, creativity and negotiability had nothing to do with it.
Asset management (as distinguished from investment banking and financial advisory services) was deemed by Warburg to be a second-tier task. He went so far as to leave the management of his personal wealth, for decades, entirely to others in his firm. I have the impression he viewed those responsible for his wealth management as little more than clerks. He did however set the following context for them. “My personal experience has been that if one expects miraculous results from investment management, this is the best way to do badly and in the long run the most favorable achievements are obtained on the basis of modest anticipations and by way of policies that err on the side of being solid and pedestrian rather than original.”
Ferguson comments that “his managers did the solid and pedestrian job asked of them and the result - thanks in no small measure to the effects of the soaring tax rates, inflation and exchange controls of the late 1960’s and 1970’s - was as modest as Warburg had anticipated.”
There is a lot of space between pedestrian and miraculous, the fact of which didn’t seem to register with either Mr. Warburg or his managers. And by the way, if one of our Advisory Team members told you our firm’s investment management philosophy was “solid, but pedestrian” and you could expect only modest results from us, what would be your response? I know what mine would be if I were a typical prospective client. “Pedestrian? Modest? Shouldn’t I just leave my money in the bank rather than do business with you?”
The Warburg decision to set and forget is a perfect example of “Goldman’s Law.”
There is the Knower, confident in his own ability to understand financial reality and confident that he can translate his understanding into a permanent investment policy. “Nobody knows anything” is unthinkable.
There is no acknowledgement or understanding that what is known and incorporated into today’s decisions will inevitably be impacted by changes - political, social, economic, familial, environmental (whoever thought Tulare Lake would refill with material damage to those who live in the neighborhood?) - over which you have little or no control. Recall that, according to Goldman, the opinions of those “present at the creation” are irrelevant to the long-term fate of the film. It is the all-in environment at the time of the film’s release that is determinative. By analogy, it isn’t so much the terms and conditions incorporated into the initial plan documents which will determine success or failure. It is the periodic required adjustments to the plan as dictated by changing conditions (micro and macro) that will make the difference.
And, in this case, there is the Alpha Male who sets into place the initial conditions and whose influence is such that those charged with implementation just keep their heads down and do as instructed.
Parenthetically, Warburg’s attitude was not without its justification. He had lived through the Depression and arrived in England in 1946 having experienced the trauma of Nazi rule in Germany. His was a classic example of what behavioral economics have discovered about risk/reward. The pain of loss greatly exceeds the pleasure of gain. And he was very much aware of the forces in the world which were (are) forever at the ready to undermine personal and societal wealth.
The example of the Alpha Male/Female is not as uncommon as you might think. If a dad or a mom is the dominant and authoritative personality in the family, the financial and/or estate plan he or she establishes is often viewed by heirs, and even advisors, as a sacred text not to be messed with except perhaps on the margin.
Obviously, not all set-and-forget choices are set and forgotten. But in my experience, what often awakens people to the desirability of a serious review is a push from a financial advisor or lawyer or CPA who asks: “When was the last time you reviewed your will, trust, financial plan, insurance, beneficiary designations, purchase and sale agreement, asset allocation, philanthropic intent and your other key planning documents and intentions?” If the push is not forthcoming the chances are good that “activities of daily living” will result in the deferral of such, otherwise crucial, reviews into the indefinite future - which could mean years, or decades, or never.
Those of you who are our wealth management and financial advisory clients know we view it as part of our responsibilities as advisors to “push” - gently but persistently. Those of you who are not are welcome to call me (cell 858 442 1212) for a short course on the virtues of our services (Advisory, Investment Management, and Estate Transition) and the benefits to you thereof. No cost. No obligation.
Postscript: (to quote Robert Burns) “The best laid schemes o’ mice an’ men/Gang aft a-gley.” You don’t have to “speak Scottish” to understand his meaning. Nor, I think, would anyone disagree with it. So much of life and life’s impacts on us are beyond our control. What is within our control is how we respond and adapt. People can rarely do this alone which is why doctors, lawyers, accountants, therapists, loving relatives, friends and, yes, financial advisors exist.
At WEIL, we are grateful to be on this journey with you. Thank you for the confidence you have placed in us and, as ever, please reach out to any member of the Team whenever the need arises.
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