Eating Our Own Cooking

Published On: January 5, 2022

Written by: Ben Atwater and Matt Malick

When we started Atwater Malick one of our highest priorities was to implement a straightforward investment and financial planning process. We continue to work hard to maintain our direct approach.

In that spirit of transparency, today we are beginning a series of essays on conflicts of interest. Although not the most exciting subject matter, please bear with us, as we think it will be an engaging topic.

Over the last month, we have been preparing our regulatory filings, including a conflict of interest evaluation. Although our transparent business model and our duty to you as fiduciaries greatly eliminates most conflicts, we still register a few and in this series we will explore them.

Simultaneously this exploration will give you a better “look under the hood” at what we do and how we do it.

Regulators view “recommending securities to clients at or about the same time the investment advisor buys or sells the same security for their own accounts” as a conflict of interest. What this means practically is that an investment advisor needs to be cautious investing in the same manner as their clients.

We think this is the opposite of how it should be. After all, if we believe in what we do, why would we invest differently for ourselves than we do for our clients? Why would we not eat our own cooking?

We do understand regulators’ concern. If we were trading thinly traded small cap stocks, we could theoretically buy for ourselves, then buy for our clients, thereby driving up the price, and then turn around and sell it from our own accounts for a quick (and highly unethical) profit. This is called front running.

But we don’t believe the theoretical possibility of front running should preclude us from investing like our clients, which even further aligns our interests with our clients’.

And given the types of investments we make, front running is not realistic. Our trades in Apple, Google, Pfizer or Procter & Gamble are not going to move the stock prices of these behemoths.

Theoretically, we could buy or sell a large cap stock all at one time, manipulate the price (in the very short term) and then take advantage of that movement for our own benefit.

That, however, is almost inconceivable and would certainly not be worth the effort. It would be the equivalent of two thieves who in 2009 sought to withdraw cash from an ATM machine by using dynamite. According to the Seattle Times, “They overestimated the quantity of dynamite needed for the explosion … The blast demolished the building the bank was housed in.” Both bomb burglars died in the incident.

Although there is an outside chance we could coordinate some kind of price manipulation, that should not preclude us from investing like our clients. Of course, it is important for regulators to be vigilant, but it is also important that we stand behind our investment process.

We own the same stocks as our clients. We dollar-cost-average into our portfolios the same way we do for our clients. We buy companies for the long-term and we manage those holdings tax efficiently, just as we do for our clients.

Because of our lengthy time horizon and our willingness to endure extreme volatility, we have our portfolios heavily weighted toward equities. However, over the years, we have laddered bonds to meet specific personal financial goals and slightly curb short-term volatility.

The bottom line is that we do buy and sell the same securities as our clients and we commonly do so during the same timeframe. Instead of running from this fact, we embrace the somewhat controversial notion of proving our loyalty and commitment to our clients by, as they say . . . putting our money where our mouth is, practicing what we preach, leading by example, and so on . . .

We hope you agree this is one conflict of interest you should take comfort in.