Today’s topic is Alignment Within Your Investments. Depending on the type of investing you do, other people may be involved. These “other” people might be a conventional investment advisor or financial planner; a syndicator; or a turn-key, single-family residence provider (turn-key provider). To simplify things a bit, I’m also going to refer to these “other” people as your partners. When their objectives are aligned with yours, it’s magical. When they’re not, things can go wrong. Think about three people paddling in a canoe. When they’re all paddling in sync in the same direction, the canoe glides smoothly through the water. If just one of the three gets out of sync or starts paddling in a different direction, the canoe’s course is altered. It’s the same with investments.

Let’s look at how each of the three, previously-mentioned partners is compensated to see how well their objectives are aligned with yours – the investor.

The Conventional Investment Advisor or Financial Planner
If you invest in stocks, bonds, and mutual funds, your objective is most likely growth in the value of your portfolio. If you hire a conventional advisor to manage this portfolio, in some cases they charge something called an assets under management (AUM) fee, which is simply a fancy term for your account balance.

To make the math easy, let’s say the advisor’s AUM fee is 1%. If you start the year with a $1M portfolio and end the year with a $1M portfolio (no growth), you will still pay your advisor $10K, and now your account balance at the beginning of the next year will be $990K. What did the advisor do for his $10K fee? He chose the mix of stocks, bonds, and mutual funds to best meet your investment objectives. Unless your objective was to have no growth, your advisor failed but still got paid. Certainly, the advisor is incentivized to grow your portfolio because the higher its value, the more money he makes. The problem is, he makes money even when you lose money. That is not what I consider alignment.

*A big disclaimer here is that I do not use a conventional advisor anymore. My reading on this topic, however, is that the AUM fee is still in use but may be declining in popularity.

The Syndicator
First of all, what’s a syndicator. When you’re driving down the road, and you see a new apartment building, hotel, or golf course under construction, it’s very unlikely that one person wrote a $10M check to fund that project. Typically, these projects are funded by investors like me, who each put up a portion of the money. These are called syndications, which is another fancy term meaning the pooling of money to acquire an asset. The person or group of people who put these deals together is called the syndicator.

In most of the syndications in which I invest, the syndicator’s compensation is a percentage of the profits the asset produces once it is up and running BUT ONLY AFTER I HAVE RECEIVED ALL OF MY ORIGINAL INVESTMENT BACK. If I invest $100K into an apartment syndication, and it takes four years for me to get my $100K back, the syndicator waits four years to get her share of the profits. It’s no coincidence that one of my investment objectives is how quickly my original investment is returned to me. So, you can see that in this situation, the syndicator and my interests are completely aligned.

The Turn-Key, Single-Family Residence Provider
What’s a turn-key, single-family residence provider? Let me answer by way of an example. One way to buy a single-family residence (SFR) rental is to do it yourself – buy it, fix it, find tenants, manage it, etc. The other way is to use a turn-key SFR provider. In this situation, you can buy what’s called a loaded rental, a SFR rental that already has paying tenants in it and is being professionally managed. There are numerous such providers across the country.

I talked with a guy who provides this type of service; and he has a vertically integrated company, which includes a brokerage firm, a construction company, and a property management company. He works a specific market in the U.S. and buys houses he knows will be good rentals, does quality repairs and remodeling, screens and installs qualified tenants, manages the property, and then sells it to you. All you have to do is show up with cash or a bank loan.

Here’s the great part! He said to me, ‘I’m not going to sell you a bad rental, with shabby repairs, and deadbeat tenants because at the end of the day, as the property manager, I’m stuck with the problem.’  As a landlord and investor, he and I both want the same thing, a profitable, smoothly-operating, and hassle-free rental property. Alignment doesn’t get much better than this.

So, the next time you’re making an investment, make sure 1) you and your partner’s interests are aligned and 2) you only do business with people you know, like, and trust.