How consistent, interconnected decisions can create value across a family’s financial life.
I have been thinking about compound interest lately, which is perhaps predictable given what I do for a living. However, the part that has interested me has very little to do with an investment return.
Years ago, Peter Kaufman gave a talk about multidisciplinary thinking built around a fairly ambitious question: if you looked across the major disciplines of the world, what principles would you find repeated again and again? His search took him through physics, biology, mathematics, history, psychology and human behavior. He was looking for the ideas sturdy enough to survive the trip from one discipline to another.
He came back to two. The first was reciprocation, which he distilled into the lovely instruction to go positive and go first. The second was compound interest.
Most of us know what compound interest does to money. Kaufman was interested in what compounding does everywhere else. His description was “dogged incremental constant progress over a very long time frame.” There are several important words in there, although the one I have been carrying around is constant.
I may be particularly susceptible to this argument because I am a bit of a plodder myself. I needlepoint. I play mahjong. I have practiced yoga for years. I have spent twenty years in a career that still fascinates me. Once I find something I love, or something I believe is worth doing, I generally stick with it. There is something deeply satisfying to me about returning to a thing and getting a little better at it.
Kaufman’s point is that constancy has an almost unfair advantage because of what happens to incremental progress over enough time. Human beings tend to be drawn to the dramatic version of progress instead. We notice the breakthrough, the extraordinary year, the brilliant investment, the business that suddenly takes off. The long stretch of ordinary decisions that made the outcome possible is much harder to see.
This is especially true with money. The financial world has trained all of us to pay attention to the spectacular.
We measure returns in quarters and years. We talk about the stock someone bought at exactly the right moment and the manager who saw something coming. We spend considerably less time talking about the person who made a series of sensible decisions for thirty years and gave each one enough time to help the next.
I wrote recently about the tortoise and the hare and our preference at Somerset for singles over home runs. The idea was mostly about investing, although I have come to think it describes good planning even better. A financial life is built through an enormous number of decisions, most of which will never feel important enough to become a story on their own.
A tax return gets read carefully and something gets noticed. An estate document written eight years ago gets pulled out because the family it describes has changed. A beneficiary gets updated. A concentrated position is reduced when the tax circumstances are favorable. A charitable gift happens before a transaction instead of after it. A trust gets funded. An insurance policy gets reconsidered. Someone has a conversation with an adult child a few years earlier than they otherwise might have.
There are occasionally enormous planning opportunities, and they are wonderful when we find them. However, most of the work looks more ordinary than that. Its value becomes clearer when you stop looking at each decision independently.
The tax decision affects the investment decision. The investment decision creates an estate-planning opportunity. The estate plan changes what becomes possible for a child or a charity. A business decision alters the cash-flow picture. A change in the family changes the purpose of the trust. Each decision becomes part of the circumstances in which the next decision will be made.
This is where Kaufman’s multidisciplinary idea becomes particularly useful. Families do not live in the individual silos our professions have created for them. A business sale belongs simultaneously to the investment advisor, the CPA and the estate attorney, but it also belongs to the family who has to decide what the money is for. Buying a house can affect an estate plan. Helping a child can become a tax question. Divorce can touch nearly every part of a financial life at once. The interesting work often lives in the space between disciplines.
That realization is part of what led us to build CLARITIES.
We wanted a way to keep returning to the whole picture rather than waiting for a problem to announce which professional should solve it. The process is deliberately repetitive. We revisit the tax return, estate documents, insurance, investments, businesses, real estate, family and cash flow because the facts change and, more importantly, the relationships among those facts change too.
A financial plan can be beautifully constructed on the day it is finished and increasingly irrelevant with every year that follows. A planning process has the opportunity to behave differently. It can remain constant while the life underneath it keeps moving.
That distinction has changed how I think about alpha.
In investments, alpha describes return above a benchmark.
It is an attempt to isolate the value created by an investment decision or process from the return the market would have given you anyway.
The idea is so central to our industry that we have built entire businesses around finding it, measuring it, and deciding whether it is repeatable.
I think there is another form of alpha hiding in plain sight.
Planning alpha is the return on better decisions.
Some of it can be counted. Taxes saved. Fees avoided. An estate strategy completed before an asset appreciates. A charitable gift structured more intelligently. Risk removed before it becomes expensive. Those are real dollars that remain in a family’s financial life and begin compounding there.
The more interesting part is what happens next. A good planning decision rarely ends where it began. Money saved in one place becomes capital available somewhere else. An estate decision changes a future tax result. A conversation changes the way the next generation handles an inheritance. An investor who has done the planning ahead of time is able to stay put when markets become frightening.
The return on one decision becomes part of the starting point for the next.
That is why I think planning alpha is less about finding a brilliant planning idea than building a process capable of producing good decisions repeatedly. We understand this intuitively in investing.
One great year tells us relatively little about an investment manager. We want to understand the process that produced it and whether that process can keep working. Planning deserves the same scrutiny.
CLARITIES is our attempt to make that process repeatable. We keep looking. We keep asking. We come back the next year and look again. Sometimes the win is immediately visible. Sometimes the thing we notice today creates an opportunity five years from now. The discipline is in staying close enough to a family’s financial life to recognize either one.
Kaufman also makes an observation about compounding that I think is easy to overlook.
Intermittency matters.
Constant progress interrupted again and again loses much of the advantage that made compounding so extraordinary in the first place.
Anyone who has invested for a long time understands this. The difficult part of compounding is rarely understanding the mathematics. The difficult part is leaving the process alone long enough for the mathematics to work.
I suspect the same is true of planning, and perhaps of relationships too. Trust accumulates through a surprisingly ordinary series of experiences. Someone says they will do something and does it. They remember what mattered the last time you spoke. They notice when something has changed. They ask a question before you knew it needed asking. They tell you the truth when the easier thing would be to agree with you. Then they are still there the next time.
Over enough years, those small acts become something much larger than any one of them.
Money compounds this way. Good decisions do too. Knowledge accumulates, relationships deepen and trust grows quietly in the background. The extraordinary part is rarely any individual moment. It is what happens when ordinary progress is given enough time.
Perhaps this is why Kaufman’s description has stayed with me. There is something reassuringly unglamorous about “dogged incremental constant progress.” It leaves plenty of room for the rest of us who are unlikely to discover the next great investment or make one dazzling financial decision that changes everything.
We can pay attention. We can make the next good decision. We can come back and do it again.
I can plod with the best of them.
Given enough time, that may be the advantage.
Lauren Pearson is the founding partner and Managing Director of Somerset Advisory, an independent wealth management firm built to serve the complex needs of multigenerational families, entrepreneurs, and executives.