Structural Integrity

On a typical weekday afternoon when most planners are ensconced in their swivel chairs and swimming in spreadsheets, you’ll find advisor John Smartt somewhere else: Out in the sunshine, teetering atop a ladder in a pair of sawdust-covered jeans, expertly hammering the last sheet of plywood onto the roof of a Habitat for Humanity home.

You can find him out there every Tuesday and Thursday, and most Saturdays, too. Yet he still finds time to manage investments for more than 36 clients–not too shabby for a guy who’s only in the office three days a week.

Smartt is serious about his volunteer work, having wielded a hammer for Knoxville, Tennessee, Habitat for Humanity for more than a decade, directed entire home builds, globe-trotted to build homes for families across the country, and even been featured in a book–More than Houses, by Habitat founder Millard Fuller–about volunteering for Habitat. He says his efforts are about as tangibly satisfying as any volunteer work could be: What could be better than helping a family in need put a sturdy roof over their heads?

But he’s also serious about his financial advisory firm, which can make finding a balance between his interests the hardest part of all. An 18-year veteran of the audit staff at Price Waterhouse, Smartt, 60, founded his own firm in 1993, built his own accounting/reporting software package using Lotus 1 2 3, writes a quarterly newsletter, acts as a financial guest speaker at a variety of gatherings, participates in his region’s NAPFA study group, and manages more than $10 million in client assets. He can even claim 50 years of investment experience, he says with a laugh: He received his first stake in a mutual fund at the age of 10 for pet-sitting his aunt’s dog for the summer.

How does he do it all? Technology certainly helps. His Lotus-based program allows him to run reports efficiently, he reports, and he can communicate by e-mail with more than 80% of his clients. If clients call during “Habitat time” (Tuesday or Thursday until 3 p.m.), they simply leave a voicemail and Smartt calls them back that night or the next day.

But the real secret to his success is his firm’s structure. There are no employees to manage (“I am my own secretary,” he says), and no active stock trading–in fact, there’s no stock trading at all, since Smartt prefers mutual funds. And he doesn’t presume to offer comprehensive financial planning or full-service tax planning; as a part-time advisor, he says it simply isn’t reasonable to bill himself as an expert in estate planning, taxation, or insurance. Instead, he offers low-cost investment management combined with advice on issues that are specifically of interest to the client. “I don’t require the full 30-page tome,” he says, referring to the lengthy financial plan prepared by many advisors. “I work with them on what they wish to work on, and I stand ready to help them answer most any financial question they have.” One client, for instance, wanted to know how much he would need to save each year in order to retire in 14 years with $100,000 in annual income. Another client, a minister whom Smartt met at a Habitat work site, wanted to know when his current investments would allow him to retire. (When Smartt told him, “Today!” the minister turned in his resignation the following week.) Other clients ask Smartt to help them plan their children’s college funding, and he regularly encourages clients to have him assist in choosing their 401(k) investments. “I began my practice to be in the education business,” he says. “The continuing investment management was almost an afterthought.”

The Smartt Approach

That afterthought would make John Bogle proud. Smartt combines a half-dozen Vanguard funds to build frugally minded, long-term-oriented client portfolios, and the portfolios can cost less than one-quarter of a typical advisor-managed portfolio. How can that be? “Last month’s Morningstar Fund Investor said that the average large-cap blend fund cost 1.29% per year [in fund expenses], and that the average fund had turnover of 88%,” says Smartt. “The Plexus Group, in its study, The Iceberg of Transaction Costs, calculated that for large-cap stocks, 100% turnover costs 100 basis points, so 88% turnover would cost 88 points. If you’re paying an advisor another 1% to manage your money, you’re at 3% per year in management costs!” In contrast, one of Smartt’s favorite funds, the Vanguard Total Stock Market Index fund (VTSMX), has fund expenses of only 0.02% per year, and 2% turnover–a total of four basis points in fund expenses. Add those to Smartt’s 0.5% management fee, and you get a grand total of 54 basis points–less than one-fifth of the cost of an average advisor-managed portfolio.

Smartt favors Vanguard funds for their low costs, and won’t even consider individual equities for client portfolios unless the client walks in the door already owning them. The only reason to own stocks, he says, is for their “psychic rewards.” “Imagine you own 100 shares of General Motors. Tomorrow you go out and pick up the newspaper off the driveway, open it up, and read, ‘GM went up a dollar a share.’ You pat yourself on the back and say, ‘This is going to be a great day.’ The next day you pick up the paper and it says, ‘GM went down a dollar a share.’ ‘Well,’ you say, ‘I better buckle down and work even harder today,’ and you have a great day,” he says. But beyond that emotional connection with the markets, “there’s not a reason in the world to own individual stocks when you can become fully diversified for 20, or even 2, basis points,” he says.

Of course, all this thriftiness raises an obvious question: How can Smartt make a living on a 0.5% management fee, especially when his account minimum is $100,000, and he doesn’t even always stick to that minimum? For starters, the income he does make shouldn’t be sneezed at: “In the last year, my practice has cost me an effort equal to about 11 hours a week,” he says. “At that rate of effort, I’m grossing more than I grossed in the first year or two as a Price Waterhouse partner–and that’s a very nice living.” He also pinches pennies: His office is in his home rather than in an office suite, and he is his own secretary. Still, a good hourly rate can only go so far on 11 hours a week, so he is currently tapping one of his profit-sharing plans from Price Waterhouse, and he expects his retirement to be well funded by the fruits of his savings throughout his Price Waterhouse career.