Filing Regulatory Paperwork for Kennon-Green & Co.
and Thoughts on the Past Couple of Years
Aside from the day-to-day workings of the firm – managing assets, helping clients consolidate and simplify their family’s portfolios, often across multi-generational lines, reading annual reports, and keeping tabs on what is happening in the world – it’s the time of the year when we have to submit regulatory filings as well as send clients certain regulatory disclosures such as a privacy policy notice (which, in our case is simple because we take discretion seriously and don’t sell or share client information without client permission unless it’s necessary for us to do our job or required by law).
It is not glamorous but I love it despite the long days and exhaustion of having to check, re-check, then check yet a third time content that describes who we are, what we do, and how we operate. Part of the reason I can tolerate the added work is that, although extensive, our regulatory burden isn’t as oppressive as it can be for other firms. That was partly a choice because Aaron and I have kept our operations simple by design. Our firm, Kennon-Green & Co., is a fiduciary for all clients and all assets under management – no exceptions. We charge a straightforward, transparent percentage of assets under management as an investment advisory fee in nearly all cases. We don’t sell financial products to eliminate the conflict of interest. We neither accept nor pay referral fees to anyone. That means the requirements for maintaining the paperwork aren’t as substantial as they can be for wealth management companies that are organized using … let’s be charitable and call them “different” … business models. (I want to be gracious here because there are a lot of talented, capable, and honest people working for firms that do not share their ideals. The problems, in these cases, are not with those employees but the firm’s choice in business model and the incentives created to sell financial products rather than act in the best interest of the client.)
The biggest of these on-going regulatory filing requirements is probably the Form ADV. All companies structured as a registered investment advisor under the Investment Advisors Act of 1940 are required to provide one to the SEC and its state regulator(s) through the IARD system. These filings are then publicly available to anyone – all you have to do is visit the Investment Adviser Public Disclosure (IAPD) website – in order to improve transparency. The filing is divided into two parts.
- Part 1 details specific information about the firm, such as its hours of operations, assets under management, a breakdown of its types of clients (e.g,. the government wants information on the percentage of clients who are “high net worth” according to one or more defined characteristics), and detailed allocation figures for assets under management (e.g., the percentage of funds invested in various types of securities such as exchange-listed stocks, derivatives, investment grade bonds, non-investment grade bonds, U.S. Treasury bills, notes, and bonds, etc.).
- Part 2 is known as the “Brochure” and follows a specific layout that requires substantial disclosures about how the firm operates, what it believes, how its fees are calculated and deducted, and a host of other data that is meant to be helpful to not only the firm’s existing clients but potential clients, as well.
You can tell a lot about a wealth management business by its Part 2 Brochure. In our case, given my background in writing financial content and the fact I have the heart of a professor, our primary version of the Brochure (California) came to 30,503 words. Those of you who are familiar with my style will recognize me in it as nearly every word came from my proverbial pen (and keyboard) other than those that required specific text to comply with one or another regulation. This was not a task I was going to outsource to a compliance company. Philosophically, I believe if people are going to entrust their life savings, or a portion of their life savings, to our judgment, they deserve to hear directly from us; to know exactly what they were going to get, how we look at the world, and how we think about topics such as quoted market value and risk. Again, I’m not judging people who choose not to do that, only stating that this is something about which I, personally, feel strongly in terms of how I want to conduct our operations.
This means that a decent portion of my life in recent weeks has looked like this:
Yesterday evening, we finally finished our annual updating amendment to the Form ADV Part 1 and 2 filing, which was dated 03-27-2019. (It’s already publicly available and we released the Part 2 Brochures – one for all states besides Texas and one for Texas as it has its own disclosure language – to the private clients of the firm last night through the Kennon-Green & Co. private client portal. If you’re curious about what it looks like, you can download the March 27, 2019 annual updating amendment version filed with our primary regulator, California, directly from this link [Adobe PDF]; at least until we update it, again, at which point the link may no longer work and you’ll have to manually go through the search process on the website.) Going forward with California as our new home base, I’m optimistic it won’t require any substantial revisions other than fairly modest and routine updates to information or details as the business evolves and changes over time, as any enterprise is bound to do if it adapts to the world and the conditions in which it finds itself operating. Even better, we’ll be able to use our private client software portal technology solution to automatically generate reports for SEC asset classifications going forward in future years, saving us a huge amount of effort instead of having to prepare asset lists in a spreadsheet then check them by hand.
All said, I’m relieved to have it off my desk. We’re ahead of schedule on our three-year launch plan. Despite all of the stress, the lack of sleep, and the enormous expense, though, this whole process has been worth it. Inclusive of today, Kennon-Green & Co. received its regulatory approval to enter the asset management business 920 days ago. In those 920 days, it has gone from $0 in assets under management to more than $54.7 million, almost entirely through word-of-mouth as we have been trying to keep a low profile and focus on building the back-office to better serve clients before we make ourselves known to the broader world (we haven’t even officially launched the website yet, as it still displays a holding page if you go visit https://www.kennongreen.com). We relocated from the Midwest to Newport Beach, California. We went through the IVF process and created the embryos that are destined to be our children once we complete our gestational surrogacy journey. We’ve traveled innumerable miles, meeting new and old friends as we criss-crossed the nation by both plane and automobile. We’ve successfully divested our sporting goods investments. We began studying Korean (though we had to take a hiatus during the relocation because time was too precious. I’d like to get back to it sooner rather than later.) It’s been a whirlwind but the goal has been to position ourselves in a way that we had a vehicle to serve as a compounding machine for what we hope is a 50+ year run.
What I didn’t expect on this journey was how personal it was going to become. Instead of simply being debits and credits, I find myself deeply emotionally involved in the lives of the people who work with us, caring for them as I do members of my own family. I’ll be sitting at my desk and suddenly wonder how they are doing; hoping their new job is going well or that they are enjoying the house they just purchased. Aaron and I found ourselves getting as excited about their victories in life and business as we do our own. Some clients call just to get a second opinion about an opportunity they might have spotted. Some just want to talk about the stock market. Other times, they’ll call just to share a book recommendation. Some want to meet face-to-face if they are in town. Others don’t want to think about their money at all and just want to outsource it and be left alone. I love helping them win; every minute of it as they plan out their goals and figure out how they want their lives to look.
The only thing that I realized I’m not going to like … Aaron and I realized that we’re so (relatively) young that it is a statistical probability we will outlive most of our existing clients despite them being much younger than the typical asset management firm’s client base. In a lot of situations, we manage wealth across generational lines and are also involved with the kids or grandkids so we should be able to help keep the family’s goals and objectives on track during those periods, but the idea of working with someone for so long then them suddenly not being there is going to be hard on me. I understand that’s life. I really do. It doesn’t make it any easier. Aaron and I feel this way about people who have had a positive influence on us, too. The other day, we were driving somewhere to get a cup of coffee and Aaron said, “You know, even though we haven’t met him, I feel like the world is going to be a worse place when Charlie Munger passes away.” I completely understand how he feels because I feel it, too. The positive influence Charlie had on our lives is immeasurable.
In any event, that’s what is happening around here. If I have time this weekend, I’m going to try to post some other things that have built up in the draft folder or my to-be-published file.
