CONVERSATIONS WITH DICK CRUM

Dick Crum founded our company in 1976 and in doing so pioneered one of the first “fee-only” financial advice and investment management firms in the country. A few weeks ago, one of our long time clients stopped by the office for a visit. His conversation with Dick led to a number of exchanges we thought you might enjoy…

Q: It seems to me that with all the difficulty the American economy has been through over the last few years, the biggest problem is that people have lost trust in their leaders.

A (Dick Crum): You are right, and it is very disappointing to see.

Q: With everything that has happened on Wall Street, hasn't there been an erosion of trust in the economic community as well?

A: This may sound harsh, but I don't believe there are many good investment advisors out there, at least not many people I would trust my money to. What may help, and something we adhere to, is a fiduciary standard across the industry. Being a fiduciary simply means doing what is in the client's best interests, always. Becoming a fiduciary creates an entirely different standard and is something we hope comes to fruition for all financial advisors, especially those that have historically been compensated by selling products or investments to earn commissions.

Q: Okay, but knowing this, how does a person protect themselves while building trust in someone who provides financial guidance?

A: There are two things that immediately come to mind, the first of which is transparency. Investors should always protect themselves by having an independent third party send separate reports showing everything that has been bought and sold as well as investment values and performance. We happen to use Charles Schwab, but there are many others. Along the lines of buying and selling investments, we require only a “limited” power of attorney to make trades on our clients' behalf. Granting someone a “general” power of attorney is where big trouble can begin…think Bernie Madoff.

Q: And what was the second thing?

A: Keep a look out for promises of big money, or suspiciously high investment returns. If anybody offers you a sure fire way to make a lot of money, I'd suggest turning around and running away as fast as possible.

Q: I read the other day that Americans are developing a new mindset toward the economy as a result of all that's happened. Do you think that's true?

A: Yes, I just don't know how extensive or permanent it is. There has definitely been a psychological shift that has made an economic and social impact. People across the board are far more careful about their spending habits. They are more careful and they are saving more, and businesses are responding.

Q: How so?

You see it with cars. It used to be that people were quite pleased with themselves when buying or leasing a Lexus or Mercedes. The consumer didn't have to mention he was purchasing an expensive car; we all knew what was going on. Now, however, things have changed. Expensive purchases draw much less positive attention, if not criticism. Consumers are concerned with value and not as much with image. For instance, now we not only find out when an acquaintance bought a Prius, but we also learn how the person negotiated the best price and their actual miles per gallon. Big difference.

Q: Where else have you seen evidence of this?

A: Take a look at the restaurant industry. We've gone to a couple of nice restaurants lately and, merely by coincidence, happened to find out that both places were offering inexpensive meals “off the menu”. We didn't ask about them, rather, we were informed. Who would have thought a delicious steak dinner would go for $10? But this is just another example of how the mindset has changed for both the consumer and the business owner. Truth is, however, that even though a conservative consumer mindset clearly leads to many positive results, it is also fraught with problems.

Q: What kind of problems?

A: The type and magnitude of any problems depend largely on the extent of this changed consumer mindset. The new thing is a focus not on how much you spent, but how much you saved. It is a mindset that has infiltrated all aspects. The quest for a bargain makes everyone price conscious. And if you are always expecting prices to go down, and reject spending money because of this, it creates deflation.

Most everyone has been focused on inflation as being our most imminent economic problem, but I am not so sure. I am actually quite a bit more concerned about the major problems we may face if deflation really sets in.

Q: So if prices go down and we can afford to spend less money on more items, how is this so bad?

A: Like it or not, our economy is based on spending. The anticipation that the price of purchased items will go down over the next few years poses a major threat to our recovery. More troubling is that it is almost completely psychological. Whether items are actually becoming less valuable is unimportant; the fact is that people believe they are, and this fear affects everything from small consumer spending to big ticket items, including homes. When you couple falling prices with our growing unemployment problem, you can begin to see how everything is connected. Deflation can quickly turn into a vicious long term cycle that is extremely difficult to break out of…think Japan over the last 20 years.

Q: What are your thoughts with respect to a full recovery for our economy?

A: Our economy has always had ups and downs. All economies do. It is just very hard to see where truth lies when you are in the middle of a problem. The important thing for us to accomplish at RS Crum is to help our clients have enough money so they can begin spending again once things have sustainably improved. That is why the philosophy of “not losing money” is so significant. And, if I can be open and honest, it is something we do extremely well here.

Q: So you're optimistic about the future?

A: Absolutely. Just beware of anybody who says we have reached the other side. We would like to know what industry will be providing new jobs. For some time in American history it was manufacturing, then it was technology, and then real estate had its day. But this is a robust economy that is a reflection of a robust people. I have faith in our economy and a general optimism that we will successfully come out of this. I just don't know exactly where the other side is, so for now we'll hang on until we can see which direction we should move in.

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