From Olympic Gold to Goldman Sachs: the payoff of ‘deferred gratification’
As a world-class competitive swimmer, David Fox could spend the better part of a year rigorously training for a swim meet where the fruits of his labor would finally be measured. Fox credits that experience for preparing him for all the wins and losses tied to a career at Goldman Sachs running its southwest U.S. private wealth management division. Fox earned a Gold Medal competing for the U.S. swim team at the 1996 Olympics in the 4x100 freestyle relay.
Texas Inc. recently visited with Fox at his downtown Houston office. He spoke about the investment climate, the tug of war with clients over investing in a market loaded down with overvalued stocks, and how “the payoff of long-term deferred gratification” that he learned as a world-class swimmer applies to investing.
Q: Describe a typical private wealth management client of Goldman Sachs in Houston.
A: The typical client here mirrors the typical client of the firm, except we’re going to have more energy entrepreneurs in Houston than, say, our Chicago office. Our clients tend to be first-generation wealth, entrepreneurs, or corporate executives; or they are big established family offices or large nonprofit and pension pools. Our average relationship is around $50 million assets under management.
Q: How long has Goldman Sachs been in Houston, and which areas do you oversee?
A: We’ve been in the business here since the early 1970s with offices in Dallas and Houston. The private wealth business has about 150 employees in Texas between those two offices. The region we cover is Texas, Oklahoma, Colorado, Kansas, Louisiana, Arkansas and New Mexico. Most of our business comes from Texas, Oklahoma and Colorado.
What we do for the clients really spans a broad spectrum. First and foremost, our DNA is in the investment side — risk management. We manage assets on discretion or in a cooperative relationship where clients are part of the process or in some cases we’re executing orders from clients, especially on the family office side where they’re doing big trades and they’re directing trading. We’re typically involved in tax and estate planning, but many of our clients borrow from us as well.
Q: How common is it for your clientele to want to borrow?
A: You might think, “Why do people with $50 million in net worth need to borrow?” Well, the funds are cheap. Many of them will borrow in private businesses or in real estate. In some cases, we’ll see people who like to arbitrage between a basket of private equity funds and low-cost borrowing. They got wealthy by being risk-takers, and that’s something they want to do. And as long as we feel like the leverage is suitable, then we’ll go along with it as well. But our first focus is keeping them wealthy.
Q: With interest rates rising, are you seeing a decrease in borrowing?
A: Not yet. What we’re seeing is interest rates are going up and economic activity is increasing at a similar pace or even greater. I’d say over the past year, I’ve seen a slight increase in risk appetite in our client base in general. It’s not necessarily wanting more public equities. People are looking at private equities, and there’s still a lot of interest in Texas real estate.
Q: You won a gold medal in the 1996 Olympics. How did a competitive career in swimming prepare you for a career at Goldman in private wealth management?
A: That’s a great question. It’s the single thing I’ve identified that’s prepared me the most. I started my career 19 years ago as an adviser, came in at the associate level, and after a six-month training process was charged with going out and finding clients, which was not easy for a 27-year-old who has a master’s in business management but no real work experience.
But what I got out of the swimming experience was an understanding of the payoff of long-term deferred gratification. I was very conditioned to do the daily little mundane things that don’t give you immediate feedback or gratification but understanding that doing those things over long periods of time can produce outstanding results. I was conditioned to suffer for a long period of time, work long hours, and not necessarily have anything good happen the first year or two. That mindset, more than anything else, helped me get off to a good start.
Q: In your business, there are obviously a lot of wins and losses and ups and downs. Did your swimming career help deal with those as well?
A: I had a better understanding and a more regular experience with failure than your average person in their late 20s. As a swimmer, failure might have been training hard for a whole year then having a big meet and not swimming well. So then the question is, “What did I do this past year? Did I get better or not?” The times say I didn’t. But you did the work, you did get better. You just didn’t get to see the results that day. And you go back to the mat and you work harder and you fine-tune things and you move forward. Eventually, those results come through. Having experiences like that, dealing with some injuries over time, general disappointments that an athlete will go through helps me moderate any emotions around both victories and defeats in the business. Keeping a steady course is important in our industry.
Q: The U.S. economy has had quite a run, but there are signs that could change. Are we heading toward the end of U.S. economic expansion?
A: In the beginning of the year, we had a view that there were many factors that are creating this steady, consistent, growing economic environment, but there were going to be many unsteady factors that would come in and cause ripples throughout the year. As we look back now, more of the factors that were unsteady factors today look better than they did nine months ago. I’d say the two things that don’t look as good are in fact likely related to some of the recent ripple we saw in the equity markets: interest rates and trade with China. But all the other things have gotten better. Economic growth has improved. Our fresh look tells us the interest rate moves are based on economic growth and not inflation. And we also don’t see rates at a place that are going to impair corporate profits. Think about a 10-year Treasury at 3.2 percent but now we have a trend GDP growth rate at nearly 4 percent, so your cost of borrowing is outpaced by your growth.
Q: Are most stocks overvalued, and, if so, how should people invest in this environment?
A: That’s part of the tug of war we have with our advice we’re providing to clients. We see a 10 percent probability of a recession in the next year. We feel pretty confident in that, and because of that the environment is really supportive of stocks. But the flip side is stocks are expensive across the board. What that means to us is returns are likely to be positive but they’re likely to be modest in the next five years compared to the last five years. But we believe clients should maintain whatever their long-term strategic weighting is in stocks. We think they should stay there. We will recommend underweights when we see the probability of recession or other risk factors rise, but currently even if the annual returns are low single digits, we still think they’ll be positive. There’s no reason to incur taxes to shift those assets around.
Q: What about bonds? It’s a difficult time to buy them with interest rates rising.
A: It’s tough. And cash rates are starting to compete with bond portfolios. We’re now yielding 2.25 in our bank deposit accounts. We’re advising clients to keep their durations short and keep their bond credits high quality. It’s not an area where we are squeezing alpha out, we want to take risk in risk assets and for high net worth families, we’d like for them to think of their bond portfolio as that safe, sleep-well-at-night money that can assure them if markets get rocky.
Q: What are some of the changes you’ve seen in the wealth management industry?
A: We’ve morphed into other services that might not fall into the financial advisory category. They fall into things that we learned because of who our clients are and what our clients want to know about: Cybersecurity, physical security, art collection, wine collection, proper uses of leverage across their balance sheet and many other things.
Q: That’s a lot of capabilities to maintain.
A: We’ve really tried to position ourselves to be become the first call where clients have a question or an issue or a problem they’re trying to solve. If it’s not something we can help them solve directly, we tend to have relationships through our network either through clients or outside vendors that have specialties that we have kind of vetted.
Q: Any predictions on what your business will look like in the future?
A: The change the last 20 years has been monumental, and I think it will continue. You have the digitization of a lot of parts of the business, you see a lot of robo-advisers coming online and building platforms. We don’t see people being taken out of the business because of the complex needs and issues of our clients. But we do see us being smarter about leveraging technology to provide our clients with an improved experience, and to run our business better internally.