Retirement Crisis

Retirement Crisis

The snow is falling on a New York City street, and Charley Ellis has taken the time to put on a bright red scarf and his coat, which is rare for him. Five minutes spent struggling in and out of his coat as he comes and goes from business meetings would be time wasted.

Ellis, one of the most revered figures in American investing, hates to waste time.

At 77, he worries about not being able to accomplish everything on his to-do list, which lately has grown to include tackling the retirement crisis. He has a new book out, Falling Short, which is making quietly rounds among decision-makers and has been reviewed everywhere from The Economist to The New York Review of Books.

“I didn’t know until I sat down and looked at the numbers how serious it could be,” he said. “Unless we act soon, millions of retirees will find that they are too old to return to work and have too little in savings. It is a terrible trifecta: old, poor and alone.”

As he steps onto the corner, a cab pulls right up, which doesn’t surprise Ellis. “Lucky,” he murmurs in much deeper voice than you would expect from his slight frame.

He’s giving a personal tour of the Frick Museum today. Ellis loves the story of Joseph Duveen, the art dealer who charmed cash-strapped European aristocracy into selling their paintings to American industrialists like Henry Clay Frick. Trust Ellis to recognize the story behind the story, which he often is, himself.

In 1975, he wrote an influential paper, “The Loser’s Game,” which Vanguard’s Jack Bogle has cited as a key influence in Vanguard’s launch of index investment funds. Over the years, he has advised the managers of some of the largest pools of money in the world, including serving on the board of Vanguard and chairing the Yale Endowment’s investment committee. The Wall Street Journal called him an investing legend and his classic Winning the Loser’s Game has sold more than a half-million copies.

In 1972, he founded Greenwich Associates, one of the world’s leading contstuancies to the financial services industry, which provides information and strategy to clients. A counselor to many young people through the courses he still teaches at Yale, he is sometimes asked by students whether they ought to become entrepreneurs. He laughs lightly as he tells this story:

“I look right at them and say: ‘Don’t do it.’ ”

“And if they blink, I know I’m right. And if they look like they’re going to hit me, I finish the sentence and say … ‘Unless you really want to.’

“If you can be stopped by someone saying, ‘Don’t go there, there be dragons,’ you won’t have the ferocious unrelenting unstoppable attitude it takes to make other people change their behavior.”

In an interview with CNBC, he talked about the lessons of entrepreneurship, and how Americans can be better investors and successful retirees.

Lessons of entrepreneurship: Knuckle down

He founded Greenwich with $3,000 after he left Donaldson, Lufkin & Jenrette. For the first year, he crisscrossed the country, visiting 90 cities, selling his idea of providing benchmarking data to financial services firms about how well they were serving their clients and how firms’ compared with each other. His insight was how rarely clients told their professionals what they really thought, and how much value he and others like him could bring by doing thoughtful interviews and offering analytics based on them.

The insight proved powerful — Greenwich Associates grew to employ nearly 400 people — but it took a while to get it off the ground.

“Going to bed at midnight, I set the alarm for 4:30 and then I would get up and get going again,” he said. “When I flew into a city, I’d get into the taxi cab at the airport and I’d say to the driver: I’m fine. I have not had anything to drink but I am exhausted. May I lie down on the back seat of your cab and will you wake me up if I fall asleep?”

About two years after he founded the company, it ran out of cash. “By then other guys had joined the firm,” he said. “I was responsible for them.”

Ellis had to borrow against securities owned by his brother to keep the firm afloat. It wasn’t the only crisis in the firm’s history: The 1987 financial services contraction laid bare the fact that the firm needed to downsize by about 10%. The partnership gave employees one month of pay for every year of service. “We said to everyone, this is our fault, not your fault,” he said. “Two or three people rejoined the firm later.”

Ever rational, he steeled himself to retire when it was time. He’d told his partners he planned to leave in three years, but hadn’t been quite been able to let go. Near his self-appointed departure date, he found himself overruled on a key personnel decision. Swallowing his pride, he let it be known to everyone that he been overruled and stepped aside.

“The partnership had to come before everything,” he said.

Lessons of Successful Investing: Know Thyself

Ellis is famous for his philosophy of “know thyself,” the key, according to him, of being a successful investor. “No one is the same,” he said. “We all differ on our assets, our history, our interesting in investing, our comfort in investing.”

Like his famous passive investing cohort — Jack Bogle, the founder of Vanguard, and Burt Malkiel, the Princeton economist — he advises individual investors to stick with an index investment strategy that keeps fees low. Working as a consultant now, his advice to companies and people centers around helping them understand who they are as investors — and helping them ask for what they want. He likens this to understanding well what colors become you.

“If you ask people whether they would like it if everyone told them they looked great, most of them would have no idea what the magic secret is. The magic secret has nothing to do with what colors you like best. It has only to do with what colors complement your complexion,” he said. “You can’t change your complexion.”

A master storyteller, he spends a considerable amount of effort coming up with the right metaphors and analogies to help people understand what he sees as the futility of most kinds of active management and stock picking today. A manager can beat the market for a little while, he said, but the landscape is so competitive that his or her skill will quickly be competed away, or his or her fund will grow too large to manage well.

Much of financial services marketing is an illusion. “Suggesting a retail investor can invest in the next Apple is like suggesting that you can date a 19-year-old Elizabeth Taylor,” he said.

Lessons on Retiring: Keep Going

His latest effort is trying to get Americans to recognize that the retirement crisis is more widespread and serious than most people realize.

In Falling Short: The Coming Retirement Crisis and What To Do About it, written with Alicia Munnell and Andrew Eschtruth of the Center for Retirement Research at Boston College, he suggests that what needs to be done: restore Social Security with targeted benefit cuts and a small income tax, increase 401(k) savings and reset workers’ thinking to account for longer life spans.

With the average household savings of people nearing retirement averaging only about $120,000, many people — still caught up in the 1980s idea of the Golden Age of Retirement — may retire believing that they have enough, only to discover they don’t.

“If each worker did know all the facts, her or his choice would almost always be to work to 70 so they would enjoy the great freedom of financial security – freedom from want and freedom from financial fear – in the many years of retirement that will lie ahead,” he writes.

Master Storyteller

At the Frick, Ellis is looking at the Gainsboroughs and the Rembrandts, pausing before a self-portrait to admire the honesty of the artist’s depiction of himself. And he’s spinning stories as he walks. Among his career highlights was working with Baring Bros., the London-based insurance company that lent the money to make the Louisiana Purchase. The engagement with Baring Brothers and an executive named Robin gave him one of his greatest tales, which combines his love of language, of his profession and of the people he’s known.

“Did I tell you the story about ‘prepropenultimate?'” he asks, and then without waiting for answer begins. Prepropenultimate means, by the way, fourth from the last.

“I was sitting in a room with Robin talking over a proposal. And he said, ‘Let’s go back to your prepropenultimate point, because I don’t think I fully agreed with you.'”

“Now, how far would you go to hear ‘prepropenultimate’ used naturally in conversation?'” said Ellis. “But he said it so easily. I always thought, ‘That’s just who he was.’ ”