Trump Invests: How He – and Other Business Owners – Could Do Better

Donald Trump is unquestionably wealthy. The pundits will question his actual worth, but for Trump’s oft-stated money making ability, the billionaire presidential candidate is leaving potentially significant amounts of money on the table through his investments.

Wealth management firm Balasa Dinverno Foltz LLC (BDF) took a closer look at Trump’s financial disclosure form and learned that Trump, while savvy in his core businesses, is making some very common investment mistakes.

Jim King, CPA, CFP®, Justin Peacock, MBA, CFP®, and John Smith, CFP® of BDF’s Business Owner Team, which provides wealth management planning for business owners and entrepreneurs, discuss Trump’s investing style, where he could make more money, and what less wealthy but still successful business owners could learn to benefit their own portfolios.

The Bottom Line:

Owning funds in retail vs. institutional share classes are costing Trump morein expenses.

Better asset placement could be a benefit to Trump

Added earning power is being eroded by taxes and fees

Trump, like other business owners, could be caught in the “Founder’s Trap”

Mutual funds are vehicles in which many more billionaires and multi-millionaires should invest

Q: When you reviewed Donald Trump's financial disclosure form, what did it reveal about his investing style?

A: Jim King: Trump is invested in actively managed mutual funds. Within the funds, he has exposure to multiple share classes including the more expensive retail fund share class. You'd expect a millionaire, or a billionaire in his case, to leverage his size of investment to get lower cost investments through institutional share classes. It indicates that, when it comes to his investments, he could be looking much more closely for ways to reduce costs.

Justin Peacock: When it comes to mutual fund share classes, different share classes have different expenses. You're getting to the same point ultimately with the same fund, but you're paying different freight to get there. In our view, it makes

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better sense to own institutional share classes that can save you money over the long run.

When delegating your investments, make sure that that someone is focused on taxes and fees in terms of product class. Those two factors really erode an investor's returns over time. In Trump's example of having retail share classes versus institutional share classes it can make a difference. It could be 10 basis points, but 10 basis points on millions of dollars add up.

Q: Even with his immense wealth, should Trump be concerned that he’s leaving money on the table?

A: John Smith: Extremely wealthy people are different in that regard. They're not worrying about all that extra money if they don't need it. So in other words, what's it there for? Incrementally now, every dollar of wealth that gets created going forward off of his investments is for someone else or something else. It's not about him any more.

Wealthy people have a disconnect between what the money is supposed to be for and what is to be accomplished with it. With no goal, it becomes neglected. I would imagine that Donald Trump and people like him are focusing on the core of their wealth and where they have direct control and impact. And with someone like him who's in the public eye, my guess is he's probably making certain decisions and doing certain things to try to preserve a reputation or fulfill some other goal that goes beyond just creating wealth as efficiently as he can.

King: When Trump runs a project he’s trying to get the optimal return on investment. Why doesn't he do that with his investments? He should be paying more attention to the costs of his investments just like he does for his business. He's giving up a significant amount of money.

Q: It sounds like business owners’ personal investment focus seems to be a bit of an afterthought.

A: King: That is true. Most business owners and entrepreneurs don't have the billions like Donald Trump, but they do have a passion for their business. That's where 80 percent or more of their time is spent.

Q: Is there much difference between Trump and the business owners that RIA’s advise?

A: Peacock: There are similarities in the sense of the focus. The business is the engine that drives everything. That’s where they’re spending their time, energy and resources. So, for that business owner, he or she goes to bed at night and wakes up in the morning thinking about the business, probably not about their investment portfolio.

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Trump doesn’t have much to worry about. But for the smaller business owner, he or she needs to understand the linkages between the business and the risks and opportunities there, and their personal financial life. Those two things must work together.

Q: Why is that?

A: Smith: It’s known as the “founder's trap”. Business owners oftentimes are stuck working in their business and not on their business, and they just are simply wearing too many hats. Typically, the only way they can get out is by assigning responsibilities to other folks. They have to be willing to give up control and some direct decision-making, and it's just a very difficult thing for them to do.

Q: Despite the discrepancies over how much Trump is actually worth, he has amassed an immense amount of wealth. If you were managing even a part of his portfolio, what advice would you give him?

A: King: I would recommend better communication across advisors. It appears, the way he is invested today, there's a lack of coordination across potentially multiple advisors. Trump has investment overlap across his accounts. For example, three of his advisors each own shares of Apple stock. Why they each own it, I don't know, but what that leads to is tax inefficiency and measurably higher costs as well. Between taxes and expenses, he could save money.

Trump also owns actively managed mutual funds, which consistently underperform their respective benchmarks after fees. S&P Indices Versus Active (SPIVA) has great research that illustrates the challenges of actively managed funds.

Smith: I would look at the bigger picture for him and suggest he not chase everything. Knowing that he has amassed enough wealth to take care of his own needs, he presumably has liquidity to take care of all of his family needs. I would encourage him to understand what his wealth is really trying to do, and then potentially basket each of his investment strategies in a way that is going to match up with his goals, like charitable giving, legacy planning and the business.

Q: When you see the words “mutual fund”, you think of middle class Americans investments in 401(k) s. Is it surprising that Trump is so heavily invested in them?

A: King: Looking at the financial disclosures of presidential candidates is always interesting. It is not unusual to see mutual funds holdings listed on the investment disclosure form. Wealthy individuals invest in mutual funds because it’s an efficient way to capture asset classes to provide diversification. Trump and the middle class should be invested in mutual funds and exchange traded funds.

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Smith: I would say many financial experts and academics would argue billionaires should invest a lot more in mutual funds than they do, and that they would have a lot more success with their investments if they did.

Q: At the level Trump plays at, would hedge funds figure in the mix?

A: Smith: Everyone talks about how they've had this tremendous success with hedge funds and private investments and whatnot. Pragmatically, if you don't have access to that very small number of the best in class out there, performance drops off dramatically. So the notion of just adding things outside of mutual funds and the basic blocking and tackling investments to get extra performance in most instances doesn't work. It detracts from performance, unless you have access to the very select few. And so even large, very well-known managers of huge endowments will tell you that, most people, including Trump, should invest just like the normal person does and focus on expenses, tax efficiency, and not trying to outsmart the market. That's going to get you better returns over time than all the other strategies.

Q: What are some of the strategies that owners can consider to reduce the tax impact of their investment portfolios? And maybe are there other areas in Trump's portfolio that you think you could see that he could take advantage of reducing tax?

A: Smith: There are four areas business owners should consider. One: using the right tax efficient vehicles. Beyond mutual funds, there are exchange-traded funds and tax managed mutual funds. Look for low turnover funds and what the manager is doing with the fund.

Second, look at asset placement. Coming back to Trump's lack of consistency and coordination, investors should own certain investments in IRA accounts versus taxable accounts, avoiding ownership of all the same type of vehicles in every type of account. Because there are tax reasons you should own one thing in an IRA versus a non-IRA account.

Third, look at tax loss harvesting. Take advantage of market volatility by selling things that take tax losses, reinvesting back into the portfolio to keep performance neutral.

Finally, spend time with year-end distribution avoidance. We know certain funds are going to pay out big distributions towards year-end. Let's get out of that fund. Let's get into another investment to avoid the distribution, and then we can always get back in after the fund has made its distribution.

There are little things that cumulatively add up and make a big difference. If you have a huge portfolio, like Trump, the amount of money to be saved will be significant.

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Q: Any final thoughts?

Peacock: We'd welcome a call from Mr. Trump anytime. We’d be happy to help him.

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BDF’s Business Owner Team (BOT) provides full-life financial planning combined with customized investment solutions for business owners seeking to secure their individual and generational wealth. The BOT leverages its own experience as business owners into specialized services and problem-solving capabilities for clients.

Unlike other RIAs or large national firms, BDF is the only advisory firm that offers The Owner’s Edge™ wealth planning process that encompasses business, personal and family concerns. Two customized plans result: a Comprehensive Financial Plan, and The Owner’s Edge Action Plan™. BDF also acts as the quarterback for managing clients’ wealth by coordinating with clients’ other professional advisors, and applying the expertise of its in-house team of Certified Financial Planner TM Professionals, CPAs, attorneys and MBAs.

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