Originally published in Business Digest, October 1998

Stone Strives for Rock Solid Advice

by Julia Lynam

Roger StoneRoger Stone founded Stone Investment Advisory Inc. in Burlington in 1995, after working in the investment field since 1971. His decision to charge by the hour challenges the mainstream method of percentage of assets managed. (Photo: Jeff Clarke)

It’s not often that you meet an investment adviser who’s come up with a bright idea to keep the cost of investment down, but Roger Stone seems to be just that.

A native of Burlington, Stone slipped almost accidentally into what became a long term career in the world of mutual funds. “I was working in Boston in 1971 when a friend suggested I apply for a job opening he knew about at Keystone Custodian Funds,” Stone recalls. “Mutual funds were a Mom-and-Pop industry then — people got in primarily because they knew people in the industry. I didn’t know I wanted to be in it. In fact I’m grossly undereducated.” A UVM bachelor’s degree in political science isn’t exactly what an investment house would be looking for in a new recruit nowadays, and Stone admits that he wouldn’t consider recruiting anyone without an MBA. This lack of formal education hasn’t, however, hampered him in carving out a career that grew and evolved as the complexity of the marketplace increased.

What is success in the investment world? Affable, deliberate and very thoughtful, Stone has a ready answer: “It’s being right on the key issues 55 to 60 percent of the time, and being able to live with being wrong 45 percent of the time.

“I’ve learned how to identify the critical factors better than I could 20 years ago,” he muses. “The previous 10 years I spent trying to identify all the factors.

“Keystone was an exciting place to be in the 1970s,” he recalls. “It was a very innovative shop.” After Keystone, Stone moved on to spend 15 years at State Street Management and Research, leaving as executive vice president and director to become a principal at Scudder, Stevens and Clark Inc.

In 1995, when the youngest of their three children finished college, Stone and his wife, Kit, who serves on the board of the Lund Family Center in Burlington, realized a long-term dream and left the Boston area to return to Vermont and a lakeside home in Shelburne. Their children have followed various paths: the youngest, Anne, has just become an assistant district attorney in the Bronx; Christopher works in Boston; and Victoria, a nurse, is busy raising the Stone’s first grandchild, 1-year-old Haley, in Nashville, Tenn.

Once back in Burlington, Stone set up his business, Stone Investment Advisory Inc., now situated overlooking Lake Champlain in the new office building at 30 Main St. It’s a small concern: just him and office manager Tess Carp (“I used to run against her brother at high school,” he remembers). Stone has focused very specifically on offering advice, education and investment services for companies and organizations that want to help their employees make the best of their 401(K) and other defined contribution plans.

“I couldn’t do here in Burlington what I did in Boston,” he explains, “which was very broadly investing with full discretion. I had no interest in selling, and Burlington is over-brokered — there are already more than enough people serving individuals. So this seemed an ideal way of parlaying my experience into a useful service.”

It is, however, a service that most potential clients don’t understand, says Stone. “They should be asking themselves about investment selection, investment performance, cost and employee education about their plans,” he says. A lack of employee participation in a company plan, or a lack of knowledge on the part of employees, are indicators that help is needed. “The problem is compounded when you consider that a CEO or CFO might have neither the time or the expertise to counsel staff in this matter. Running the business probably takes at least 110 percent of (their) time!

“I know the investment management business backwards and forwards. I know the different players and I’m very confident in decision making,” he continues, adding that a certain degree of arrogance is also a useful quality for a successful investor to have!

“The market has enjoyed a glorious, glorious 18 years since 1981,” he adds. “It’s been a wonderful stretch and there will be a huge amount of consolidation.”

Since the enactment of the Employee Retirement Insurance Security Act (ERISA) in 1974, there have been great changes in the retirement investment plans provided by employers. ERISA, aimed at protecting benefits for employees, eventually led to a shift from defined benefit plans where the employer made all the decisions, to defined contribution plans that give employees a say in how their funds are invested.

This is where an investment advisor and educator comes in, says Stone. “People tend to be much too conservative and put their money where they feel it would be safe — for example in money market accounts — and be under-invested in stocks. The growth they obtained that way would be inadequate to provide lifetime security.”

The key is in the definition of the word “risk,” he claims: “An individual understands this as losing money and not recouping it. But for an investment practitioner, risk is the volatility of returns over a time period — not the loss of the asset forever.

“A sophisticated investor has confidence that if you’re properly invested the volatility works over time to give a good return.”

It’s to explain concepts like this that Stone decided to work with companies and organizations. He offers various approaches: “I can work with an existing investment plan, or help them choose a plan,” he says. “I can also talk to employees individually once or twice a year to review plans and I can produce a quarterly newsletter for the specific company.”

Where Stone differs dramatically from other investment advisors is in his system of charging for his services: “Most programs offered by insurance companies and brokerage houses cost 2 percent of the assets managed, annually. These percentages erode a substantial amount of the investment earnings and sap the effectiveness of programs,” he claims. By contrast, Stone charges a set, pre-arranged hourly fee for all his services, including the investment of assets.

David Wray is president of the Profit Sharing and 401(K) Council of America, a national body established in 1947 to promote profit sharing — which now largely takes the form of 401(K) plans — as a way of maintaining free enterprise and creating goodwill between employers and workers. He describes Stone’s approach as remarkable.

“The hourly rate is an emerging area, and there isn’t just one way to do this,” he explains. “There are other people providing services on an hourly or other fixed basis, but there are things he (Stone) is doing for a fixed cost that other people don’t.

“He’s really challenging the mainstream, where the model is to make as many costs as possible connect to the assets.”

Stone has picked his time carefully, says Wray: “If we have a correction or a neutral return for any length of time the trend to base everything on an asset based model will be evaluated.”

People have always been willing to pay well for superior service, Wray observes, but they are less happy to pay well for mediocre service. In the bull market of the past 18 years even mediocre performers have brought in good returns, but in a less “go go” market, where careful stock-picking is important, the failings of mediocre advice and management will be more apparent.

Stone would agree. He points out that investors have been making such big gains that paying 2 percent on assets under management, even though this might have been a large sum of money, seemed reasonable when compared to the overall gain. As returns stabilize or even decrease, however, that 2 percent might begin to be onerous.

“There have been a couple of people who’ve tried this in the past,” says Wray, “and not done very well. But (Stone)’s timed this well. He’ll make some people prove their worth!”

Another interested observer of Stone’s progress is that friend who originally enticed him into the investment world. Len Darling is executive vice president of fixed income for the Oppenheimer Funds in New York City.

“I wasn’t surprised when Roger moved back up to Vermont, both for personal and professional reasons,” says Darling. “He’s blazing a trail. There are lots of people who offer advice to 401(K) plans, but Roger’s approach is unique in that he gets paid for the advice he offers in a way that’s very cost effective for plan sponsors and individuals.”

Remarking that Stone could earn a lot more with a large company, Darling says: “He’s a very principled man and an excellent investor. He feels that people are charged too much and he loves the idea of doing what he’s doing. It’s a real service to people and I hope he’s having fun!”

“Stone’s Throw,” a monthly investment outlook broadsheet is where Stone sticks his neck out. “In this format I’m able to cover the subjects that an informed investor is thinking about,” he says. And it’s not surprising to find that he likes to give opinions, not to sit on the fence.

Unlike some commentators, Stone doesn’t think we’ve yet seen the worst effects on the U.S. economy of the meltdown in Asian, Latin American and Eastern European markets. “The key to the global economy is Japan,” he declares, “and Japan has been and will be an economic disaster.” He sees a parallel with 1927 to 1933, when Europe watched the U.S. failing to take the necessary steps to avoid financial disaster. “Japan is a command nation with little capacity to self-correct,” he says. “They’re not like Americans who love the angst of being wrong and moving on and they’re a risk not just to themselves but to the global economy.”

His advice to investors: “It’s a real world out there. It isn’t always as easy as it’s been since 1981. There is change coming in the short term and it’s going to have an impact. But stay with your plan. Long term, the comparative strengths and flexibilities of our political process, business environment and investment markets favor excellent returns from U.S. stocks and bonds.”

This comes from a man who foresaw 20 years ago that long-term treasury bonds would drop from their high 14 percent return to current levels around 51/4 percent, and planned his long-term investment accordingly. “My bullish adherence to that outlook over a generation may have kneecapped me occasionally on a cyclical basis,” he grins, “but in the long haul I’m pleased I took that stand.”