By Our Own Petard

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Thomas Manetta
1 year ago

Complex systems. Simple rules. What if technology strips away everything in the current financial advisors tool kit? Ben’s “three-body problem” obliterates the pretense of “active” investment management, Joe Duran’s assertion at WealthStack that financial planning will ultimately be fully automated, etc. What if everything is replaced by automated systems with the next leg up in computing power? Rather than discarding the advisor completely, what if it creates a need for an entirely new and different kind of advisor? One whose only function is to share their “human” life experience as the foundation for their ability to offer advice in the first place. An Advisor who makes sense of all the data by leveraging their “soft skills” rather than falsely trying to predict the future. What if all this discussion around fees and commissions and AUM and RIA spreadsheets is really just noise? Of course it’s all bullshit and backwards and wrong. Information asymmetry made it that way and the thundering herd kept it that way. But technology is forcing its hand in a way very similar to the Industrial Revolution and the emergence of Artificial Intelligence and higher order computing power will take all this bullshit away. You say “alignment” is impossible. I think its the only way an advisor can survive going forward. The value add for an advisor will be precisely that which aligns them to their ideal client. If their life history and ability to navigate through the pitfalls and hardships of life resonates with the end… Read more »

Thomas Manetta
1 year ago
Reply to  Rusty Guinn

Thank you for the reply and for all your work. I cannot begin to quantify how much your writings have meant to me. Very much appreciated.

1 year ago

It took me a while to absorb the message in the chart that drilled in on the distribution of outcomes at 8% volatility. Once I understood it, my entire view on performance fees changed. That is some powerful stuff Rusty. Well done.

1 year ago

Thank you! This is one of the things that I have been trying to explain to clients and regulators ever since the Department of Labor released its Fiduciary Standard. There is no such thing as conflict free humans. There is no ideal compensation method. Every one of them has a conflict. Commissions are evil? Taken to excess, sure, but if you are a buy and hold investor it can be the cheapest way to pay for occasional advice. Advisory fees are perfect? Why does the SEC have a bulletin on reverse churning? (Charging Advisory fees, but not trading frequently enough to make the advisory fee cheaper than a commission model.) Advice only model? Who will help me execute the advice? I get a blueprint, but how do I pick a contractor to make it real? Don’t even get me started on updating the regulations. Bernie Madoff, Ken Lay, and numerous others were fiduciaries for their investors. It did nothing to protect the investors. Governmental regulations are like a warranty. A warranty may force the manufacturer to repair their product, but it won’t prevent the hassle and other costs associated with a failure in the product. A strong warranty does not make up for a poor quality product. I would rather have a high quality product with no warranty. (Also, any car dealer will tell you that warranty repairs are the ultimate in misaligned incentives.) Technology will take an extremely long time to replace human interaction. (if it ever does.) No… Read more »

1 year ago

Rusty-I’m reminded from a line in an Indiana Jones movie, “Son, we are pilgrims in an unholy land”. I’m a discretionary fee-only FA who runs what in effect is a hedge fund for widows and orphans (no 2/20’s or performance fees). I’m getting killed by fee compression. It doesn’t matter that my PERSONAL investable money is right along side my clients’ in the same portfolios, and I pay the same or HIGHER fee than they pay. I can’t possibly be more “aligned” as I suffer or prosper right along side them in both income and wealth. However, such a message/meme never resonates in a market environment that can only be described as the never-ending money chase orgy of free money. Thank you Fed. My approx. 80% of S&P capture with approx. half the risk for nearly 20 years does NOT resonate in the market place. I can only take solace from the notion that a replay of my lower risk 2008 “over” vs the S&P will happen again rewarding those who ignore the Siren’s song of no-risk, no-cost passive indexation and stayed with me.

I’m reminded of, “The problem with doing the right thing is that you often do it alone”. Damn, I feel lonely out here!

1 year ago

The thing many fee-based clients don’t understand is this: they are subsidizing commission-based clients. My commission clients (usually older, buy-and-hold, low maintenance people) don’t do nearly enough trading to justify charging them a fee. But they still get phone calls, meetings, Christmas cards, and all the services they need. But maybe they make one or two trades a year. Without the fee-based people essentially paying the bills these commission clients would be passed off to someone else or sent online. And they don’t want that. A lot of them have been with my family for decades. We have relationships. So they get everything they need and it costs them very little. It’s a great deal for them.

P.S. With how rich Ken Fisher is you’d think he could afford a suit that fits him. The guy looks like he’s wearing his older brother’s suit that he bought for the Homecoming dance in 1987.

Bruce Winson
1 year ago

Hi Rusty. Re your recommendations, how do you suggest calculating the beta hurdle, adjusted for long/short exposures? Thx

Kevin Coldiron
1 year ago

This a really important post. My experience as a manager has been that even the best efforts never get us to complete alignment and, as Rusty suggests, we need to accept this. I used to think the gold standard in alignment was for managers to have a large % of their net wealth invested in their own funds. I still think this helps, but following Rusty’s logic, it’s no more than that. What I came to realize as a manager with something like 80%+ of my wealth in my own fund was that my risk preference at certain times was likely to very different from my clients where our fund was one piece of a much larger portfolio. This really hit home in 2009/2010 after we had navigated the GFC with only a modest single digit drawdown which we recovered over the next 18 months. We could have recovered more but remained in somewhat of a defensive crouch with lower levels of leverage than pre-GFC. A client said he was disappointed in our results – we should have more aggressively re-levered post the crisis. At the time I honestly felt he was a bit crazy – wasn’t the crisis driven by excess leverage? But with time I’ve realized that part of it was a difference in our risk preferences. As managers with the vast majority of our wealth in the fund we were nervous about re-levering, even if we didn’t explicitly recognize this. As an outside investor, with distance and… Read more »

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