What Gang Aft Agley
January 19, 2019·1 comment·In Brief
Every alignment scheme between asset owners and asset managers eventually fails, not because the structures are poorly designed, but because we're trying to engineer around a problem that exists at a deeper level. We keep inventing new solutions: fee structures, ownership models, forced co-investment. Yet they all collapse under the weight of the principal-agent problem we're trying to escape.
• The cycle repeats with each generation of alignment thinking. We hate fixed fees for creating the wrong incentives. We switch to incentive fees and regret the outcomes. We demand managers invest their own capital and watch them panic sell in downturns. We propose ownership stakes and discover resentment replaces partnership.
• We've mistaken the problem we're solving. Jack Bogle's achievement wasn't Vanguard's client ownership structure. It was ruthlessly reducing the cost of investing itself. We've been celebrating the corporate form while missing that the real alignment came from eliminating the need for alignment in the first place.
• Our fiduciary behavior is actively sabotaging our relationships. We obsess over negotiating every basis point, imposing headcount restrictions, demanding insider knowledge for meetings. All while believing these demands are justified by our status. We don't realize these implicit incentives dwarf any explicit fee arrangement.
• The real alignment has nothing to do with financial engineering. What matters is whether a manager's temperament and fears match their investment strategy and commercial terms. A manager panicked about losing business while required to stick to a volatile strategy will fail differently than one comfortable with his approach.
• We've been asking the wrong question entirely. We focus on alignment between us and our agents, when we should be examining alignment between the agent's circumstances and their actual strategy. The first is nearly impossible to find; the second determines everything.
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Comments
Alignment may be akin to finding true North.
How do you get to a that optimal state when the foundations are no more?
The truth of the matter is that most of the things which draw people’s attention in their day-to-day experience, whether it’s names, titles, news stories, political parties, economics, history, philosophy, religion or what have you, consist entirely of mental noises firing off inside your head…made-up mental narratives which can be easily controlled by the powerful, and hardly anyone fully grasps this. If they did, both change and alignment would be easier.
Navigating a society that is made of mental narrative is very much the same; if you don’t know which way’s up, you’ll get lost and confused. Before you can see the narrative matrix clearly, you might be aware that some narratives serve power and swat at them while you’re spinning through space, but you won’t have any solid ground on which to orient yourself for the purpose of forming a clear path forward toward a healthy state.
Your first and foremost task as a fiduciary or being genuine, therefore, is to find solid ground on which to plant your feet while operating within a swirling sea of narratives and counter-narratives. Without this you’ll find yourself expending energy on ineffectual agendas, chasing shadows, attacking friends and advancing the interests of the enemy as you stumble around trying to fight a threat or status symbol you can’t even see clearly. You’ve got to figure out for yourself which way’s up. The only way to do this is to turn inward and sort out your own mental narratives in your own experience. This takes a lot of dedicated work, because there are many layers of tightly believed narratives which dictate one’s perception of the world that most people aren’t even aware of.
Memes like “Inflated asset prices aren’t real wealth” or “fake news about fake news” are distractions, or obstructions to flow…
“What’s your story?
I don’t mean your personal history, relationship status or childhood traumas from your parents failures. I refer to your market narrative. What story or stories are you telling yourself to rationalize your investment posture and behavior?
Its a legitimacy crisis…
It’s all around us i.e. DC, Europe, Information, our jobs and its getting more chaotic and complex…TBD!
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