Cost of Doing Business (Part 1)

Long-time readers may not be surprised to hear that I am sometimes jaded and skeptical of the financial industry (e.g. optionScam.com). Seen differently, however, perhaps this is just the cost of doing business.

According to some of my teachers/mentors over the years, the financial industry has brainwashed the public at large. People believe investing is an important, responsible enterprise that is best left to the [financial] professionals. I agree with the former and disagree with the latter. I believe many financial/investment advisers are glorified salespeople who push products their firms are contracted to sell. I discussed this in detail here.

Along these lines of thinking, the financial industry has brainwashed society to pay more and expect less. A standard management fee has traditionally been 1% of assets under management per year. In exchange, savvy clients have expected to beat the benchmark.* This means when the benchmark loses money, clients should remain satisfied as long as they do not lose more. Paying someone to lose money that you could lose yourself is anathema to me.

Financial brainwashing also includes the acceptable sale of inefficient services. This involves getting clients to pay up for less-efficient investment strategies than what they could employ on their own (think long stock instead of trading options). Society seems to be comfortable with and accepting of this.

I occasionally seem so down on the financial industry! I feel like a closet conspiracy theorist and I do not like it. My preference is to be positive and encouraging about things.

The time has come to challenge the assertion that society has been brainwashed. A cursory evaluation reveals two components that must be present for this brainwashing to have taken place.

The first component would be a widespread belief that the financial industry has a proprietary edge. Truth be told, I have little understanding what the “public at large” thinks about financial matters and I doubt I’m alone on this. The issue to survey is whether investing success is a result of domain-specific expertise or simply a matter of having the right education. Domain-specific expertise might involve professional research teams able to cover a large number of companies/industries or professional stock pickers powered by innate talent and lengthy experience: forms of expertise no laypeople could develop on their own.

I will continue this discussion in my next post.


* This is changing with the promotion of passive/indexing investment strategies, which always fall a bit short.