My Take on Asset Managers

Today I want to discuss my dynamic attitude toward the asset management industry.

I consider the following terms to be synonymous: asset managers, wealth managers, and investment advisers.

Throughout the course of this blog, I have not been so kind toward the asset management industry. Examples of posts where I have expressed a negative bias are here, here, and here.

I was a big more neutral toward asset managers here.

I was more positive and understanding when I decided to challenge my previous claim that the financial industry has brainwashed America.

After some further deliberation, I reached some logical conclusions here.

The asset management industry is far from perfect. Some advisers are shady and others are fraudulent. Some advisers incorrectly assert that options are too risky for retail investors while others are ignorant about derivatives altogether. Although this may represent a breach of fiduciary duty, an alternative perspective is warranted.

Without the services of asset managers, many people would basically be storing their money under a mattress. Interest rates were close to zero for nearly a decade while the average annual stock return is upwards of 11% (S&P 500 since 1926). If not for wealth managers, stocks would be an inaccessible vehicle because so many are clueless about how to do it.

I probably have two paths if I choose to bypass the asset management industry: trade for myself or bed mattress [crawl space]. One need not be a genius to be a self-directed trader but I have discussed some prerequisites. Also, as CJ suggested with the analogy of brushing teeth, the average worker may lack the flexibility to do this altogether.

Asset managers may be flawed but in the end I believe they are necessary. Regardless of their ignorance about derivatives, their consequent lower performance, and their expensive fee structure (debatable), the difference between mattress and stocks is significant. Net-net, they have a wide margin for error beyond which they can still provide a valuable service and achieve their advertised goals.