Delving Further into TPAMs (Part 3)

I’ve been going through my “drafts” folder this year trying to finish partially-written blog posts and get more organized.

TPAMs are Third Party Asset Managers. The August 2018 content below follows from Part 2.

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In his article “The Coming Shakeout in Third-Party Asset Managers,” Greg Luken argues that TPAMs will face a leaner environment going forward. In order to survive, they will need to provide:

     > A truly differentiated investment approach. In one of the most
     > well-known studies of consumer behavior in America—the so-called
     > “Jam Study”—two psychologists found that shoppers at a Bay-area
     > grocery store were 10 times more likely to purchase one of the
     > jams on display when the varieties of jam available were reduced
     > from 24 to six.
     >
     > This pattern should be familiar to any advisor who has tried to
     > parse through the vast number of available TPAM offerings on their
     > broker/dealer’s platform lately. Past a certain point, adding more
     > options to the menu does not benefit the advisor; it simply places
     > another burden on their time in order to figure out the
     > differences in the various choices.
     >
     > Going forward, TPAMs that are successful in defending their
     > position on broker/dealer product platforms will be those that
     > offer clearly differentiated investing approaches and results,
     > not those whose portfolios boil down to minor variations on
     > readily-available index funds, or a slightly different take on
     > large cap growth.

This largely echoes my sentiment.

In addition to being truly differentiated, I believe TPAMs should be better. Perhaps Luken doesn’t address performance because it tends to be highly variable and never guaranteed (“past performance is no guarantee of future results”). Regardless, if the average bank product return is 2% and stocks on average have returned 8% per year then a professional delivering 6-7% per year is far better than the 2% people can achieve on their own. I believe, though, that being “professional” means they should do better than 8% per year.

My expectation for professionals to beat the market may be holding the bar too high. An internet search of “do professional traders beat the market” will turn up many articles arguing to the contrary. Over long periods of time, hedge funds certainly haven’t been able to do this. If beating the market is unlikely then perhaps “plain vanilla” will suffice especially if it consistently comes close to matching the market like passive index fund investing. Even this passive approach, which is exhaustively detailed in any Dummies Guide may be well worth the management fees.

It’s still hard for me not to expect something more. My last paragraph simply suggests realizing more is worth paying up for and if more isn’t delivered I probably won’t have to pay much (see fourth paragraph here).