Asset Management in 2018 (Part 2)

Today I continue presenting my perspective on asset management in 2018.

On one hand, as someone who has devoted the last 10 years to learning about the mechanics of trading and investing I think the lack of performance reporting is an outrage. I feel strongly that anyone worth their salt as a trader should disclose performance, aim to maximize it, and be open to performance scrutiny. Shouldn’t we all be aiming to get better?

On the other hand, even if GIPS compliance and verification were commonplace, most potential clients probably wouldn’t understand the detailed statistics anyway. Leaving performance out of the consideration and paying hefty fees for mediocre returns remains acceptable because this still represents significant improvement in beating the pants off a savings account or cash under the mattress. As a bonus for those fees, financial advisers do much more than just [supervising] the investments.

Most advisers use selling techniques to connect with potential clients, to establish trust and rapport, and to raise assets regardless of investment performance. Despite a gut reaction to call this despicable, given the significant improvement I can’t say this is bad for the everyday client.

I am reminded of skill-oriented activity proficiency as described in Michael Mauboussin’s 2012 book The Success Equation. Mauboussin argues most people attain acceptable skill level in day-to-day activities (e.g. playing a sport, driving a car) after about 50 hours of training/practice. People then plateau and are perfectly content to remain. Elite performers advance beyond natural plateaus through deliberate practice. This involves hours of concentrated/dedicated repetition along with timely and accurate feedback (e.g. from a coach or teacher) to detect and correct errors. Deliberate practice is laborious, time-consuming, and not much fun, which is probably why few people become true experts or champions.

With regard to investing, clients generally settle for the plateau. Whether anyone realizes it [due to the lack of performance reporting], most money managers fail to beat the market.* Their plain-vanilla investment offerings generate subpar performance that still represents significant improvement. Despite the persuasive pitches that appeal to compassion, tenderness, and sensibilities, these offerings are essentially the same no matter how much they assert a sincere desire to custom-tailor a plan for individual uniqueness.

Flip a coin and choose an IA.

One other phenomenon that obscures lackluster returns is the mature bull market that continues into 2018. Aside from a few short benders, equities have rallied higher for the last 5-6 years. Layperson clients either have their heads in the sand or are happy when profitable. Most strategies have been profitable. This satisfies the casual observer for whom discontent only arises when investments lose money.

Beyond the widespread existence of poor financial literacy, I certainly believe a category of client exists that aims higher and wants more. This is the client who realizes that even in times of plenty, outperformance is important as a means to buffer against the inevitable losses that will occur when the market turns sour.

These are the people who invest in hedge funds.

These are the people who seek something more akin to optimal asset management rather than the garden-variety mediocrity.

This is beyond the scope of most financial and investment advisers.

This is where I might fit in.


* I may blog on this at some later date.