Why pay for anything in financial services?

Some time ago, in a coffee shop in Stamford, I had the pleasure of meeting with one of the consultants affiliated with Bridgewater.  Our conversation centered around the definition of "alpha".

"Their focus is so intense it is mind boggling," I was told.  "They literally look at all of their operational costs, as small and obscure as some of them are, as contributors to alpha."

That comment resonated with me.  All operational costs...even those that were small and obscure.

Ray Dalio has run one of the world's most efficient engines of alpha. (Click here for a writeup of his recent outperformance)

Why would you treat your life any differently?  Why not treat everything as a source of alpha?

Now in P2P lending we have the opportunity to compete disintermediate banks.  We can lend to one another.  Alongside that there is a whole cottage industry skilled portfolio managers who are exceptionally proficient in this space (here is one).

What about FREE mutual funds?  Yes, this is true.  Check out the folks at Replicas who are completely disintermediating mutual funds with Motif.

All of these vocational components of the financial services industry are going away.  Irrevocably going away.

Whats remaining?  Those that can truly create alpha.

Did I sell at the RIA peak?

Back in 2008/2009, I realized that the financial services industry was in real trouble.  Serious, no turning back, trouble.

Years ago, the wealth management industry was seen as a prestigious profession.  It was one of the few areas that was considered professionally elite.  Forgive me for sounding base, but I liked that.

And, years ago, in lieu of systems, an intelligent advisor had an edge.  Again self-serving, but I felt that I fit the bill.

But would I become an RIA today?  No.

Why?  Anyone...absolutely ANYONE can be an advisor today.  As Joe Kennedy said, when did he sell stocks?  When the shoe shine boy was giving him stock tips.

Today, anyone can become an RIA for literally NOTHING.  There are no barriers to entry.  Here was an interesting article highlighting the change. Young man, right intentions, very low fees.

The majority of advice can be provided effectively without a "human" involved.  

However, there are vocational aspects of the profession that do require assistance.  Tax preparation.  Trust and estate planning.  Philanthropy.  Like a chef or a plumber, they do require some paperwork and getting one's hands dirty.

But an asset allocation?  Budgeting?  That can be done online without an advisor charging a high fee.

So, did I sell at the peak?  I think so.

As MP3 players were to the iPod, Wealth Managers are to...

Robo-Advisors.

Lot of good blog content this week on comparing Kodak to the wealth management industry.  It's a correct comparison.  The lecture below by Piter Diamandis simply nails it:

Kodak was a well established brand that leased photo processing equipment to local franchisees.  These franchises were the folks that did all the photo work for your kids little league.  Bought the pizzas.  Had the banner with their name on it in the outfield.  Etc.  True pillars of any local US community.

Where did they go?  Literally, in the span of one year they were gone.  Abandoned their leases.  Left the equipment and closed up shop.  How much support did they garner from their local neighborhoods ...when people realized they could do it all cheaper on a phone?  For FREE?  Not much support at all if any.

That's where we are now in the financial advisory business.  It will not happen overnight, but a substantial portion of the business has been brutally commoditized.  It is irrevocably going away.

How long before investors stop paying 1-2% for a "friend"?

Here however, there is one difference.  "Kodak" woke up.  In this case, that's the custodians.  More specifically, Schwab.

Schwab's model is quite clever and practical.  As long as the franchises still keep feeding the mother ship, give them the tools to do so.  In effect, allow the Kodak franchise to sell digital cameras.  

Why don't the franchises see the obvious?  Their dependency on their legacy revenue streams.  They simply cannot pivot out of this.  Tragically, they have become the frog in the pot of boiling water.

For me this is actually the smaller trend to watch.  

The larger one to watch is when the behemoths see that the IRRs work.  These gorillas are really good at creating consumer products globally.  And when they figure it is time (it is inevitable that they will), their entrance will be game over.

So for now, watch the advent of multiple "digital cameras", but really keep an eye for when Apple, Facebook, and Google decide to play ball.

...just too bad they don't buy pizza and banners for the outfield!

The View as an Ex-Pat This Week

First off, Happy Easter to all of our friends back in the USA!  We will miss this holiday season with all of you.

One of the things that has been interesteting to witness is the reaction to the USA-Iran negotiations from here.  "Is Iran really part of the Axis of Evil that the West espouses?" 

I am not smart enough to fully answer that, but I think several observations from the ex-pats here are important.

1. The price of oil has dropped significantly.  Is this driven by us?  The Saudis?  Or fundamental supply/demand reasons?  
2. The US economy still seems "stuck".  This is the most worrisome.  A price pull back should have garnered some economic growth, but it hasn't achhieved that.  In fact, we see articles here about Tesla being impacted and able to carry on with regards to cheaper gas prices.
3. Where is Russia in all of this?  With the impact to their reserves, have we really just effected a win in the economic "war column"?
4. Would it be that bad if the US vacated a Middle East footprint and scaled back? Why is this a bad outcome for the US?

All of this is concerning as we watch the price activity in the equity and bond markets.  

I personally feel that the price of oil is a policy decison, not an economic outcome.  To be clear, I think it was deliberate and engineered.  What better way to impact an enemy?

However, for investors, the alarm bells have risen demonstrably.  We are not seeing the activity of a healthy equity market.  We are seeing the opposite as investors clamor for riskier investments (of note the SEC ruling on crowdfunding).  Truly, the shoe shine boys can now buy pre-IPO stocks.  Why?  Because the institutional money will not.

My thought?  I agree with William McChesney Martin...it is time to take the punch bowl away.  Enjoy the chocolate, but come Monday, begin thinking about taking some money off the table.

A Fascinating Week In Singapore

Many of you know that I moved to Singapore last year.

This was a HUGE move for my family and I.  It defintely has had its challenges, but all in, we have been delighted with the outcome.

This week Lee Kuan Yew passed away.  LKY was a true giant and statesman.  Most Americans have no idea who he is/was, and it was only in Kissinger's eulogy in The Washington Post (click here to read it) that Americans might have begiun to understand the man.

Pragmatic.  Unapologetic.  Determined.

LKY dedicated his life to Singapore.  What he accomplished in under 50 years is incredible.

When I look out my apartment view this is what I see:

Downtown CBD in Singapore

In just under 50 years LKY built this entire country into a first world nation.  AAA credit rating (remember those?) and one of the safest cities in the world.

My children now take taxis anywhere.  They ride the subways alone.  Would I have ever done this in the USA?

Conversely, this week, it is easy to see the absurdity of the US political process again in Indiana.  It continues to baffle me how the US continues to shoot itself in the foot.  

But the focus this week was US rates.  Chairwoman Yellen confirmed that rates would go higher.  Albeit gradually.

What does this mean for the economy?  What does this mean for housing?

One could argue that over the past several years we experienced nothing more than an asset appreciation due to low rates and a low dollar.

But with oil at these low levels (is it a market or policy phenomena from the Saudis?)

For your portfolio, this means one thing very very clearly: Start locking down rates.  At PIMCO they would refre to this as "the handoff", when the yield curve would change again.  The yield curve is beginning that now.

What is tricky is the issue of the dollar.  A stronger dollar and higher rates do not bode well for the US economy, hence Yellen's slow approach.

But as you review your portfolio, think on several things:

• Is the US economy where you want to be now?  
• Should you be allocating to countries who are still in a depreciating currency?
• Is a US-centric equity portfolio the correct one?
• Should you own long-dated bonds at all?

 Use this as an opportunity to talk with one of our advisors.  They are free and always available by clicking here.

As the US economy transitions, we also witness a transition here in Singapore.  It is a sad day for the country, but they have shown an amazing resilience with regards to change.

I just hope the USA can do the same.