The Business of Investing - Part 1/6: Introduction

For all my griping about blind advocacy, I do advocate from time to time. I believe strongly in minimizing coercion and will tell you about it if you give me half a chance.  I’m passionate about free enterprise and for me, it’s not the “enterprise” part that’s rewarding as much as it is the “free” part.  The individual and societal benefits of freedom accrue most broadly and rapidly when counter-parties are informed and agree to an exchange, without threat of force.  The consumption of investment advisory services is one area where there is a basic lack of necessary information.  In other words, one of the parties isn't well informed.  So, I am certainly an investor education advocate.

I continually find that investors don’t know how to evaluate – i.e. “shop for” – investment management services.  The result is that the purveyors of investment advice tend to be an oddly diverse bunch, occupying spots all along the competency scale.  It’s a peculiar phenomenon, really.  Take the field of medicine as a comparison: there are certainly differences between doctors, but if two docs have MDs and are both board certified in the same field, patients can rest assured that they are buying a basic level of capability and that each doctor is likely to care reasonably well for them.  Law and public accounting are similarly narrow with respect to competency.  And at the other end of the services spectrum, you also tend to find a relatively narrow band of competency among, say, lawn mowing service providers, and for obvious reasons.  But with investment advisors, you’ll find individual investors working with everybody from math & finance PhDs in New York to annuity salesmen in Paducah.  

The spectrum itself is a curiosity, but what agitates me is that such a large percentage of investment advisors cluster in a relatively tight range we might call "not-really-competent."  Why do investors keep paying – and often times paying way too much – for this level of non-competency? 

Pause.  I’m being careful to speak about competency of practice.  I’m not suggesting a basic lack of intellectual capability.  Of currently working advisors, a far larger percentage of them could be practicing competently than is currently the case.  It’s not a lack of smarts; but what is it?

      

The answer to that has a lot to do with the evolution of the investment business.  Many advisors lack competence because it’s not demanded of them.  Their employers do not encourage them to be competent because it doesn’t fit the business model.  It’s a matter of institutionalized incompetence, actually.  But it doesn’t have to be this way.  There are alternatives.  One alternative is to give Federal agencies more power to control financial advice.  You can imagine that in my reluctance to coerce, I’m not wild about either the hit to freedom or the level of effectiveness that this choice would yield.  But, as a friend recently challenged me: if education - instead of regulation - is the best option, then what exactly am I proposing?

Touché. 

   

I'm not sure how much I can do by myself, frankly, but it's worth trying.  I believe I can help investors become better informed, free participants in the selection of investment advisory services, and if I'm right, I might be able to do some good - at least among the small number of people within my sphere of influence.

This is the first in a series of posts explaining how we got to this point, a point where far too much money is paid for far too little quality.  I also want to propose the "what" and "why" investors can do about it.  In the post following this one, I’m going to talk about the history of investment advice – high level – to point out how we’ve come to the place we are.  In the posts that follow, I’m going to call out specific practices that are most limiting to the attainment of good investment advice.  Then I’ll conclude with some suggestions of what a healthy and ideal investment advisory relationship looks like.  

I’d love to have your feedback on this series.  Portions of the material is totally self-congratulatory: the ideal practice I describe looks a lot like my own.  I could choose to be shy about that, but instead I’ll just note that I’ve spent a ridiculous amount of time over my career becoming competent individually and searching for truly competent partners with whom I can hang out a shingle.  I'm comfortable with the awareness that having made many earlier mistakes, I do now 'get it.'  Look, I  don't think my firm is the perfect investment management solution; I just want to share what I know.

But let’s face it: I’m a career investment guy.  I can no longer see easily how non-professionals perceive the investment advisory business, and I'd love to have your feedback on whether my opinions translate into your experience.