by David Robertson, CFA
November 2017
Dickens' famous opening line, "it was the best of times, it was the worst of times ..." also captures the paradox of current investing conditions. On one hand, technology has significantly improved many aspects of investing: Commissions have plummeted, online trading facilitates much greater personal control, and digital delivery of information has increased access and decreased the cost of research. All of these improvements make today the "best of times" for investing.
On the other hand, there are also aspects of investing that are almost shamefully backward. The costs of many services are still far too high and investors are often overwhelmed by the massive flow of news and research, much of which is confusing and/or conflicting. These conditions effectively impose a tax on realized returns and in important respects make today the "worst of times" for investing. Why do such disparate realities exist and what can be done to improve conditions for investors?
A big problem is intent. It would be nice if most investment practitioners were clearly oriented to helping investors, but that is not the case. According to Focus Consulting Group [here], most investment practitioners are just "not sure" what their purpose is. In particular, a survey from the CFA Institute indicated that only 17% of respondents "identified a strong purpose".
Further, the satisfaction of customers is just not a high priority at many incumbent investment firms. This was a point made abundantly clear by Jane Marcus and Terry R. Bacon in "Developing Better Asset Management Leadership" [here]. Marcus and Bacon reported, "There has not been a profound belief in doing what is right for the client" and "The fundamental problem ... is lack of client focus."
The connection with purpose has also become increasingly tenuous in the technology industry. This is especially problematic because technology has historically been a great enabler; indeed many of the great advances in human history have resulted from the application of new technologies. Technology is not an end in itself, however, and its careless application has consequences for society as a whole and by association, for the investment community.
Indeed, the negative social and political consequences of technology and big tech firms have been drawing much greater scrutiny recently. Issues ranging from the role social media firms played in potentially affecting the 2016 presidential election [here], to the dangerously addictive design of many technology offerings [here], to evidence of monopoly profits at big tech firms [here], to the avoidance of taxes by many large tech firms [here] have now percolated to the point of becoming mainstream concerns.
If there are any doubts that such concerns are likely to blow over, Ed Luce dispels them in the Financial Times [here]: "Big Tech is the new big tobacco in Washington. It is not a question of whether the regulatory backlash will come, but when and how."
How did big technology become so deeply embroiled in key social and political issues? The answer is the same way the investment industry lost its purpose, poor leadership.
Luce explains the new scrutiny of technology by way of the example of Facebook's Mark Zuckerberg. According to Luce, one of the delusions that are "common to America's new economy elites" is that "They think they are nice people ... but they tend to cloak their self-interest in righteous language." This has the effect of deflecting scrutiny and appropriate criticism.
Of course there is nothing unusual in this; it is what many corporate executives, politicians, and other leaders do. But that is exactly the point. The behavior of many tech leaders is ultimately no different, and certainly no more virtuous, than that of any other self-serving economic agent trying to benefit from the gullibility of others.
Another delusion that new economy elites exhibit is to believe that "they have a truer grasp of people's interests than voters themselves." Again, there is nothing especially new or interesting about this. After all, there is nothing like billions of dollars of wealth to further stimulate an inherent sense of overconfidence and to attenuate any proclivity towards reflection or self-criticism. This pervasive self-absorption explains why incantations from Silicon Valley may sound visionary to acolytes, but also ring hollow for much of the general public.
Even more fundamentally, tech firms have become embroiled in so much controversy because many tech experts exhibit a form of "tone deafness"; they just don't understand the issues. In many cases, they aren't even aware that such social and political issues exist. As Scott Hartley describes in his book, The Fuzzy and the Techie, "it’s a horrible irony that at the very moment the world has become more complex, we’re encouraging our young people to be highly specialized in one task."
A sensible roadmap for overcoming such shortcomings is to explicitly acknowledge and incorporate social and political consequences into technological innovation. Hartley writes, "One of the most immediate needs in technology innovation is to invest products and services with more human qualities, with more sensitivity to human needs and desires." Hartley continues, "Those products and services developed with the keenest sense of how they can serve our human needs and complement our human talents will have a distinct competitive advantage."
This course was echoed by John Thornhill in the FT [here]. In a deliberate spin on Zuckerberg's irreverent mandate to "move fast and break things", Thornhill instead recommends that tech companies try to "move fast and fix things". Rather than disputing whether technology is good or bad, Thornhill suggests that we determine, "how to use many of the remarkable technologies of our age to improve public service and people's daily lives."
It's not like constructive examples of improvement by way of technology don't exist. One of the quintessential technological innovations was Apple's development of the graphical user interface (GUI), which substantially eased the interaction of people with computers. Indeed, Hartley singled out Jobs for his recognition of purpose. In regards to the notion of sensitivity to human needs and desires, Hartley said, "Steve Jobs brilliantly recognized this."
Hartley provides another more recent demonstration of such sensitivity with the example of the non-partisan charity, Code for America. The organization is driven by the purpose of "bring[ing] together technologists and public officials to help make government work better," and explicitly recognizes that "Both sides want things to work better and to spend less." This is clearly an objective "That can be enabled by tech." Hartley continues, "Although Code for America thinks big, its approach is to go small: identify problems and fix them." The general lesson from the example is that "as our technologies become more accessible than ever before, our ability to apply those technologies meaningfully becomes more important."
So how can "many of the remarkable technologies of our age" be used to improve the exercise of investing? One great place to start is with costs. While clearly there are instances of higher costs being related to higher quality, all-too-often, higher costs are simply related to less efficient delivery. If there is one lesson to be learned from Amazon's runaway success in retail, it is that consumers have little tolerance for overpaying in order to compensate for inefficient distribution or for the exploitation of a dominant position.
Interestingly, that intolerance has not encroached as forcefully on investment services. Sure, some things like trading commissions and commodity products like index funds are cheaper, but there are still plenty of examples of costly inefficiency. The practice of regularly having in-person quarterly meetings, for example, is both costly and rarely a persistent source of value. In addition, the investment services industry is rife with the types of middlemen and distribution agreements that Amazon has obliterated in the retail world. Finally, in many cases recurring fees are charged on assets under management (AUM) when investment expertise is only required on a periodic basis.
As the Economist explains [here] distribution cost efficiencies are rapidly migrating to other businesses: "Following the example of successful e-commerce brands such as Warby Parker, a glasses firm, and Casper, a mattress-maker, a growing number of startups are reimagining everyday household items—from pants and socks to toothbrushes and cookware. These 'direct-to-consumer' (DTC) companies bypass conventional retailers and bring their products straight to customers via their online stores." In addition, since "The DTC business model first emerged in product areas dominated by slow-moving incumbents with hefty profit margins, such as spectacles and razor blades," it is clearly also applicable to the investment services industry.
Another area in which remarkable technologies can be used to improve the exercise of investing is by helping to make sense of the complicated landscape for investors. While technology has made investment information cheaper and more widely accessible, it has done so with such force as to overwhelm just about anybody who is not simultaneously effective at processing massive amounts of information, committed to doing so, proficient in the vocabulary of investing, and adept at synthesizing the key implications for investing. As Hartwell writes, a "wealth of information creates a dearth of something else ... It consumes the attention of its recipients." This leaves many investors confused and unsure.
To make matters worse, many technology offerings actually exacerbate the problem by engaging in a "race to the bottom of the brain stem to seduce instincts into getting us to spend time." Such applications may amuse and entertain, but they also distract from the important exercise of investing. David Brooks provides a clue as to how this situation can be improved [here]: "The big breakthrough will come when tech executives clearly acknowledge the central truth: Their technologies are extremely useful for the tasks and pleasures that require shallower forms of consciousness, but they often crowd out and destroy the deeper forms of consciousness people need to thrive."
It follows that more fruitful applications of technology for investing should focus on activities requiring "shallower forms of consciousness" such as data collection, processing, assimilation and other tasks. Doing so can both reduce costs and increase reliability of routine functions. In a similar way, automation and efficient information management can be used to develop decision tools that "amplify human potential" rather than distracting from it. This will allow professional investors who do have the expertise and invest the time and effort to focus more on synthesizing information, tracking changes, formulating independent perspectives, and communicating implications in a way that is relevant to each investor and his/her specific situation.
In sum, the short answer to improving conditions for investing is to "move fast and fix things". High costs and information overload are two key constraints that prevent investors from receiving better service (we highlight more in the white paper, "Re-imagining Investment Services" [here]). Both factors result from the fact that many investment services and technology firms (among others) have lost touch with their purpose as an organization. Tim O'Reilly, the author of WTF? What's the Future and Why it's up to us highlights this point [here] when he exhorts technology leaders to "play the game of business as if people matter." Likewise, Jim Ware laments the state of the investment industry: "I don’t understand how the investment world has lost sight of our mission: to help people with financial health."
Finally, a focus on thoughtful application doesn't happen by itself. While we do benefit from a wide array of "remarkable technologies of our age", direction and purpose are needed in order to harness the power of these technologies in useful ways. In this respect, it is interesting to note that Thornhill specifically singles out how "small tech" can "move fast and fix things". In a culture that almost automatically associates technology with disruption, this message serves as a stark reminder that disrupters tend to be smaller players. Although many investors prefer to hire large firms due to their perceived safety, perhaps smaller firms are the ones best equipped to thoughtfully apply technology with the purpose of actively helping people improve their financial health.
November 2017
Dickens' famous opening line, "it was the best of times, it was the worst of times ..." also captures the paradox of current investing conditions. On one hand, technology has significantly improved many aspects of investing: Commissions have plummeted, online trading facilitates much greater personal control, and digital delivery of information has increased access and decreased the cost of research. All of these improvements make today the "best of times" for investing.
On the other hand, there are also aspects of investing that are almost shamefully backward. The costs of many services are still far too high and investors are often overwhelmed by the massive flow of news and research, much of which is confusing and/or conflicting. These conditions effectively impose a tax on realized returns and in important respects make today the "worst of times" for investing. Why do such disparate realities exist and what can be done to improve conditions for investors?
A big problem is intent. It would be nice if most investment practitioners were clearly oriented to helping investors, but that is not the case. According to Focus Consulting Group [here], most investment practitioners are just "not sure" what their purpose is. In particular, a survey from the CFA Institute indicated that only 17% of respondents "identified a strong purpose".
Further, the satisfaction of customers is just not a high priority at many incumbent investment firms. This was a point made abundantly clear by Jane Marcus and Terry R. Bacon in "Developing Better Asset Management Leadership" [here]. Marcus and Bacon reported, "There has not been a profound belief in doing what is right for the client" and "The fundamental problem ... is lack of client focus."
The connection with purpose has also become increasingly tenuous in the technology industry. This is especially problematic because technology has historically been a great enabler; indeed many of the great advances in human history have resulted from the application of new technologies. Technology is not an end in itself, however, and its careless application has consequences for society as a whole and by association, for the investment community.
Indeed, the negative social and political consequences of technology and big tech firms have been drawing much greater scrutiny recently. Issues ranging from the role social media firms played in potentially affecting the 2016 presidential election [here], to the dangerously addictive design of many technology offerings [here], to evidence of monopoly profits at big tech firms [here], to the avoidance of taxes by many large tech firms [here] have now percolated to the point of becoming mainstream concerns.
If there are any doubts that such concerns are likely to blow over, Ed Luce dispels them in the Financial Times [here]: "Big Tech is the new big tobacco in Washington. It is not a question of whether the regulatory backlash will come, but when and how."
How did big technology become so deeply embroiled in key social and political issues? The answer is the same way the investment industry lost its purpose, poor leadership.
Luce explains the new scrutiny of technology by way of the example of Facebook's Mark Zuckerberg. According to Luce, one of the delusions that are "common to America's new economy elites" is that "They think they are nice people ... but they tend to cloak their self-interest in righteous language." This has the effect of deflecting scrutiny and appropriate criticism.
Of course there is nothing unusual in this; it is what many corporate executives, politicians, and other leaders do. But that is exactly the point. The behavior of many tech leaders is ultimately no different, and certainly no more virtuous, than that of any other self-serving economic agent trying to benefit from the gullibility of others.
Another delusion that new economy elites exhibit is to believe that "they have a truer grasp of people's interests than voters themselves." Again, there is nothing especially new or interesting about this. After all, there is nothing like billions of dollars of wealth to further stimulate an inherent sense of overconfidence and to attenuate any proclivity towards reflection or self-criticism. This pervasive self-absorption explains why incantations from Silicon Valley may sound visionary to acolytes, but also ring hollow for much of the general public.
Even more fundamentally, tech firms have become embroiled in so much controversy because many tech experts exhibit a form of "tone deafness"; they just don't understand the issues. In many cases, they aren't even aware that such social and political issues exist. As Scott Hartley describes in his book, The Fuzzy and the Techie, "it’s a horrible irony that at the very moment the world has become more complex, we’re encouraging our young people to be highly specialized in one task."
A sensible roadmap for overcoming such shortcomings is to explicitly acknowledge and incorporate social and political consequences into technological innovation. Hartley writes, "One of the most immediate needs in technology innovation is to invest products and services with more human qualities, with more sensitivity to human needs and desires." Hartley continues, "Those products and services developed with the keenest sense of how they can serve our human needs and complement our human talents will have a distinct competitive advantage."
This course was echoed by John Thornhill in the FT [here]. In a deliberate spin on Zuckerberg's irreverent mandate to "move fast and break things", Thornhill instead recommends that tech companies try to "move fast and fix things". Rather than disputing whether technology is good or bad, Thornhill suggests that we determine, "how to use many of the remarkable technologies of our age to improve public service and people's daily lives."
It's not like constructive examples of improvement by way of technology don't exist. One of the quintessential technological innovations was Apple's development of the graphical user interface (GUI), which substantially eased the interaction of people with computers. Indeed, Hartley singled out Jobs for his recognition of purpose. In regards to the notion of sensitivity to human needs and desires, Hartley said, "Steve Jobs brilliantly recognized this."
Hartley provides another more recent demonstration of such sensitivity with the example of the non-partisan charity, Code for America. The organization is driven by the purpose of "bring[ing] together technologists and public officials to help make government work better," and explicitly recognizes that "Both sides want things to work better and to spend less." This is clearly an objective "That can be enabled by tech." Hartley continues, "Although Code for America thinks big, its approach is to go small: identify problems and fix them." The general lesson from the example is that "as our technologies become more accessible than ever before, our ability to apply those technologies meaningfully becomes more important."
So how can "many of the remarkable technologies of our age" be used to improve the exercise of investing? One great place to start is with costs. While clearly there are instances of higher costs being related to higher quality, all-too-often, higher costs are simply related to less efficient delivery. If there is one lesson to be learned from Amazon's runaway success in retail, it is that consumers have little tolerance for overpaying in order to compensate for inefficient distribution or for the exploitation of a dominant position.
Interestingly, that intolerance has not encroached as forcefully on investment services. Sure, some things like trading commissions and commodity products like index funds are cheaper, but there are still plenty of examples of costly inefficiency. The practice of regularly having in-person quarterly meetings, for example, is both costly and rarely a persistent source of value. In addition, the investment services industry is rife with the types of middlemen and distribution agreements that Amazon has obliterated in the retail world. Finally, in many cases recurring fees are charged on assets under management (AUM) when investment expertise is only required on a periodic basis.
As the Economist explains [here] distribution cost efficiencies are rapidly migrating to other businesses: "Following the example of successful e-commerce brands such as Warby Parker, a glasses firm, and Casper, a mattress-maker, a growing number of startups are reimagining everyday household items—from pants and socks to toothbrushes and cookware. These 'direct-to-consumer' (DTC) companies bypass conventional retailers and bring their products straight to customers via their online stores." In addition, since "The DTC business model first emerged in product areas dominated by slow-moving incumbents with hefty profit margins, such as spectacles and razor blades," it is clearly also applicable to the investment services industry.
Another area in which remarkable technologies can be used to improve the exercise of investing is by helping to make sense of the complicated landscape for investors. While technology has made investment information cheaper and more widely accessible, it has done so with such force as to overwhelm just about anybody who is not simultaneously effective at processing massive amounts of information, committed to doing so, proficient in the vocabulary of investing, and adept at synthesizing the key implications for investing. As Hartwell writes, a "wealth of information creates a dearth of something else ... It consumes the attention of its recipients." This leaves many investors confused and unsure.
To make matters worse, many technology offerings actually exacerbate the problem by engaging in a "race to the bottom of the brain stem to seduce instincts into getting us to spend time." Such applications may amuse and entertain, but they also distract from the important exercise of investing. David Brooks provides a clue as to how this situation can be improved [here]: "The big breakthrough will come when tech executives clearly acknowledge the central truth: Their technologies are extremely useful for the tasks and pleasures that require shallower forms of consciousness, but they often crowd out and destroy the deeper forms of consciousness people need to thrive."
It follows that more fruitful applications of technology for investing should focus on activities requiring "shallower forms of consciousness" such as data collection, processing, assimilation and other tasks. Doing so can both reduce costs and increase reliability of routine functions. In a similar way, automation and efficient information management can be used to develop decision tools that "amplify human potential" rather than distracting from it. This will allow professional investors who do have the expertise and invest the time and effort to focus more on synthesizing information, tracking changes, formulating independent perspectives, and communicating implications in a way that is relevant to each investor and his/her specific situation.
In sum, the short answer to improving conditions for investing is to "move fast and fix things". High costs and information overload are two key constraints that prevent investors from receiving better service (we highlight more in the white paper, "Re-imagining Investment Services" [here]). Both factors result from the fact that many investment services and technology firms (among others) have lost touch with their purpose as an organization. Tim O'Reilly, the author of WTF? What's the Future and Why it's up to us highlights this point [here] when he exhorts technology leaders to "play the game of business as if people matter." Likewise, Jim Ware laments the state of the investment industry: "I don’t understand how the investment world has lost sight of our mission: to help people with financial health."
Finally, a focus on thoughtful application doesn't happen by itself. While we do benefit from a wide array of "remarkable technologies of our age", direction and purpose are needed in order to harness the power of these technologies in useful ways. In this respect, it is interesting to note that Thornhill specifically singles out how "small tech" can "move fast and fix things". In a culture that almost automatically associates technology with disruption, this message serves as a stark reminder that disrupters tend to be smaller players. Although many investors prefer to hire large firms due to their perceived safety, perhaps smaller firms are the ones best equipped to thoughtfully apply technology with the purpose of actively helping people improve their financial health.
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