| Areté Quarterly Q124 |
Business update
When I started Areté over fifteen years ago, one of the founding premises was that investors should be able to have access to high quality investment services at a fair price. One of the determinants of fairness was the minimization of unnecessary sales, marketing, and distribution fees. My thinking was (and is) that such fees only hurt investment performance. Further, investors who do just a little bit of work can avoid them almost completely.
Recently, a blog post by Wes Gray of AlphaArchitect brought a lot of memories flooding back. In characterizing the model of distributing financial services by big banks, he draws an analogy between big bank investment platforms and the railroad monopolies of the past. Both monopolize proprietary platforms in order to extract high rents from consumers.
In particular, Gray notes, “banks, and their powerful distribution capabilities, have managed to limit the competition’s advance. They continue to push high-fee, tax-inefficient, opaque, non-client-friendly products into the financial services marketplace.” In other words, they don’t care nearly so much about clients meeting retirement goals as themselves meeting profit goals. As Gray puts it, “From the bank’s perspective, the quality of a product is secondary to its profitability.”
To be fair, things are better today than they used to be. Fee-only advisors have displaced some of the worst advisory practices. Further, access and information are both better as well.
That said, things could be so much better than they are. Arguably most fintech has been designed to gamify investing, enable speculative activity, or both. Efforts to “democratize” finance have mainly had the same effects. Further, the big banks still run platforms that still charge excessive middle man fees for access.
The causes of this suboptimal situation can be debated, but I think there are just a few key factors. One is that most people don’t feel comfortable pressing hard on the business models of advisors and other providers. Another is that extraordinary monetary policy and strong markets have undermined the desire and the need to pushback against such deleterious practices.
As a result, this discussion is both timely and relevant. Increasingly, it is looking as if the environment that proved so amenable to the 60/40 (stock/bond) strategy is in the process of changing dramatically. Indeed, strategist Russell Napier recently described “a profound structural change in geopolitics and in how the international monetary system works”.
The main antidote, as I have been saying for some time, is to find the “anti 60/40” in the form of active strategies and diversifying asset classes that are often well off the worn path. By the same token, they are often NOT on big bank platforms.
The goods news is finding such investment services is eminently doable. The other good news is such services are often a good deal because they don’t involve excessive middle man fees. The only bad news is that some modicum of effort is required.
Very few investors made that effort after the GFC largely because the market rebounded so quickly and strongly they never felt compelled to follow through. I think the forces this time will be stronger and last longer.
While I have believed in the notion of providing very high quality investment services at a fair price for a long time, I am thrilled to hear someone of Wes Gray’s stature and expertise also making the same case very publicly. Maybe it’s finally time for this very basic consumer proposition to take off!
If you have any questions about what I do or just want to learn more about the All-Terrain strategy, please reach me at [email protected]. I look forward to it!
Thanks for your support!
David Robertson, CFA
CEO and founder, Areté Asset Management
When I started Areté over fifteen years ago, one of the founding premises was that investors should be able to have access to high quality investment services at a fair price. One of the determinants of fairness was the minimization of unnecessary sales, marketing, and distribution fees. My thinking was (and is) that such fees only hurt investment performance. Further, investors who do just a little bit of work can avoid them almost completely.
Recently, a blog post by Wes Gray of AlphaArchitect brought a lot of memories flooding back. In characterizing the model of distributing financial services by big banks, he draws an analogy between big bank investment platforms and the railroad monopolies of the past. Both monopolize proprietary platforms in order to extract high rents from consumers.
In particular, Gray notes, “banks, and their powerful distribution capabilities, have managed to limit the competition’s advance. They continue to push high-fee, tax-inefficient, opaque, non-client-friendly products into the financial services marketplace.” In other words, they don’t care nearly so much about clients meeting retirement goals as themselves meeting profit goals. As Gray puts it, “From the bank’s perspective, the quality of a product is secondary to its profitability.”
To be fair, things are better today than they used to be. Fee-only advisors have displaced some of the worst advisory practices. Further, access and information are both better as well.
That said, things could be so much better than they are. Arguably most fintech has been designed to gamify investing, enable speculative activity, or both. Efforts to “democratize” finance have mainly had the same effects. Further, the big banks still run platforms that still charge excessive middle man fees for access.
The causes of this suboptimal situation can be debated, but I think there are just a few key factors. One is that most people don’t feel comfortable pressing hard on the business models of advisors and other providers. Another is that extraordinary monetary policy and strong markets have undermined the desire and the need to pushback against such deleterious practices.
As a result, this discussion is both timely and relevant. Increasingly, it is looking as if the environment that proved so amenable to the 60/40 (stock/bond) strategy is in the process of changing dramatically. Indeed, strategist Russell Napier recently described “a profound structural change in geopolitics and in how the international monetary system works”.
The main antidote, as I have been saying for some time, is to find the “anti 60/40” in the form of active strategies and diversifying asset classes that are often well off the worn path. By the same token, they are often NOT on big bank platforms.
The goods news is finding such investment services is eminently doable. The other good news is such services are often a good deal because they don’t involve excessive middle man fees. The only bad news is that some modicum of effort is required.
Very few investors made that effort after the GFC largely because the market rebounded so quickly and strongly they never felt compelled to follow through. I think the forces this time will be stronger and last longer.
While I have believed in the notion of providing very high quality investment services at a fair price for a long time, I am thrilled to hear someone of Wes Gray’s stature and expertise also making the same case very publicly. Maybe it’s finally time for this very basic consumer proposition to take off!
If you have any questions about what I do or just want to learn more about the All-Terrain strategy, please reach me at [email protected]. I look forward to it!
Thanks for your support!
David Robertson, CFA
CEO and founder, Areté Asset Management
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