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Ben Hunt is the chief investment strategist at Salient and the author of Epsilon Theory, a newsletter and website that examines markets through the lenses of game theory and history. Over 100,000 professional investors and allocators across 180 countries read Epsilon Theory for its fresh ... more

Mailbag: By Our Own Petard

Date: Sunday, December 8, 2019 3:19 AM EDT

Sometimes we get enough good responses to a note from pack-members that we think it’s worth publishing them on their own. Our readers had some especially useful thoughts on our note about principal-agent problems and the meme of alignment! in the hiring of advisers, consultants and fund managers.

Thank you! This is one of the things that I have been trying to explain to clients and regulators ever since the Department of Labor released its Fiduciary Standard. There is no such thing as conflict free humans. There is no ideal compensation method. Every one of them has a conflict. Commissions are evil? Taken to excess, sure, but if you are a buy and hold investor it can be the cheapest way to pay for occasional advice. Advisory fees are perfect? Why does the SEC have a bulletin on reverse churning? (Charging Advisory fees, but not trading frequently enough to make the advisory fee cheaper than a commission model.) Advice only model? Who will help me execute the advice? I get a blueprint, but how do I pick a contractor to make it real?

Don’t even get me started on updating the regulations. Bernie Madoff, Ken Lay, and numerous others were fiduciaries for their investors. It did nothing to protect the investors. Governmental regulations are like a warranty. A warranty may force the manufacturer to repair their product, but it won’t prevent the hassle and other costs associated with a failure in the product. A strong warranty does not make up for a poor quality product. I would rather have a high quality product with no warranty. (Also, any car dealer will tell you that warranty repairs are the ultimate in misaligned incentives.) Technology will take an extremely long time to replace human interaction. (if it ever does.) No one cares about hurting a computer or robot’s “feelings.” We feel beholden to other people. How do I know? Look at physical fitness. How many people have lost weight, improved their diet and turned their life around because they bought a Fitbit or Apple Watch? How many have done it with a personal trainer and/or nutritionist? Investment analysis, portfolio design, portfolio management, financial planning, tax analysis, budgeting, really all of the math components of financial success will be automated. I’m sure there will be several different competing tools. None of them will take the place of a caring human financial advisor that will encourage you to use the tools, understand the differences between them, and provide personalized interpretation (wisdom) on using them to maximum advantage. I don’t work with institutions, I work with people. People want a caring guide to show them the ropes, identify the traps, and generally help them do better than they could do on their own. My clients are part of my packs. I use this part of my pack to help me do a better job for that part.

Pack Member TheCoeus
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