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Mailbag: By Our Own Petard

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

We believe in advice, too, a belief we have brought up a few times whenever the “everything in finance will be automated” crowd shows up after Vanguard or Blackrock enters a new segment.

Like TheCoeus, I am not, however, a believer in the Fiduciary Rule. I’m also not a believer in the application of the standard duties of care, loyalty, etc. to corporate and other board structures. Not because I don’t think that there are such duties we owe. Of course we do. But because “prudent man” standards are precisely what give us layers of consultants and bankers and lawyers to ensure that executives, boards, pension management teams, service providers and others have done enough to offload accountability for the decisions they’ve made. That is the problem with any good idea made into a meme, like alignment!: it auto-tunes our behavior to satisfy the parameters of the meme instead of embracing the underlying concept with a full heart.

The thing many fee-based clients don’t understand is this: they are subsidizing commission-based clients. My commission clients (usually older, buy-and-hold, low maintenance people) don’t do nearly enough trading to justify charging them a fee. But they still get phone calls, meetings, Christmas cards, and all the services they need. But maybe they make one or two trades a year. Without the fee-based people essentially paying the bills these commission clients would be passed off to someone else or sent online. And they don’t want that. A lot of them have been with my family for decades. We have relationships. So they get everything they need and it costs them very little. It’s a great deal for them.

Pack Member Desperate_Yuppie

A similar observation with some practical implications of it.

Because our industry (often very rightfully) obsessed with process, we like to think that cutting off the possibility of the appearance of not having our clients’ interests at heart by eliminating structures with the potential for abuse is the right choice, somehow better than building a practice around values that requires effort and discipline to achieve without error.

I’m with Desperate_Yuppie here (Ed Note: Some of y’all’s handles…). Putting alignment over alignment! can accommodate a wide variety of fee structures.

Hi Rusty. Re your recommendations, how do you suggest calculating the beta hurdle, adjusted for long/short exposures?

Pack Member Bruce Winson

I have a few thoughts on principles here, but above all: simplicity.

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