I am heading out for the long weekend, and then off to speak at a CFA conference, so expect light postings the next week (Reads continue unabated). But before i go off the grid, i had to share with you my colleague Ben Carlson’s most recent missive, which is (as usual) brilliant.
Its called How The Finance Industry Tricks You and it is your weekend homework assignment:
“It’s hard for many clients to even know that they have subpar results because the “experts” they’re listening to set the expectations and benchmarks. Trust is obviously a huge aspect of any client relationship in the financial services industry, but there are some red flags people can look for to make sure their outsourced investment advice isn’t coming from a charlatan. Here are four tricks the finance industry plays on their clients:
1. They move the goalposts. One of the most important jobs of any finance professional is to set reasonable expectations for their clients in terms of potential risk and reward. For those who don’t do a very good job at this, one of the go-to moves after a poor period of performance is to simply move the goalposts.
2. They exhibit style drift. Some money managers or advisors have carte blanche to make fund or portfolio changes as they see fit in a go-anywhere investment style, but these types of strategies are typically few and far between.
3. They change the narrative. Everyone loves a good story, so instead of admitting wrong-doing many finance pros will simply change their narrative. Institutional investors in hedge funds are notorious for the narrative shift. At first they were looking for outperformance. . . . An inconsistent investment narrative has a high correlation with an inconsistent investment process. Neither is helpful to the bottom line.
4. They blame someone else. When all else fails, most pros just end up blaming someone else — the Fed, the markets are artificial or being manipulated, risk-on/risk-off, index funds, correlations are too high, the markets are rigged, short sellers, other market participants are irrational or any number of conspiracy theories.
How to be a Good Client
That’s an excerpt; you are strongly advised to go read the entire thing . . .
How The Finance Industry Tricks You
Wealth of Common Sense, May 26, 2016