What Would You Say…You Do Here?

One of the most interesting lines from the new Carl Richards book is when he talks about how hard it is to decipher the many different roles in the financial industry

I know of no other industry where it’s harder to figure out who does what.

It’s easy to shake your head when you read a story about a naive person getting taken advantage of by a financial scam, but I sympathize with people that don’t understand the inner-workings of the financial sector. From an outsiders perspective, it can be a daunting challenge to find competent, trustworthy sources of advice.

A few months ago, State Street put out an excellent research piece called Folklore of Finance that looked at how behavior and existing beliefs sabotage success in the investment management industry. I even wrote about it at the time (see The Lollapalooza Effect in Active Management).

Suzanne Duncan, the head of the department that conducted the research for that report, recently sat down for an interview with Julie Segal of Institutional Investor to shed some more light on her findings. I thought this exchange was very telling:

What did you discover in your research that most surprised you?

How difficult it was for many executives throughout the industry to define success. That is a fundamental question, and what that difficulty tells me is that there is a significant reckoning going on. Most organizations are going through some significant questioning of the business model, the value proposition and their reason for existence. We would be sitting in a room, and when I would drop the question, “How do you define success?” there was silence.

You could see that as being somewhat disturbing, but I think it’s healthy. The industry is asking whether it has it right, and considering that it might not have it right and might need to consider changes. I think it’s triggered by the financial crisis after which so much has changed, whether it’s shifting correlations or the needs of clients or low interest rates. It’s a hard question to answer because the value proposition used to be very simple: the production of alpha, period. Now it’s much more complicated: We need to help investors achieve their long-term goals.

I find it troublesome that those in the industry have a difficult time defining success. It’s a challenge because there are so many competing interests and the incentives in finance have rarely been kind to clients. Helping investors achieve their long-term goals should have always been the goal. But it does sound like the industry is finally coming around to this idea, even if some have to be dragged kicking and screaming to that conclusion.

I’m hopeful that changes in the current way of doing things will result in an increase in honesty, transparency and an alignment of interests that will allow both sides of the client relationship to benefit. I’m also hopeful that the old days of excessive fees, shady sales tactics and unnecessary complexity will continue to fade away. I’m not naive and I know that these types of changes in an entrenched industry aren’t going to be easy. Turning the financial battleship will take time.

The biggest problem I see is a lack of communication. It’s difficult to figure out who does what because most individuals and organizations in finance are terrible at communicating what it is that they do. In the past, most firms have relied on a sleight of hand to gather assets instead of being upfront and honest with their clients or potential clients.

Fund performance has been more important than actual investor returns. Marketing materials and sales pitches have been used in place of education and counseling. Behavioral biases are ignored in favor of proving intellectual superiority. Self-confidence is seen as being more important than self-awareness.

This can’t last forever. The speed of technological change is giving more power to financial consumers than ever before. You can’t cold call an unwitting customer anymore to try to sell them something with a fat commission attached. Maybe it’s wishful thinking, but I think the abundance of information available today is making positive change a possibility whether the old gatekeepers want it to or not.

In the past, people could get away with trying to impress clients by saying they could outsmart the market or their competitors. It’s not going to be enough to say that you can offer a “differentiated” strategy anymore. You’ll actually have to prove your value-add and offer legitimate reasons. I think the firms and individuals that are able to both communicate and educate will have a leg up on the competition in the future.

State Street’s Suzanne Duncan Reveals Investors’ Biggest Mistakes (Institutional Investor)

Further Reading:
Should Fund Managers Care About The Behavior Gap?
The Secret Sauce of the Investment Business
From Black Magic & Sorcery to Finance 3.0

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  1. chris simpson commented on Apr 01

    Great post. I especially like the points of ‘Fund performance over
    actual investor returns; Marketing materials over counseling; Self-confidence over self-awareness.’ We see the behavior that is rewarded. Rarely do we
    see this violated. True for financial advisors as well as raising
    kids. The “internet of all things” provides new financial options that
    are becoming increasingly simple and challenging the way industry
    (financial and otherwise) thinks and acts. Love it.

    • Ben commented on Apr 01

      Thanks. I’m hopeful those challenges continue. I still think it’s going to take a while but we’re heading in the right direction.

  2. Scott Boone commented on Apr 01

    Good article. In the course of my career, I spent a number of years as a “Wealth Adviser” for a large money center bank, the purpose of which position was to advise wealthy clients on how to invest their money and then shift their assets down the generational ladder. However, I quickly learned that my real function was to translate in terms that a client could understand the often obscure and overly technical advice they had received from their legal, tax and investment advisers. I also came to understand that one of the best things I could do for a client was to simply listen to what they had to say and that with a very few questions, a client would often tell me their most important needs and wants. The irony is that I spent a good deal of my career developing my technical and sales skills when what may have mattered more was some genuine empathy and a willingness to listen.

    • Ben commented on Apr 01

      Great point. Knowing and understanding your audience is an under-rated skill, especially in the investment industry. I always liked the Carl Richards line of make sure you listen before your subscribe a solution. Most in the industry have a solution before they even hear the problem.

      • Scott Boone commented on Apr 02

        Exactly! I often told clients that I was their “financial doctor,” and that I could not provide a diagnosis until they had described their symptoms to me.