Of Cabbies, Portfolios and Clients

Being in New York City recently and riding in a fair number of taxis over several days, I was repeatedly reminded that NASCAR has nothing on Manhattan cab-drivers.  Flying up the West Side Highway while weaving in and out of traffic was both exhilarating and terrifying.  I was also reminded that cabbies drive in much the way that people typically manage portfolios – alternately “putting pedal to the medal” and slamming on the brakes.

We do that for a variety of reasons.  To begin with, we tend to focus on short-term results above longer-term performance and the investment process.  In the shorter-term (and sometimes longer!), even the best process can underperform and even a dreadful process can succeed (sometimes it’s better to be lucky than good). We also respond to marketing that is passionate and certain to the exclusion of work that is careful, measured, thoughtful and honest, which can cause us to act rashly.  In general, we like to be told what’s right rather than be shown what’s working. That preference leads to ideological rather than data-driven decisions, and that’s a huge problem.

If you think I’m wrong, or even if you are unconvinced, listen to the political marketing that will be virtually omnipresent this fall.  Most of it will be cast in moral rather than practical terms. It’s the way we’re built.

Advisors and money managers are prone to these same defects, of course.  This is largely understandable in that they (we) are human (obviously) and thus subject to the same foibles as everyone else.  Moreover, they (we) are responsive and responsible to clients, and no client is entirely comfortable with losing money or underperformance no matter how thoroughly the plan and its risks were explained and agreed upon.  For example, risk mitigation sounds great to clients when they are terrified, but they still tend to be pissed when the markets rally (even temporarily) and their lower risk portfolios underperform the high-flyers.

For advisors, the key question is how to respond to these realities.  In my view, that means deciding whether to build a business for the long-term or merely to trade-as-you-go. That means acting as a fiduciary and building a business via fees rather than commissions. Some clients won’t be satisfied with the long-range view and it hurts to lose clients.  Moreover, it’s usually harder to attract clients without shiny objects and claims of certainty.

That’s unfortunate, but nobody claimed this was going to be easy. I know that the long-term doesn’t pay the bills when one is just starting out (and getting to “critical mass” within a fee context can be very difficult), but once established with the right type of client, sustaining such a business is easier and it’s also a lot more fun. Best of all, it’s the right thing to do. Instead of reacting to the next new thing or the latest gyrations of the markets or the talking heads on CNBC, you can actually build relationships and, in the process, help people reach their goals and even their dreams.