In a variety of contexts, the DOL has suggested that it doesn’t think this change to a fiduciary standard for retirement assets is all that big of a deal. And conceptually, it isn’t. It needn’t be a big deal to replace a suitability standard — whereby recommendations must be suitable but not necessarily in a client’s best interest — with a fiduciary standard.
The problem, Santa, is that the DOL, through 1,000-plus pages of regulatory requirements, set up a complex framework that must be followed whenever retirement asset investments are involved. This framework touches every aspect of the BD business and requires a complete overhaul of everything that happens therein: paperwork, systems, technology, operations, oversight and supervision, surveillance, training, compliance and more.
Every BD I’m familiar with has spent enormous amounts of time and money to try to comply with the new rule (which, again, isn’t altogether bad because advisors should be fiduciaries), but almost none of that spending relates directly to client care.
My latest ThinkAdvisor article is now available. You can find it at the link below. Here’s a taste.
With the possible exception of the inverting demographic pyramid, I expect climate change to be the dominant investment challenge and opportunity of our time over the long term. But I don’t expect it to play out quickly. For most traders, an actionable item is one that can and should be undertaken right now and is expected to pay off essentially right away. But no matter how often I point out that lunch tomorrow is not a long-range plan, I don’t seem to get heard all that often on this point. What I offer is an action item that will almost surely pay off in the longer term for those with the necessary patience based upon any reasonable interpretation of the available data. The climate is changing and those changes will have to be dealt with sooner or later.
The “skeptics” and even governmental opposition conceptually do not trouble me in the least. As Bruce Chadwick put it, “if your investment horizon is long enough and your position sizing is appropriate, you simply don’t argue with idiocy, you bet against it.”
“I keep making terrible decisions and can’t seem to stop.
“Last year I left my home, my family, my friends, a 20-year secure (if uninspired) career, to move 2,000 miles away to be with my first love. I’m 50 and I was his first love as well. He’s married and his wife invited me to their home. We decided to share him, although his wife and I were not interested in one another like that.
“My job here fell through. My dog died. The romance flopped spectacularly. I still love him desperately. And when he told me that it was over and that he didn’t love me and never had, I begged him to reconsider, only to have his wife come in and start screaming at me to keep my f***ing hands off her f***ing husband.
“I snapped. I tried to kill myself. I ended up in a coma and then went to the psych ward. I have been out for only a week. I’m back at work. I’m freshly diagnosed as Bipolar I. I’m on new meds I don’t think are helping. Of course I had to move out and I’m living a very lonely life. I do not feel stable and I cry for hours every night. The loneliness is killing me. I have psychiatric follow-up and intend to do what I can to survive and thrive.
“My former boyfriend is now making noises about wanting to be ‘friends with benefits’ with me once I am ‘well again,’ which sounds more like he wants a self-supporting mistress that he can come and have sex with and then leave at will. I still love him but I realize this is a gross affront to my worth as a human being. I just don’t trust myself to say ‘no.’ Counselling may help but I still don’t trust myself to make good, healthy decisions. Everything I do blows up in my face.
We humans are shockingly prone to bad ideas, ideas that routinely grow into poor decisions and then metastasize into behavior that may undermine, severely damage or even ruin our lives and futures (see, e.g., Weiner, Anthony). In the words of Kant, “Out of the crooked timber of humanity no straight thing was ever made.” We share a pitiable and cracked nature desperately in need of a repair job nobody seems qualified to perform. We’d all like to think that we’re a lot better off than the letter-writer above, and most of us probably are (if not nearly so self-aware), but vanishingly few of us has a consistently good track record of decision-making and none of us is as good as we think we are. We’re all too much like the party girl in the Busby Berkeley movie musical Gold Diggers of 1935’s surrealist closing number, “Lullaby of Broadway,” who ends up dancing herself right out of a skyscraper window to her death.
Accordingly, the idea that we act in our own rational self-interest with any degree of regularity is, quite obviously, ludicrous and falsified every single day by our choices and our lives. Worst of all, we readily recognize such self-destructive behavior in others but consistently and tragically lack the ability even to see it in ourselves. As legendary physicist and Nobel laureate Richard Feynman warned , “The first principle is that you must not fool yourself – and you are the easiest person to fool.” The Apostle Paul also (an odd pair for agreement if ever there was one) made the same point (Romans 7:15): “What I don’t understand about myself is that I decide one way, but then I act another, doing things I absolutely despise.” We just can’t seem to help ourselves.
Despite the enormity of this problem, the investment portfolios we design, recommend and manage routinely discount or even effectively deny the overwhelming evidence of our cognitive and behavioral weaknesses and how they impact our financial decision-making and well-being in favor of technocratic attempts at efficiency and optimization. In the immortal words of Pogo, “we [may] have met the enemy and he is us,” but we don’t seem very willing to try to do very much about it.
William Goldman is an Academy Award winning screenwriter, novelist and playwright. He wrote Butch Cassidy and the Sundance Kid, All the President’s Men and The Princess Bride and some other excellent films. He famously said the following about the movies, but it applies much more broadly.
“Nobody knows anything…… Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.”
Josh Brown stated why perfectly: “People can’t be accurately modeled. And it’s people who work and vote and invest and trade and make deals and stick things into themselves that require a trip to the emergency room.”
This dangerous reality implicit in our portfolio construction choices ignores an irrefutable fact: no matter how fantastic the financial plan or how perfect the portfolio, they don’t do a bit of good if the plan isn’t followed and the portfolio maintained when times, markets, situations and feelings change…as they inevitably do. Or, to turn the problem on its head, as Josh would have it: “You can boil down whether or not a financial advisor is adding value into a single metric, you might even say it’s the only metric that matters: Retention. Do clients stay?” Therefore, a “Mary Poppins” portfolio – “practically perfect in every way” (when the “every way” means analytically and not behaviorally) – won’t usually be good enough, to the extent it even exists.
Our lives change. Our goals change. Our outlooks change. Our situations change. Our risk tolerances and profiles change. Emotions run high. Life gets messy. Are our financial plans and investment portfolios robust enough from a behavioral perspective to cope when that (inevitably) happens?
In my experience the answer is, “Usually not.” For example, we (clients and advisors alike) are always prone to performance chasing – buying what has been working well recently and selling what hasn’t been working and thus buying high and selling low – which inevitably leads to losses when mean reversion sets in and to excess trading generally. “In hot markets, money flows in,” says Professor Ilia Dichev of Emory. “In down markets, people get scared and leave.” As a result, stock investors lagged behind the stock market itself by 1.3 percentage points annually between 1926 and 2002, according to Dichev’s research. Even pension plans and other institutional investors earn an average of at least three percentage points less than the funds they buy. In other words, “past performance is indicative of future beliefs.”
How we might strengthen portfolios so as to withstand the weaknesses of human behavior is thus the enormous challenge this analysis sets out to explore. Continue reading
I had been fitfully and uncomfortably sleeping, dreaming of a small dog licking my leg and stealing my snack. I awoke to find an escaped boxer with a cute face avoiding my eyes and licking her lips. Once the flight attendant found her rightful owner, who was not nearly as embarrassed as she should have been, I reassess my situation.
I’m still more than an hour behind schedule and said to be losing even more ground on account of intense headwinds. I’m still scrunched into a long metal tube with the seat-back in front of me compressing my kneecaps into my hips while hurtling cross-country, still several hours from arrival home in San Diego. I’m tired from lots of planes and being away from home for too long. I’m not in the most conducive spot I can imagine for counting my blessings.
But count them I shall, as part of this birthday reflection. “Birthday luck” describes a nuclear explosion of luck that is supposed to happen inside you on that day, giving you the ability to do anything. I don’t really have birthday luck, of course, but my luck is so good that it’s hard to tell the difference.
We are self-serving creatures to the core, of course, and self-serving bias is our ongoing tendency to attribute our successes to skill and our failures to very bad luck. Being an early investor in tech stocks was really smart while being long and wrong in 2001 was really unfortunate. But the reality is that luck (and, if you have a spiritual bent, grace) plays an enormous role in our lives – both good and bad – just as luck plays an enormous role in many specific endeavors, from investing to poker to winning a Nobel Prize. In fact, if we’re honest, we’ll recognize that many of the best things in our lives required absolutely nothing of us and what we count as our greatest successes usually require great skill and even more luck.
That my birth, which I celebrate tomorrow, was into a loving and stable family that valued education and industry was not my doing. That I was born into a land of freedom and opportunity that would allow and even provide the means for a child of working class parents with just one high school diploma between them to pursue and secure a world-class education was not my doing. I merely had to provide sufficient effort. That I was blessed with some ability and interest in a field that provides a good living and constant stimulation was not my doing. I merely had to provide sufficient industry. That I have a boss who supports and encourages me in work I love is not my doing. That I married extremely well and have three terrific and productive children who have also married extremely well is only partly my doing (and surely less my doing than I’d like to think). The wonder of delightful grandchildren is grace personified.
I could have been born in the 7th Century. I could have been born in North Korea. I could have been born into a family that abused me. I could have had to struggle for even minor educational advancement. My boss could be a jerk. My children could be disdainful. My wife could be a little less wonderful (though I doubt it). My grandchildren might never visit. As the great Frederick Buechner puts it, “all moments are key moments and life itself is grace.”
So truly – happy birthday to me. For much of it – verily, for most of what’s happy about it – I have luck (and grace) to thank.
This post initially ran on October 14, 2013.
The story has essentially attained the level of holy writ, at least to those committed to data and evidence, such that it now seems almost too good to be true. The quick-and-dirty version of the tale is that stats geeks with computers, like those former player and broadcaster Tim McCarver called “drooling eggheads,” outsmarted and outmaneuvered the stupid yet arrogant “traditional baseball men” who ran our most traditional sport at the professional level and who thought they knew all there was to know about the game. Thus, it is said, everything the old-time baseball men thought they knew about evaluating players and teams has been found wanting, not that those whose day has passed, committed to wizardry and witchcraft as they are, have recognized it.
This revolution – as shocking as it has been comprehensive – is said to have brought about the ultimate revenge of the nerds. The geeks now run the baseball show, having moved the level of analytical precision involved in running teams and evaluating players from zero-to-sixty in a flash. The new breed of “baseball men” aren’t grizzled scouts looking for “five tool guys” but, rather, Ivy League educated experts in computer modelling and statistical analysis who use those skills to determine who to scout, who to sign, who to play and how to play. The prevailing narrative describes this new contingent as dominating professional baseball at every level, down to the depths of the independent minor leagues.
Is the analytics overhaul of baseball proper as complete and comprehensive as the telling claims? No. The real story is much more interesting and enlightening than that.
Baseball is particularly amenable to the use of statistical analysis because it offers large sample sizes, discrete individual-performance measures (such as plate appearances, pitches, and the like), and ease of identifying positive results (such as winning, home runs, and the like). However, when humans are involved – and baseball is as human as can be – interpretation of the underlying data is highly complicated.
Great interpretation of difficult data sets, especially those involving human behavior, involves more sculpting than tracing. It requires great skill, imagination and even a bit of whimsy as well as collaboration as to whether the various interpretive choices are acceptable (not to say the right) ones. That’s why we understand reality better with respect to the natural sciences than in the social sciences. As ever, information is cheap but meaning is expensive.
To lead off, let’s recall that if it seems too good to be true, it usually is. To see what I mean by that in the context of our story will require some in-depth analysis of its own, starting with more than a bit of background information and history. Continue reading
“As I write this, the yield on the long-bond is roughly 2.25%; the yield on U.S. Treasury 10-year notes is just over 1.5%. That’s a long way from 15.32% and 14.68% [1981 levels]. There isn’t much room for further price appreciation today, and yields are anemic at best.
“Starting from such low yields means that, after adding a reasonable inflation forecast, the real expected return on U.S. Treasury paper is effectively zero. Bond yields, which are roughly equal to their expected nominal return, are so low that the current environment has been characterized as one of ‘financial repression’ by Larry Siegel of the CFA Institute Research Foundation and Tom Coleman of the University of Chicago in that current rates are depriving the economy of one potential growth area via income from savings.”
Al Davis, the late owner and general manager of the Oakland Raiders, had a famous motto for his team, “Just win, baby.” Nothing else mattered, or so he claimed. The Raiders did that on the opening week of the season Sunday, beating the New Orleans Saints, 35-34, when Derek Carr hit Michael Crabtree on a fade route for a two-point conversion in the last minute of the game.1
Two words. Powerful emotions. Searing memories. Evocative stories. Fifteen years.
Fifteen years ago, on Tuesday, September 11, 2001, I was sitting in front of a Bloomberg terminal when the first, cryptic hints about trouble at the World Trade Center crawled across the bottom of my screens (I think). I had been scheduled to fly to New York the day before and had reservations at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed. Instead, I decided to stay home and go to a “Back to School Night” presentation at my kids’ school. As the day’s events unfolded, I recalled having been on the Merrill Lynch fixed income trading floor at the World Financial Center doing a STRIPS trade when I heard and felt the February 26, 1993 World Trade Center bombing. I was really glad I didn’t get on that plane to New York.
My little, not so evocative story is insignificant within the context of the tragic losses, horrible evil and incredible heroism of the “American epic” to which that day bore inexorable witness. But it is what happened to me. It provides context and a framing device to help me remember and think about what transpired and what it means. It is emotional to think about still. But many other stories are far more important.
The image reproduced below is central to several other converging stories from that dreadful day.