The financial services industry is in flux. Traditional investing beliefs have become discredited, challenged by experience, factually disproven by data-driven analyses. No, the markets are not efficient; No, human are not rational economic players; No, Buy & Hold is not a successful strategy, nor is frenetic day trading.

The big wire houses are still reeling from their collapse and bailout during the credit crisis. Assets are fleeing, looking for a home where they will be treated better. High net worth clients are reviewing options. Studies show that when an inter-generational wealth transfer occurs, client retention by the majors is in the single digits — more than 90% of big firm clients leave, and take their money with them. So long, thanks for nuthin.’

Can we blame them? The kids have heard their parents bitch about their advisors for 20 years: Cookie cutter portfolios, crashes in 2000 and 2008-09. They may have been well served at times, but the bottom line is still the bottom line — and on that basis, the big firms have failed all too many clients. Hence, the enormous exodus.

Into this void, this industry needs a major disruption. There are all sorts of financial professionals who are disgusted with their own industry. We need to reinvent the concept of investment advisory services. It requires new technology, new behavioral understanding about ourselves, ours attitudes, and our emphases.

The current offerings in Asset Management and 401k plans are under-served by Wall Street. The traditional asset management business has looked at clients as little more than crops to be harvested. It has evolved from a “Churn ‘em & burn ‘em” approach to a “Net’em & forget ‘em” of today. I reject these business models as dangerous value destroying dinosaurs. Why don’t more firms use an approach that applies intelligent risk management metrics and quantitative tools? Why stick with the traditional analytics that have served investors so poorly all these years?

Consider the typical 401k sponsor today: They are focused on high fees, mutual fund driven, layered with excesses. Some have gone so far as to call the entire business “skimming.” It is ripe for a low cost, ETF driven disruptive new model — one that Apple has actually implemented.

What can change this industry? What new technology will alter the dynamic? What legislation will shift the balance of power back to the customers?

What this industry needs is a good disruption . . .

Category: Finance, Investing

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “What This Industry Needs is a Good Disruption”

  1. Moss says:

    The industry has been corrupted by the sense of privilege and entitlement. Enforcement of laws are lax as the regulatory and political class are complicit in the ethical demise. Dump the banks for Credit Unions and use private fiduciaries when possible like Vanguard and Fidelity. People know that the manipulation has benefited those who are direct stakeholders in the industry.

  2. There are a number of needed approaches.

    Here are a few:

    *Enable the political microcontribution and its networking. (this has ramifications that include but go beyond the F.I.R.E. sector)

    *The use of sortition in various areas of corporate governance. (e.g. perhaps some method whereby shareholders or even possibly members from the general population for well-developed and critical industries… are selected via a randomized process… as in the jury system… for oversight and alternative perspectives on Boards, ethics committees, pay committees, etc.

    * Transparency and timely availability of related data enabling direct citizen oversight of the markets (distributed, de-centralized regulatory mechanisms including bounties for the discovery of transgressions) Note: transparency doesn’t necessarily require identifying the individual or institution making the transaction until and unless the need for investigation arises.

    *And, of course… on a personal note… firing and imprisoning where possible the Boards of all the TBTF criminal enterprises… especially Wells Fargo since they’ve stolen my home.

    Compensation and the Social Network

    And speaking of disruption:

    Personal Democracy: Disruption as an Enlightenment Essential

  3. rd says:

    You lost me at “low cost”……

    In the next few months, 401k recipients will start getting statements saying how much they pay in fees. When people with significant 401ks start to realize that they are paying more in mutual fund fees every year than car payments or sales taxes, they will start to demand change. Right now the number is a percentage buried in a prospectus – many people have a very hard time converting that into cold hard cash payments. The new law will help.

    401ks and IRAs are the gift that just keeps giving for the financial industry. Why fix something that ain’t broke from the 401k provider industry standpoint. At present, the employers are just focused on getting the lowest cost to them in record-keeping etc. fees. That means that the expenses on the options get passed on to employees and the 401k industry continues raking in big bucks. The move to have automatic sign-ups just means more income for them.

    I think the change will start once more information is presented in a consumable form.

  4. Old Rob says:

    What is really needed is certain financial institutions going bankrupt, those responsible for the mess going to jail with Bernie or banned from this business, and workers in those businesses losing their jobs from the top down. That gets everyone’s attention real fast.
    Holding per-scripted hearings to satisfy the muppets and boffins does nothing.

    Does anyone really want to read another article or hear another ‘newscast’ featuring Bernanke, or Blankenfein?


  5. xatta says:

    Back in the 90s, I worked at a couple smaller wealth management type offices and then in the dot-com era I worked in the home office of one of the big wire houses. One thing I found was underappreciated was the hand-holding aspect of the relationship. People were not necessarily motivated by the returns on their investments.

    At the smaller offices, the clients were primarily interested in long-term planning and making sure they didn’t out-live their savings. Even at the large, diseased firm the clients were not angry so much about losing money during the dot-com times as they were about the lack of contact from their advisors. Many of the advisors were basically hiding under their desks because they assumed their clients were angry about losing money.

  6. lunartop says:

    I’ll defer to your much greater knowledge of the financial industry but I’m not sure how you can fix that industry when it currently exists in an almost completely central banker driven distortion vortex – reality is a long time gone. What I think really needs fixing is the private sector credit allocation system and all it’s risk weighting distortions.

  7. xatta,

    to your point..
    4. One that depends on the protection of another.

  8. rd,

    with..”…401ks and IRAs are the gift that just keeps giving for the financial industry…”

    no kidding~

    aka..”The Font of the Eternal Bid.”, on ‘one side’, and, another example of “The Goose that Lays the Golden Eggs”, on the ‘other’..

  9. rpseawright says:

    “Buy & Hold is not a successful strategy.”

    This sounds right. I even think it *is* right (at least in a secular bear market). But I think we need to demonstrate its truth rather than merely assert it or (perhaps even worse) pitch it. Where can I find such a demonstration?

  10. DrungoHazewood says:

    Unfortunately, the whole dysfunctional shooting match needs a disruption. I’ll get crushed, but it has to happen sooner or later, and in one way or another.

  11. Mark Down says:

    Beav, Wally, what you do this weekend? Sat around the house and listen to the parents bitch about their advisors.

  12. willid3 says:

    ion not really sure how to fix it. but on of the things might be breaking up the collusion that corporate America has with the 401k and pension industries. the biggest holders of stocks are from these groups. and they aren’t very good stewards mostly because their independence is corrupted by the fact that they earn their income based on how much they get paid for their services. so they are passive investors, more interested in getting the fees and the business from corporate America, which allows management because they don’t have to worry much about making the biggest investors happy, as long as they can make their quarterly numbers look good, they are golden

  13. Conan says:

    First off Buy and Hold exsists because most Americans just want to invest like installment payments on consumer debt. They would rather be watching Reality TV shows than spend a few hours per week/month on their portfolio. This is why the big houses can milk them as they are complacent. It doesn’t take too much time to duplicate with ETFs a simple long term stratagy and use a simple 10 month simple moving average as Doug Short shows to keep you in or out of the market.

    Lastly just as in the last BEAR Cycle ended in the early 80′s consumers will adapt, most likely by just giving up on the market, just as the cycle is ending and not be ready for the next BULL Cycle. so they are always one cycle behind. Which is sad as a cycle is like 16 years +/- 2. That’s a long learning curve! (Nobody wants to study History as American Idol is more intersting)

  14. constantnormal says:

    “What this industry needs is a good disruption . . .”

    “Disruptions” come in many shapes and flavors … what they all have in common is that they represent a severe break from the past norms.

    When you look around, at the lopsided distribution of assets in society and the economy, and their influence in the markets, to HFT, to dark pools, to corrupt business and political practices that go unchallenged, brazenly confident, I think that qualifies as “a good disruption” … it has just not run its course …

    A further data point along this line of thought …

    We are on our way to being a jumble of shards, lying on the floor …

  15. Greg0658 says:

    on 401Ks:
    the so called cash in a #d account needs to change hands out of the company offing said # as a future benefit
    preferably (no as a matter of fact) out of any subsidiary sub or parent corporation

    the need of flow and ramifications of above is well within the IQs of this website

    .. well I’ll add a WarGames quote
    “Stephen Falken: Uh, uh, General, what you see on these screens up here is a fantasy; a computer-enhanced hallucination. Those blips are not real missiles. They’re phantoms.”

  16. willid3 says:

    buy nd hold exists because for the majority of Americans, we don’t have the time to give it, we are busy with our real jobs, and that isn’t just 40 hours any more.

  17. NoKidding says:

    “What This Industry Needs is a Good Disruption”

    Just tell us before you get on a plane.

  18. ashpelham2 says:

    Americans are still dealing with the fact that retirement used to mean a Pension. Very little decision-making was left to the participant/employee. They worked at Company X for 25 years, here’s how much they would collect when they retired. Done. Simple.

    When did it become the normal to make Joe Sixpack become a knowledgable investor to make his own retirement savings? Whoever made that decision clearly had only corporate interests at heart, because this has been a detriement to the average American worker.

    Of course, I meet with retirement plan participants every day, all day. I get their perspective, and they are getting the shortest straw. They know this, they don’t like it, but they are powerless. Corporations will no longer pay a pension benefit. Not even the darling of the ball, Apple. Even municipalities are trying to get out of it. It’s just too expensive, people live too long now, are too sick when they do live. Too needy.

    My particular company in this industry has a niche in the hospital and governmental sectors, and has been taking business from the other players for a couple years solid now. Know why? It’s not because of anything other than being CHEAPER….. I hate that we are sold out now for a race to the bottom.

  19. peachin says:

    The entire industry has become “ADICTED” to easy wealth buildup reinforced by Lobbying (which should be outlawed in it’s entirety – good and bad) A majority of Washington linked to legislation are “sociopaths” drugged by endorphins produced by thru wins so easily attained – with just a few lies and manipulations, written off by most… equivalent to “speeding over the limit” – everyone does it. Power knows no boundaries that’s why we have legislation to curb it. The Legislation is “bought off” so the Power can resume in their consumption.

  20. Conan says:

    Americans are used to a pension. Well I am in my 50′s and have worked on average 5 years for each company, what pension? The days where you graduate from High School (Joe Six Pack) and work 20 to 30 years at the same job have been over for the vast majority of workers for decades.

    The only remaining groups are a few, mainly unionized industries that employ a small percent of the US population and the various levels of Government. So unless you are my Father’s age or my Grandfather’s (and they were basically the only generations to truely lived this life) then forget it. Neither I nor my children will see it, much less my two grand kids.

    The distruction of the extended family, church and charity has been replaced by big government and big corporations. Local solutions of the past are trounced by the big solutions of today. When did big business or big governmen ever have the intrest of Joe Six Pack in mind? Outside of local solutions, there are no caretakers with your interests in mind. Think about it, only you and yours know who you are, for all the rest you are just a cost or a way to earn revenues.

  21. [...] The money management business needs a good disruption.  (Big Picture) [...]

  22. gordo365 says:

    The only way I would continue to use my Monther in Law’s investment strategy / adviser – is if I can get her to change it before she passes.

    Her adviser has her in a bunch of commission based mutual funds with 2% annual fees, and various annuities she has to pay to get out of. WTF?

  23. obsvr-1 says:

    more fodder for disputer justification …

    Gretchen Morgenson: Wall Street Really Does Enjoy A Different Set of Rules Than The Rest of Us

  24. RC says:

    Some have gone so far as to call the entire business “skimming.”

    Exactly. 401k is a way of getting asset based fee model clients (the Fee being hidden from clients) where the clients are captive by the fact that the clients are employees who are forced to invest their money in the fixed options given by their employers. What a f#$%ing scam!!!!

  25. ToNYC says:

    Confidence will not return without an obvious alignment of interests rather than information and co-location arbitrage. The killing field is decimated and harvests only HFT fraudulent static representing volume stripped clean of all meaning. Until then the debris field that began in September 2008 will only continue to populate in slow motion. Apocalypse then; this is now. The Big Bang has bonged.

  26. streeteye says:

    A website to create a simple financial plan and a low-cost ETF portfolio.

  27. AHodge says:

    The entire financial sector costs us about $210 billion or 14% of GDP per year
    as for 401k mgrs
    my rough backout for Regulated Investment Companies RICs alone is $60-80 billion per year

  28. AHodge says:

    enough for a lot of 401k salesmens yachts

  29. rd says:

    Bogle has long advocated a simple 50/50 stock/bond mix. Somebody who simply dollar cost averaged 15% of their paycheck into such a 50/50 fund for the past 30 years with less than 1% expenses would be doing ok today with “buy and hold” even after 12 years of a secular bear.

    For the average person who is dollar-cost averaging into tax-deferred accounts, the trick is to have a well-diversified portfolio, reasonable expenses, not panic, and save enough. The last one of the four requires a lifetime commitment. In many cases, the realization that one has not done that long-term disciplined savings drives many of the poor investing decisions as they now believe they need to swing for the fences instead of continuing to get walks and singles..

  30. cthwaites says:

    “Consider the typical 401k sponsor today: They are focused on high fees, mutual fund driven, layered with excesses”

    Agree but the costs of running a 401(k) are high and unattractive. Costs like: bi-weekly contributions (so lots of small odd lot sums), non-discrimination testing, loans and repayments, filings, required education, having to keep non-employees in the plan….it’s a rubbish business. So the way to pay for it is to get actively managed funds, and their margins, to subsidize the cost.

    There is a much better alterative in Sweden: state run, open architecture, fund administration with 100% participation.

  31. cognos says:

    Nice to see so many of the bearish folks still here commenting.

    Not broke yet? Still affording that internet connection?

    Obsvr-1… still think the economy is all broken? You said – Sep 19, 2010 Re: Epic bad calls:

    @Cognos — your trivializing of the bank failures does not hold this week, 6 banks closed at a cost of 1/3 billion … the financial foundation is still crumbling.

    Or Not!

  32. blackjaquekerouac says:

    Charles Schwab is the first place i would go. He’s been in the “empowerment space” for decades now. Got a little dicey with the implosion of money market fund in 2008. Apple has saved him and the business model. Obviously one need not change the simple S&P index fund either. Through the crisis to today they have been the best place to be…though i would agree not within the crisis itself. If however you were buying “Greenspan notes” going into the collapse that more than offset whatever losses you had in your equity space (simply going long the three and six month t-bill. incredible returns thanx to the worst Fed Chairman in history by far. What a nut.) And of course if you simply stayed the course “you got an equity kicker” as perhaps one the best Fed Chairman in history took over from him. And now all we need is for the American people to vote out anyone in office for more than two years (who cares about political party anymore…right?!!) and “go from there.” It can’t be any more disconnected from reality than the current crop.

  33. pintelho says:

    I couldn’t agree more. Give me the client full freedom to choose whatever vehicle I want to use to invest my retirement savings, also f’ this penalty for taking my money out. If the funds have sucked ass I should be able to vote with my feet to a different fund or different asset class…Isn’t that how capitalism is supposed to work anyway? I allocated my capital to you… you screwed the pooch… as a capitalist you should understand my right to take my capital and allocate it elsewhere.

    I can loose a shitload of money all on my own for lower fees thank you very much.

    However, the products offered are not new. they are just repackaging of the old. mutual fund is now ETF…what is the real difference between these 2 vehicles? nothing really. semantics.

    options? expensive fees, and unfortunately not very liquid except in a minority of the underlyings…however, employed properly can manage risk handily.

    bonds? the average person and even the above average retail investor has very little knowledge about how bonds really work, let alone manage them on their own…i see this as a real opportunity for educating the investment public…bond gestapos are really missing this opportunity….i can’t believe there isn’t a low cost e-brokerage pushing “trade bonds like stocks”

    anyway there isn’t much newness in the industry and clients are yearning for it.

  34. you know, for all of the Squawk about ‘Indexing’, and ‘the ETF is gonna ‘kill’ the MutFund’..

    it’s funny, with the concomitant b*thching about ‘getting 0.50 APY ‘at the ‘Bank’, that no one seems *interested in Covered-Call Writes of Index ETFs..

    those puppies Expire by the end of the Week..

    as ex.

    142.00 SPY120330C00142000 0.72 last trade on the 142 Calls..

    SPY ~After Hours: 141.97 Up 0.36 (0.25%) 7:59PM EDT

    0.75/141.97 ~0.528 % for ~3 Days.. (your Commission/Slippage ‘milage’ will vary..)

    142.00 SPY120421C00142000 1.76 last trade April 142 Calls..

    1.76/142.00 ~1.239% for ~25 days..(ibid.)

    but, really, it’s Simple, make sure to continue to convince yourself that ‘you’re tooo Busy’/’you don’t have Time’..

    that way, you can feel better–paying through the Nose for extremely sub-Par ‘performance’..

  35. baychev says:

    401Ks are not going to change anytime soon. Look no further than how the plans are set up: you get 2-3 ‘family of funds’ choices, I bet you these slots are being auctioned by the employer to the highest bidder for favors of some sort. Then you have the tax deferral scheme that allows the ‘contributor’ to immediately bag savings of 20-30%, nevermind that it would be lost further down the road on commissions and subpar peformance. Whatever happens, you stay with your family of funds or families, your only option to break free is by switching employers which would bag you a significant loss on your deferred compensation.
    Meanwhile the Bernank is debasing the buck to the tune of 5-10%.

  36. cognos says:

    MEH -

    Covered call writing is NOTHING like a bank account.

    You could lose 10-20-30% of your money. Comparing the two… is utterly foolish.

  37. obsvr-1 says:

    cognos Says:

    not the economy, the market is broken

  38. cognos,

    w..”…Covered call writing is NOTHING like a bank account…”

    yes, of course, I didn’t mean it to be a direct comparison..

    was meaning to give a ~Flavor of the ‘general P****ing & M***ing’-heard, oftentimes, these Daze, by peep that don’t want to ‘bothered’ by simple Math..

    this POS allegedly “Yielding” ~7.4%, while ‘paying out’ 200+% of ‘Earnings’, would have been a better example..

    but, past that, the point stands..~