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What This Industry Needs is a Good Disruption

Posted By Barry Ritholtz On March 26, 2012 @ 7:15 am In Finance,Investing | Comments Disabled

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 . . .


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