Last week Bloomberg Businessweek profiled my path from hedge fund manager to personal financial adviser.
You can read the article HERE.
The focus of the article is Warren Buffett’s complaint that most money managers and investment consultants aren’t worth their fees. Naturally, I’m pleased that Fielder is recognized in the article as advocating for a better solution for clients. This, I believe, is a natural extension of our fiduciary duty to ensure that our clients' interests come first.
Of course, the cheapest solution is not always in the client's best interest. Often it is, but not always. Having worked in the active management industry for 15 years, I clearly know that active managers can add value (“alpha”). But it’s so hard to find. Trust me. What I see is an industry of closet indexers (effectively mirroring the market’s holdings). They are, in effect, passive investors masquerading as active managers. They're more interested in building scalable business models than in generating superior returns. The reason is not stupidity. Rather, they shrewdly understand that generating above-market returns requires having a differentiated view. That means a portfolio that doesn’t look like the market. That means a portfolio that will at times under-perform the market, which in turn means they will lose investor assets. Although they may later outperform, it will be on a smaller asset base (since investors will have yanked their money during the earlier period of under-performance). Hence, strategically, it has long been a more profitable decision for a money manager to “closet index” and run with the herd. Better to fail conventionally than succeed unconventionally, as Keynes famously quipped. For decades their clients have tolerated this.
Why is the world all of a sudden waking up? Why are investors, after decades, finally abandoning the closet indexers? Here’s one underappreciated reason: the rise of fee-only Registered Investment Advisers (RIA’s)*, who are required to act as fiduciaries (at all times). In the old days, most people relied on their stockbroker for advice. These brokers earned fat commissions selling high-fee funds. Over the past decade, however, investors have been leaving commission-based brokerage firm advisers to work with independent fee-only RIA's, who have been growing in numbers. (Fielder is one such RIA.*) Fee-only advisers do not accept commissions on the investments we recommend. That removes the incentive to recommend high-fee funds. In fact, as fiduciaries, fee-only RIA’s are obligated to find the best value for our clients. In effect, we are “buy-side” advisers who sit on the same side of the table with our clients. As RIA's have gained share from commission based advisers, this has helped drive the shift of funds away from high-fee closet index funds and into low-fee index funds.
For the record, I have no bone to pick here either way. We will use passive indexes for our clients where they make sense and active managers where they make sense. I do, however, yearn for a world in which it is easier to find active managers who generate significant value net of their fees.
The active management industry will not go away. But closet indexers will. Unfortunately, that’s most active managers based on my research. Those managers who will survive - and thrive – will be those who have portfolio structures and cultures that optimize the potential for market-beating performance.
Amen of the Week
"Ask for money, and get advice.
Ask for advice, get money twice."
- Pitbull (Feel This Moment)
Yours in the Field,
Frank Byrd, CFA
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