George Rebane
In the 21may22 Union’s inserted adverts there was a slick one from local investment advisor and financial columnist Marc Cuniberti. He is now “accepting new clients for the markets of 2022”, who no doubt have formed a line outside his office door. Jo Ann and I are lifelong investors who, from time to time, have allowed various investment advisors and wealth managers to manage a part of our portfolio. All of these people have been of good reputation, trustworthy, ethical, professional, and careful, quick, and kind. But none of them have been able to match our own acumen in the markets, and all of them have required payment of perverse money management fees. So, we have switched them out, and finally decided that, while we can do well in portfolio management, we’re not worth a hill of beans in picking investment advisors.
In recent years I have been given to quite a bit of puzzling in the financial engineering field, and quite successfully, I might add. My claimed forte is in the areas of monetary utility and risk tolerance. (see figure) In those endeavors I have had a jaundiced attitude toward the wealth management industry that charges you a fee regardless of the performance they deliver on your portfolio – they play a ‘heads I win, tails you lose’ game. As an entrepreneur and algorist I offered our last advisor an opportunity to retain our account by modifying his fee structure so he would have more skin in our game.
In the new ‘skin in game’ (SIG) fee structure, we would split our portfolio’s annual gain, say, 80/20, with him during profitable years, and we would pay no fee for years with no gain. Instead, we would then get a dollar amount credit for the year’s end market value loss in our portfolio. The credit would be applied toward gains in profitable years. There were a few more obvious details involved, but you get the idea. If he made us a bunch of money, he would also get a heap more than the percent or so of the total year end value of our portfolio. In other words, he, like us, would be betting on his performance with a SIG fee structure. Sadly, he wouldn’t touch that deal with a ten-footer, and since then I have talked with a number of money managers in our circle of friends, and they were of the same mind – ‘No way Jose!’
So circling back, how do we choose a money manager in today’s investment world? Then looking at Mr Cuniberti’s ad this morning, the idea of a Performance Registered Advisor (PRA) came to me. To become a PRA, an investment advisor would first qualify for some existing certifications that put letters after his name before applying to Portfolio Registration Services (PRS), the auditing and clearinghouse that vets and maintains the nation’s PRAs in good standing. PRS would charge a nominal fee for its services from its members.
To become a PRA, an investment advisor will have to have at least one half of his gross assets in a registered and audited portfolio of investments of the type that he offers to his clients for two years – in short, at all times his clients would be able to invest in the same securities that make up the advisor’s R&A portfolio. Each PRA’s R&A portfolio would be audited monthly for its market value and yielded dividends. With modern brokerage houses, this would be a completely automated process. The PRA would then publish monthly the financial performance metrics of each PRA, and allow the PRAs to include these nationally-reputable metrics in their advertisements and other promotional materials. For obvious reasons the R&A portfolios’ specific securities and asset allocations would remain confidential. The published metrics would include such items as percent gains/losses YTD, 1-year, 2-years, …, 5-year, etc. The PRS may also publish (for a fee?) the PRA’s performance by investment sector – say, real estate, energy, high tech, commodities, etc.
With this data available, the retail investor now has reliable information on the investment performance of the candidate advisors he is considering in his short list. And, of course, if a wealth advisor chooses not to become a PRA, then the client would want to know why, before giving the candidate further consideration. But the bottom line is that such a new and transparent view of the investment advisor industry would immediately cut through the BS in which today’s investors find themselves inundated by all the slick ads that address none of their concerns about the management of their portfolios.
Pay Gaps and System D
George Rebane
Frankly, it’s a bit eerie how the events long predicted on RR are ticking off as recently having happened, or about to happen. Here I want to focus on the infamous pay gap of the American worker, and an economic activity that is hard to track, but globally significant.
Income comes in two forms – wages and profits/interest. As has long been argued here, the pre-Singularity years are illuminated by worker productivity abetted by screaming technology advances. Using new gizmos and software, today a worker can make more and/or service more per unit time than yesterday, and even more tomorrow. Given that the size of the markets requiring new stuff and services is not growing as fast as productivity, the result should be predictable for people who think.
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