In my last post I sneered at the idea that Masters of the Universe could ever be replaced by machines. To put some more color on that thought, let’s look at my own industry, the financial advisory business.

Like any other industry we have our own food chain, but unlike most industries, where weak competitors tend to get competed into oblivion, the financial advisory food chain is heavily over-populated at the bottom – talk about fat tails!

Why would such a thing happen? Here’s why. Imagine that you are a very wealthy family who also happens to be a bunch of cheapskates. You interview a handful of financial advisors and are shocked – shocked! – to learn that some of them charge a lot more than others. You naturally hire the cheapest firm you can find, Rock-Bottom Advisors. What happens to you?

Every quarter you receive a large bundle of papers from Rock-Bottom called a “quarterly performance report.” This mess begins with a three or four-page description of what happened in the markets last quarter, written by the CIO at Rock-Bottom. If you can get through that without falling asleep, you find that it’s followed by page after page of dense numbers.(1) These numbers are supposed to enlighten you about how your portfolio did last quarter, and they might actually do so if you’d wasted your time getting a CFA instead of building a successful company.

Then, when the Rock-Bottom advisor shows up for your quarterly meeting, things get worse. This fellow (or, better yet, gorgeous babe) is a terrific salesman for Rock-Bottom, but whenever you ask him a question he always has the same response: “We’ll get back to you on that.” Your performance sucks, of course, but at least you’re not paying much for it.

Now let’s move to the top of the food chain and see how things work up there where the oxygen is thin. In this world you receive your quarterly performance report from Lavish Advisors, Inc. and damned if it isn’t a breath of fresh air. Sure, it started off with a (mercifully brief, and sometimes even interesting) take on what happened in the markets last quarter, written by Lavish’s CIO.

But then – voila! – this is followed by a plain English description of what happened in your own portfolio that quarter. Whether you did well, poorly, or so-so, the description tells you what happened and why: managers outperformed or underperformed (and why), your long-term strategy helped or didn’t, your tactical tilts added or subtracted, your opportunistic bets worked out or stunk.

While you are still marveling at this, the report goes on to make customized recommendations, just for you. Should you fire that long-underperforming manager or give him more money? Should you adjust your tactical tilt to be more aggressive or more cautious? Should you take a plunge on that under-valued market sector everyone else is bailing out of?

Maybe you look at the actual numbers and maybe you don’t, but either way you know exactly what happened to your money last quarter and what you should do this quarter. It’s absolutely terrific, plus you get to pay a lot for it.

So back to my topic: being replaced by a machine. This is just my personal opinion, mind you, but it seems to me that the advisors at Rock-Bottom and the other bottom-feeders at the fat end of the financial advisory food chain could easily be replaced by machines, namely, robo-callers. Why bother to go to all the trouble and expense of showing up at the client meeting if all you’re going to say is, “We’ll get back to you on that?” Why not just call it in? This would save Rock-Bottom a lot of money on comp, which means that they could reduce their already-low fees to practically nothing – which, after all, is what they’re worth. This has already happened in the retail world and I think we can confidently predict that it will also happen at the omega competitor level of the high net worth space.(2)

But matters are quite different at the alpha competitor level. If you are going to customize the client experience as described above, you have to hire really smart people who’ve got a whole lot of experience. You have to pay these people lots of money. You’ve got to figure out how to manage a firm populated mainly by 800-pound gorillas. You’ve got to charge high fees and figure out a way to explain to prospective clients why you’re worth it.

Thus, the bottom line is that the folks at the bottom of the food chain can, and probably should, be replaced by machines. But the folks at the top? Ha, ha, ha, ha, ha. You’ve forgotten that you’re talking about Masters of the Universe, my friend, the alpha competitors of the world. No way! (But see “Replaced by a Machine, Part 3 (the Worst Part).”)

 

(1) In a particularly inspired episode of The Office, boss Steve Carrell is presented with a massive bunch of spreadsheets he can’t make heads or tails of. “Explain this to me,” he says to his financial guy, “Like I’m an eight-year-old.” The guy explains it to him. “Ok,” says Steve, “Explain it to me like I’m a five-year-old.”

(2) In case you’ve forgotten your ancient Greek, “omega” is the last letter in the alphabet.

Next up: Replaced by a Machine, Part 3 (the Worst Part)

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.