Ep. 20 – 21 Questions (Series) – 19. Who manages your money?

Welcome to the Real Retirement Financial Planning Podcast. This series covers the 21 Questions to Ask Your Financial Advisor. The list of questions was inspired by Jason Zweig of the Wall Street Journal, and his blog post: The 19 Questions to Ask Your Financial Adviser. Responses to Jason’s questions I read from other advisor websites lacked depth. “Yes,” or “no,” sometimes needs more context and a greater explanation into the whys. The goal of this series is to target the essence of what I think Jason is trying to protect you from, and help you make a better educated decision.

21 Questions to Ask Your Financial Advisor

19. Who manages your money?

Jason says you should listen for: “I do, and I invest in the same assets I recommend to clients.”
At MARGIN, we use passive investing with light factor exposure (risk premiums) systematically just like I recommend to clients.  No, I don’t “time” my own money, or get cute looking for angles.  I eat my own cooking. But. I’m in my 30s, so my asset allocation is different from most of our clients due to our respective time horizons. 

Will passive investing loose it’s superiority?
If you’re a diehard Vanguarder, and/or efficient markets believer, you may feel it’s a high “impossibility” for passive to loose ground. Ever… You’re thinking: It’s all marketing. He’s trying to get my money into higher fee investments; those “wall street guys” are at it again. Nope…So…Please… Don’t see this inquiry into a possibility as an attempt to overcomplicate, confuse, or sell you active management, so I can create a problem to solve. That’s not the goal. Evolution takes no prisoners, and either does capital markets. Things change. This was summarized by the Grossman-Stiglitz Paradox: If everyone accepts the market is “efficient,” the market will become “inefficient” because their is nobody to price the securities. Active managers will eventually pick off the mispriced securities, and make a profit. Ya, they were decades early on the theory, and it still hasn’t come to fruition, but…   If the father of Efficient Markets doesn’t know, you don’t either… At a recent Dimensional Fund Advisors conference, we had the distinct pleasure to ask Eugene Fama questions. Who better than one of the fathers of finance and the efficient market hypothesis, who’s theory provides the proof passive managment rests on, to ask “the” question we all are thinking…  
“At what percentage will passive break”? Said another way, “How much of the market needs to be passive, for active to have enough inefficiencies to earn a return for clients above their fees?”   Mr. Fama thought about it, and then looked at me: “I don’t know.”  
I’m still a passive advocate
It may be awhile with about 20% of overall global equity assets in passive management. Based on much research, it’s still imprudent to allocate to active management. And. I agree: Most likely for the foreseeable future, passive will keep dominating active. We just don’t know how much of the market can become passive before active managers have the opportunity to earn consistent alpha, and maybe, we will never get to that point. Maybe the active game will get harder…As the weaker players die out looking for the best stocks, the stronger players will be the only ones left making it even harder to compete against each other for outperformance. But. We don’t know how fast passive growth with robo-advisors, the Vanguard effect, and the exponential growth of ETFs, will effect this debate. Time will tell. Most likely we still have a long time to go. The thought experiment is not a sales pitch for active, just a reality that we live in.
Does your advisor eat what they cook, or, do they just sell you high commission products?
Does your advisor say the believe in their superior due diligence investment committee to pick active managers, but then just invests their portfolio passively?