Neo: I don’t like the idea that I’m not in control of my life.
Morpheus: I know exactly what you mean. Let me tell you why you’re here. You’re here because you know something. What you know you can’t explain, but you feel it. You’ve felt it your entire life, that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I’m talking about?
Neo: The Matrix.
Something is wrong, very wrong, at the heart of the investment advisory industry.
Many of my most astute colleagues, who like your author have more than two decades of experience in private banking advising high net-worth clients, know in their hearts that something has gone awry in our trade. Far from improving, the situation is worsening, and the very tools of our profession (deposits, stocks, bonds, annuities) are increasingly inadequate to build a portfolio for our clients that will satisfy their fundamental needs for capital preservation plus reasonable, low volatility growth over time.
Like Neo in “The Matrix”, we face a choice. We can take the blue pill and ignore these doubts about our current toolkit. We can take comfort in empty concepts such as “stocks for the long term”, “buy and hold”, or “value at a reasonable price” or the misleading “value at risk” methodology. We can continue on our merry way, hoping that things will work out eventually, despite the increasing body of evidence to the contrary.
Alternatively, we can choose to take the red pill, admit that we need to free our mind of outdated concepts in order to find better tools and methods to serve our clients, and get to work to find solutions. This article is written to motivate investment advisors to have the courage to take the red pill and embrace Alternative Finance for the benefit of their clients.
Investors, or Savers?
One of the fallacies that has enslaved the minds of investment advisors is the idea that their clients are “investors”. My experience is that this is patently false. Warren Buffett is an investor, George Soros is an investor, but most of our clients are in fact simply savers, even if they can correctly be profiled as “sophisticated investors” and hold substantial wealth. They hold for one reason or another an accumulation of financial wealth that is not needed to finance their living expenses in the short or medium term (though it may well be needed for retirement) and seek to earn a reasonable return on this money. A “reasonable return” for most would a few percentage points above the current inflation rate in their base currency, but crucially with a primary emphasis on capital preservation.
Most clients would be perfectly satisfied to earn this sought-after return on their capital through bank deposits, and have done precisely this until very recent years. Here the bank serves its classic function of paying a reasonable interest rate to take deposits from those who have a surplus of money, and charging a somewhat higher interest on loans issued to qualified borrowers who have a deficit of money during a given time period. This is a win-win situation, as the savers earn a return on their hard earned savings, while the bank serves as an intermediary to allocate this surplus capital to consumers and business people to enable them to finance their purchases or investments to grow their businesses.
Bank Deposits No Longer an Attractive Investment
In recent years, this model, so essential to our economy, has to a large degree ceased to function. Central banks throughout the developed world have pushed interest rates to historic minimums hoping to stimulate sluggish economies and lower chronic high unemployment rates. Returns from bank deposits both in the US and Europe are now rarely above 1% per annum. The lost interest income to those who save through bank deposits has made a dramatic impact in any reasonable estimate of the amount of money necessary to provide sufficient income for a secure retirement. The official and lasting policy of low interest rates in the developed countries has forced many savers to move from the security of the government-insured bank deposits to assume a much greater risk as investors in the capital markets in order to attempt to earn an acceptable return on their savings.
