Scale: Wall Street Can’t

Taking Reformed Broker’s Advice– I chopped this post into bite-sized pieces (I’m still over the word limit).   I’d love to master the long form like @JAltucher. Until then… part 1.

One of the things my colleagues will tell you about me is my obsession with scale. Not my weight. — Econ 101– the ability to add incremental business with less cost & effort.

I obsess about it: be it account applications, software, email, new clients, heck- holiday cards… I think about scale.

Frankly, they’ll tell you I’m annoying about it.

Where it comes up most daily is for a trade.

Anytime one of my advisers has a trade idea, I say great– now “scale it” across our entire client base. And believe me, each of us get ideas; Heck, we’re an idea factory– we all love the markets. We watch it everyday like it’s Manchester & Arsenal. And some of the ideas we come up with are even good. Short bonds?! Next big trade, probably. Want to dabble in currencies? Here’s a dollar. Pick of the Year? Japan. {these are all bs predictions btw or are they?}

And the technology exists for us to do it too. Now, we can place a trade across every account in two clicks (okay 5).  And sure, we can customize large accounts, but for most– we recommend one of the models we manage– keep it simple, if you can.

Why? Because at the end of the day, we are not a hedge fund where people expect something sexy. Nor do we charge hedge fund rates. We aren’t a mutual fund where people want faceless, soulless portfolio management (that trails their indexes anyway). And we aren’t traders. We are a shop that is an advisory firm. And the reason for our existence is for people to bank on that advice.

As such, everyone of our clients needs to be on the same page, the same basic field. And an adviser should limit themselves to sustainably provide said advice on that field. Because no one can risk the brand equity of bad advice. If we fail, people DIE!!! It’s just that simple.

{Is he joking?}

But the point is, if that hot idea of yours isn’t scalable practice-wide it’s taking away from the marginal effort, not adding.  And as such, at my firm they all know– we need every adviser with the same bottom line opinion about our approach– the MIB of advice, if you will.

But something different happens everyday on Wall Street– all these ideas & products du-jour that we refrain from at my shop, are mixed into bolted-on trades creating hundreds of thousands of Frankenstein portfolios across the country. And people don’t even question it, heck they still gobble it up. Every advisor is an island in a sea of advice. And, maybe your island even wears a Hawaiian shirt on Fridays.

But I still remember 2008; the confusion– not one advisor AT ANY FIRM had a clear signal from theirs on what to do in that mess. Other than stay on the phone; which is just common sense.

Sad. Because really the firms have become too big to offer any real, “hang out your shingle” advice then. Sure, buy signals and sell signals on some stock or esoteric macro report that the news picks up for a day or two– but always timed to contradict another report within the firm, so an advisor has a solid 50/50 shot at being right.

That’s the Wall Street of today.

And here’s how it plays out– daily.  Your advisor (aka broker in adviser’s clothing) gets a good trade idea, or that hot research, a new fund, a manager, or some awesome bond– And calls 100 clients. 30 answer, 10 play phone tag, 10 want to think about it, 15 will never call back, 32 buy, & 3 want more information {they always want more information}, and the rest?

Well, by the time I got through the paperwork (god the paperwork) and those 32 transactions were done, the position had moved up/down, or out of inventory.  And sure I’d call the next 100 clients, but for most of them I wouldn’t get the trade I wanted. So, move on to the next _____. And then again with the next 100 clients still.  That’s the average advisor’s life.

And tomorrow? Some great muni bonds and CDs hitting inventory…

A shark’s existence; dying if you ever stop moving. No scale. None.

So, does my obsession create some missed opportunities? Yep.  Does it limit what we can do? On purpose. Because it also keeps us process driven, backtestable (yeh, i know- not a real word.), and completely scalable.

to be continued…. (part 2)