What Skills does the Market Value in Financial Services?

This is a question I have been asking myself with increasing regularity – and the answers seem to be increasingly disappointing. With regard to the Finance Industry, I am witnessing more individuals trusting their financial security and future to people with a smooth sounding sales pitch but no substance to their production. It is clear that the relationship building aspect of financial advice is taking precedence over any ability to add value. It is difficult to blame the industry for this, as people always have, and always will, respond to appropriate incentives – and the majority of behaviour is not illegal, or even immoral – performance is simply secondary to the relationship.

I am not going to rant about the advisor who literally steals from his clients – everyone knows this is both immoral and illegal – and thankfully, the regulators are clamping down in these instances. What I find puzzling, and somewhat disappointing, is that advisors who devote more time to pitching their business to clients often build a larger book of business, despite an often inferior service offering. Likewise, advisors who invest the time and effort in educating themselves and making more informed decisions for their clients, often find that they are unable to devote as much time to building their book of business.

In addition, there is often an asymmetric incentive involved in the relationship – it is far easier to invest a client’s account in a risky portfolio with two possible outcomes:
1)      The risky bet pays off with a large return, thus cementing the relationship and encouraging further risk taking behaviour.
2)      The risky bet fails (more often) but the advisor has already cleared their commission, and even if the relationship ends, they can simply move on to the next client.

The issue with this model is that there is no outcome where the advisor loses; they are essentially long a call, with their downside risk capped at the time invested in signing up the client.

The best option that I can see to counter this imbalance is to increase public speaking and general relationship building skills in schools – once everyone can relate to another human being comfortably, the emphasis will shift to the actual value added – rather than the client’s comfort with the advisor.

The other solution – which is borderline impossible to implement, is a ranking system for financial advisors. This would need to provide an objective framework for assessing the performance of an advisor against another. There are a multitude of problems with this approach, beginning with the cost (in both time and dollars) of measuring performance to a single standard (see GIPS).

Maybe this is all sour grapes, as I am disinclined to be the gung-ho salesman chasing every piece of commission I can – but there is no doubt that the more clients fall for these simple sales pitches – the more advisers will implement this method. Much the same as in the dating world, where the fact that single guys who are the “nice guys” are marginalised, while the douche bags who will lie, cheat and steal for sex, find themselves surrounded by girls, leads to more of the nice guys saying “screw it – why treat women like princesses when they respond better to disparagement” – advisors will use the methods that generate the most business for them.

So – People of Australia – Please select your Financial Advisor based on what they can do for your finances, not because they have a good sounding sales pitch!

Why I Hate Charting...

As you can see from the title above, I am not a fan of charting, or technical analysis in general. I’ll always have a look at a chart when I am investigating a stock, but I will never make a trade decision based on technical indicators. There are two main reasons for this, the first of which is that I have never taken the time and put in the effort to really understand how to apply this style of analysis. I have always been somewhat dubious of the efficacy of charting, in spite of the innumerable books, blogs and media on the subject, but I find it hard to believe that trades that occurred yesterday/last week/last year will dictate the direction of a move in a stock tomorrow/next week/next year.  

The second reason for my aversion to technical analysis is derived from the saying “a picture is worth a thousand words”. Many people are looking for the path of least resistance when it comes to investing, and it is easier to look at a chart, apply some indicators, and presto! Decision made. I find that this methodology is particularly prevalent in young men in the broking industry, and a lot of the methods that they are using are essentially data mining. There are so many indicators that can be applied in even the most basic charting package, that you can almost always justify both a buy and a sell on a particular stock at any given time.

I write this all with the caveat that I am sure there are dedicated professionals who are diligently working away on their charts, and understand exactly what they are doing, however, I find that all too often; it is a smokescreen to justify an investor not wanting to put in the research time.

I find myself walking past people with their market data up, and more often than not, they have dedicated up to half their monitor real estate to a chart with so many lines on it, that it looks like one of those magic eye puzzles I used to have when I was a kid – you need to stare at the screen and walk away slowly, then maybe it will come into focus. However, I rarely see these same “market experts” reading other sources of research, and certainly never have they got the latest annual reports or financial statements open.

This is understandable, researching company statements and financial reports is boring, for most people, and they are complex – even with an extensive financial education, and years of experience, they are difficult to interpret. However, if you are using the same charts and the same indicators as everyone else in the market, don’t be surprised when you come to the same conclusion as everyone else, and end up losing your money.

Opening Bell

Hi All,

I am writing this purely as a record to show what I think regarding particular investment opportunities at a given point in time. The goal of this blog is simply to record my thoughts as to the current and future intrinsic value of various Australian Equities.

I am based in Sydney, Australia and have long held an interest in the share market, particularly with regard to determining the fundamental value of various stocks, as opposed to a short term, sentiment based value.

I'm not going to try and claim credit for coming up with the methodology, I have read extensively on the subject of investment analysis, and am happy to use techniques espoused by successful fundamental investors such as Warren Buffett and Roger Montgomery.

Please note that I am not an advisor, nor am I qualified as such. I am not providing advice in any way, I am simply recording my interpretation of intrinsic value at a particular point in time. Intrinsic value is not necessarily related to share price - nor do I have any ability to predict share price movements, please do not interpret this blog as an effort to do so.

Regards,

Andrew