Over the past few decades, I have watched the financial industry change. Some parts have evolved quite slowly, while others shift rapidly. But I am always amazed at how some business models manage to hang on despite overwhelming proof of their lack of purpose or value added.
Some parts of the investment world exist simply because people don’t know better. The information is out there, but it is obscured by a relentless parade of advertising, promotion and marketing. The truth gets lost behind a smokescreen of noise and deception. Indeed, there are increasing numbers of people who are employed for just that purpose.
Ignorance: It’s a job creator.
But rather than merely complain, what if we take a look at the parts of the financial industry that don’t create value.
Fund of funds: I have been critical of hedge funds that charge too much for the privilege of failing to deliver alpha, or market-beating returns. But what should we make of the fund of funds that charge an additional fee for the privilege of selecting underperforming hedge funds for investors? However they get paid — a layered fee on top of other fees, or directly from the hedge fund — they create conflicts of interest and/or drags on returns. How these continue to exist is beyond my comprehension.
Retail commission brokerage: I am perplexed at how long the retail-brokerage industry has managed to hang around. In the late 1990s, I expected it to come to an ignominious end. It morphs and thrives, even while under pressure from many different directions.