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Portfolio > Asset Managers

What Do Gundlach and Goldman Really Think of Advisors?

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Sometimes a reporter attends a session at a conference whose content ends up somewhat distant from his reader’s concerns.

What to do? Report on it anyway, and try to get readers interested in areas that are peripheral to their concerns? Or extract the insights that more targeted to the readers?

In truth, it depends on how bridgeable a particular gap is. In this case, the session at the Milken Institute Global Conference titled “Follow the Flow: How Asset Management is Reshaping the Global Financial System” appeared promising for a financial advisor audience, all of whom are interested in, well, asset management and are broadly concerned with the global financial system. The ever-popular Jeffrey Gundlach of DoubleLine Capital also seemed promising.

But in truth, the session was really by and for asset managers, as opposed to retail financial advisors, so this reporter will follow the second strategy: conveying the thoughts of intelligent and well-informed speakers made en passant — of interest to advisors.

These ideas are not part of a coherent message — since the subjects covered in the session focused on the synthetic credit market, de-equitization and SIFIs — systematically important financial institutions; all of these subjects were wrapped in coherent arguments.

Perhaps the most important insights relating to advisors came in an exchange between Gundlach and Kent Clark, who runs one of Goldman Sachs’ in-house hedge fund divisions.

Listening in on this asset manager to asset manager conversation was revealing.

Gundlach was explaining that robo-advisors are a new force increasing asset concentration in the investment industry. As money pours into these online platforms, assets are flowing increasingly into ETFs.

The reason, he argued, was that everybody says they want the same thing: “growth plus safety.” So the algorithm is sending more and more assets to the same ETFs.

Asked by the moderator to explain to a crowd of asset managers what exactly these robo-advisors are, Gundlach said:

“The financial planner industry has very wide range of delivery. A lot of … asset gathers do nothing; others are very creative. With robo-advisors, the costs are low. So the draw is the lack of overall success by human advisors at three or four times the cost of an algorithm, or spreadsheet advisor.”

Gundlach’s overriding point, of course, related to the subject of asset concentration. He was arguing that one-size-fits-all solutions channel people into the same investments, which then introduces systemic risk.

But advisors can hear in this internal asset manager conversation both the sting of rebuke and the call of opportunity. Advisors have to find a way to add value.

Goldman Sachs’ Clark picked up on that, this time offering the sting of rebuke and call of opportunity to end-investors whose natural tendency he said was to engage in herd-like behavior.

“A lot of people were …getting out of equities in March 2009, then waiting till the record high to get back in.”

“There’s value to having people who do something we don’t do,” he continued, referring to financial advisors.

Having someone whose job it is to encourage people to hold on, even at a price, holds more value than not paying that price and not having that support, Clark went on to say.

So that’s what they think of you? Well, yes.

For added measure, another panelist, David Harding of the British quantitatively oriented hedge fund Winton, added:

“People do buy recent returns, and that is the fundamental pitch of the financial services industry.”

This is all good, meaningful feedback. By listening in to this conversation among well-informed, high-level investment industry executives, we have learned (actually, re-learned, but reinforcing our learning is vital) that:

  • Investors behave in predictable ways that tend to harm their investment performance.
  • Many — perhaps a great many — financial advisors are focused more on the business end of their work: gathering assets rather than financial planning. This kind of behavior leads to the sort of customer dissatisfaction that has fueled the robo-advisor phenomenon.
  • All this spells opportunity for advisors who make the creative planning for and solving of their clients’ financial issues their paramount concern. And even the creative geniuses among the planner population may find they contribute the greatest good in the most basic task of them all: keeping their clients from acting on emotional impulses — selling when markets fall or “buying returns.”

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