Last week I participated in a focus group. This is when fund companies pay participants to sit in a round table discussion and watch behind one-way mirrors. I’ve done this several times and they’re always a great experience. I get to see how other people in the industry think, how much they know, and how they communicate with their clients.
They don’t tell you anything ahead of time, so when the person leading the discussion let us know it was on gold, I felt my heart flutter. I have strong opinions about owning gold, so I was excited to hear from other people in the room. There were three other advisors, each on teams that manage over a billion dollars. Before I go into some of the details, these weren’t kids. Each indicated they had twenty years in the business. Other than that, I don’t know what roles they fill in their company.
Two out of the other three advisors use gold. The one that didn’t said something to the effect of, “Even though stocks are wildly overvalued and we know a crash is coming, gold hasn’t been working and my clients don’t want to own it. We feel we’ve found an alternative that will work much better than gold when the market crashes.” I said, “not to pry, but beanie babies?” He laughed, and then it was my turn to share how I think about gold. “We don’t use gold because financial advisors are supposed to stand in the way of clients and bad decisions, and gold is the ultimate bad-decision asset. Gold is pure emotion. It’s the ‘if everything goes to hell trade.’ People’s view of gold is driven by who is in the White House, how much taxes you pay, whether you’re employed or on government assistance, etc. I don’t dislike gold the instrument, I dislike gold promoters. It is the go-to tool for the apex financial predator. It goes against everything we believe.” At this point, the music started to play me off the stage.
Another advisor said they keep 2% of their portfolios invested in gold, and they aren’t too bullish on it now because it hasn’t performed well recently, and then he made up something about demand in India. The fourth advisor said they’re at 3% of client accounts and have been building a position over the last few months.
Later in the conversation, I clarified my views and said “I see nothing wrong with a permanent 10% position in gold, for example, but the problem is, I’ve never heard of anyone actually keeping 10% of their portfolio in gold. It’s either 50% or 3%, which does nothing. ” One of the guys took umbrage with me saying a 3% position in gold does nothing. I said, “The only reason you hold 3% in gold is to placate your clients in the event gold goes on a run and you don’t own it.” He was perturbed by this. “What are you talking about? There are plenty of reasons to put 3% of your portfolio in gold.” I said, “okay, like what.” He didn’t have anything to say, he just sort of shook his head and we moved on.
They gave us 7 slips of paper, each with different ways to describe what this new ETF would do. The first advisor, the one with an alternative for gold kept making things up. He sounded very confident, but he was literally making up numbers. “The U.S. dollar is at an all-time high, so why would you want to own gold?” This went on the entire time. I actually’d him once, but for the most part I let him do his thing. The other two guys were thoroughly unimpressive, but less bombastic than the other.
I know there are a lot of really talented financial advisors who do a great job for their clients. But I also know from my experience at these focus groups that there are a lot of really lousy advisors too. The last one I was at, an older “advisor” (he worked for an insurance company) asked me how I knew so much about smart beta. I think my knowledge of smart beta is slightly above average, but compared to him (he didn’t raise his hand to the opening question of “How many of you have heard the term smart beta?”), I was basically Rob Arnott.
There’s a point to this story, three in fact.
First, active management gets killed for its high fees and lousy performance, which I think is mostly fair, but the other side of the coin is that the people who directed money into these funds, lousy financial advisors, get a pass. And while the value of an advisor goes beyond portfolio management, being competent is table stakes.
Second, according to the BLS, there are 249,400 financial advisors in the United States. I know “financial advisors” is a catch-all, but anyway you slice it, there are a lot of people out there who just don’t do a good job and deserved to be replaced. There are 13,000 wealth management firms in the United States, according to RIA Database, so when the robo-advisors see charts like the one below, they must lick their chops.
Third, Betterment just received $70 million in funding, at an $800 million valuation. They’re not going away, in fact, they’re just getting started. If you’re an advisor and you’re afraid that automated solutions are going to replace you, you’re probably right to be worried.