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Just to add a 3rd question to balance the other two: "Are financial firms able to change the way they've operated for decades (centuries?) easily?"
by dudul 8y ago
Just to add a 3rd question to balance the other two: "Are financial firms able to change the way they've operated for decades (centuries?) easily?"
- cascom 8y agomy experience with this is that its not whether they are able to - but the cost benefit of abandoning legacy service lines that are still hugely profitable but maybe not be growing (or actually shrinking)
- delecti 8y agoYour question seems to be implying that you believe financial firms are more stupid than greedy. In contrast to Hanlon's razor, I think it's usually fair to assume greed over stupidity.
- kevin_thibedeau 8y agoHence ACH. Greed and stupid combined.
- mlthoughts2018 8y agoYou are just wrong. Being unable to overcome bureaucracy or organizational tech debt is not a matter of stupidity, and various actors up and down the hierarchy can have misaligned incentives that ensure it remains contentious and political. Furthermore, many boutique investment business exist for purposes of client services and plausible deniability on part of the client’s board. I’ll give you a concrete example from when I worked in an asset management company. One client was a large pension fund for a state’s retired firefighters. We showed them time and again a variety of enhancements to the basic portfolio construction product they bought from us, particularly in line with their overall goal of balancing investment in certain sectors across different asset managers to reduce risk. They were not interested, not even on the basis of paying reduced fees for a simpler process. We also talked to them at length about why using a concentrated benchmark for that product (SP500) was a bad idea. Again, not interested. After some months where our performance was pretty flat in that portfolio against SP500, pretty much as we told them we predicted it would be, they fired us. In the client exit interview with two members of their board, they basically told us that each year they have to fire a certain number of the asset managers they do business with, in order to appear proactive and justify getting bonuses for taking action. They obviously didn’t say this directly, but it was clear enough. They ended the call by saying they would be super excited to review re-investing with us later the next year, presumably at which time they have to do musical chairs with which asset managers they hired & fired to look proactive again. Internally, some of my older mentors on the portfolio management team badically said this was the business. Nobody cares what math you use for investing at all. Everybody just uses super stupid linear regression based on outdated factor models from 40 years ago, all using the same data from the same big data vendors. As long as you have hilariously over-credentialed PhDs selling linear regressions based on momentum or price-to-earnings, the clients are happy because you are cover-their-ass hire & fire insurance to them, nothing more. It would not be hard at all for skilled amateurs to outperform these shops.
- ww520 8y agoWow. Thanks for sharing the story. They were literally setting up a strawman to beat down.
- dudul 8y agoI never implied that. Stupidity has nothing to do with the inertia that comes with big organizations and institutions. Of course they're greedy, but sometimes it's easier and more "natural" to make more money by rising fees, as opposed to deeply changing a modus operandi.
- strangemonad 8y agoWhy is a question like this being downvoted? It seemed honest and in good faith – what is it that leads to organizational ossification and stagnation. It might be different factors in different industries.