The landscape has shifted in the investment industry in the last 10 years as indexing has become more popular and costs are increasingly scrutinized. And the industry narrative has evolved with it. Unfortunately, the same underlying problems largely still exist. Let’s explore some of the new narratives.
1) We believe costs matter so we use low fee index funds in our portfolios.
Translation: we’ve realized that index funds are all the rage so we’ve transitioned our fee structuring. Instead of charging you a 1% management fee PLUS a 1% underlying mutual fund fee we’ll use low fee index funds and only charge you the 1% management fee. See what we did there? We kept the costs high, but we changed the message to make it sound like we’re now low fee. You probably won’t even notice!
2) We don’t ever try to predict the future because we know that trying to forecast the markets is difficult.
Translation: we pick assets in all of our portfolios, but because we’re using index funds we’ve positioned ourselves as something that is different from stock picking mutual funds. Except for the fact that we’re still picking our asset allocations and relying on implicit forecasts of the future. Damn, it looks like we are forecasting the future after all and relying specifically on our ability to pick assets. But we’re hoping you won’t notice because we’re using index funds and referring to our approach as “passive”. You haven’t noticed the difference have you? Oh, good.
3) We don’t believe in “active” management. We prefer factor tilting and smart beta strategies.
Translation: we know that factor tilting and smart beta strategies worked in the past because we ran the backtests you dummy! If we can construct the marketing pitch as though these “factors” are ironclad laws of the market’s future returns then we can differentiate ourselves from “active” managers and still sell the idea that we’re a passive manager while still charging relatively high fees. And heck, it’s called “smart” beta for a reason. Because we’re so smart at marketing it that you won’t even notice how dumb it might be.
4) The financial system is a fragile and scary place to be and the government is guaranteed to make things worse. Let us help protect you from this scary world by helping you diversify in alternatives to stocks and bonds.
Translation: our political biases have infected our ability to think objectively. But it doesn’t matter because we know that you will continue to fork over high fees because our message resonates with you. All fiat currencies fail. The Federal Reserve only wants to enrich the banks. The government is large and inefficient. And that means you need to run for the hills with your gold and guns. We might not understand how the monetary system works, but we know that we can sell you fear in exchange for your dollars, you know, those things we’re telling you are so bad….
The narratives still fail, but the message is being sold in a way that gives the appearance of having evolved with the new landscape of the indexing word. Don’t be fooled.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.