Automation Will Destroy Financial Advisers

Way back in the day, financial advisers were hard-working sales people who matched investors with products they needed.  The profession morphed into a refuge for trust fund babies who needed a real job on their resumes to meet their multi-generational trust's inheritance requirements.  The brokerage infrastructure grew into a multi-headed hydra, mixing an investment bank's cute ideas into proprietary products.  The age of Big Data and artificial intelligence (AI) is about to turn this whole enchilada inside out.

The virtual financial adviser is an interim step toward full automation.  A new generation of financial salespeople are managing relationships via Skype and Google Hangout, all without ever meeting their clients in person.  Tech-savvy investors want a personal touch but don't have time to trek to meetings.  The brokerages with the most tech-savvy compliance architectures have approved social media channels for marketing.  The firms' other IT challenge is grafting on archiving systems that allow firms to record client contacts in social media.

Human advisers working remotely are a bridge to the wave of full automation about to break over anyone in finance who manages client relationships.  A full stable of fully digital wealth management firms deploy AI interfaces that cut out human advisers completely.  Machine learning teaches cloud-based AI algorithms how to behave when a human client asks financial questions.  Fully automating client relations cuts out the layers of back office people who processed client orders and designed financial products.

The end of overhead in wealth management means a drastically lower headcount.  Employee compensation is the single greatest expense in the finance sector.  Eliminating the lazy idiots kicking back and counting their bonuses will save money for clients.  Part of the cost avoidance will undoubtedly leave more earnings on the table for the shareholders of automated brokerage firms.  The SEC should breathe a sigh of relief at the dramatic reduction in broker misconduct complaints.  Fewer human operators of any system mean fewer human-caused errors.

The creative destruction that the cloud / AI / Big Data paradigm brings to finance will change Wall Street for the better.  Branch managers won't have to act in loco parentis for trust fund baby brokers because neither will be needed anymore.  Client decisions aggregated into Big Data packages will arbitrage away the investment products that cost too much and deliver too little alpha.  I suspect index funds and ETFs will be the biggest product winners because they are simple to build, cheap to operate, and easy to distribute to AIs from wholesale channels.

I wish tech had been this mature when I was a financial adviser from 2005-2006.  I could have blasted out emails, scored social media followers, and closed accounts electronically.  Tech has finally caught up to the needs of sophisticated clients.

Nota bene:  Alfidi Capital is not a registered investment adviser (RIA).  Anthony J. Alfidi is not a financial adviser.

The Hidden Agenda Behind Retail Investment Proprietary Products

I despise proprietary investment products.  These are investment securities specific to one brokerage, usually created by its investment bank or wholesale asset management arm.  They've been around for years and need to go away.  Like mutual funds, they've outlived whatever usefulness they possessed at their creation.

Internal hedge funds are stupid and probably a conflict of interest.  The academic research on the inability of actively managed funds to deliver alpha over the long term is clear.  The high expenses and volatility of hedge funds magnify this deficiency.  Firms that create internal hedge funds use them as dumping grounds for securities they couldn't sell to retail investors and as make-work jobs for well-connected insiders who have nothing better to do for a few years.

Structured notes and principal-protected notes are just as dumb.  They represent positions on a given sector or theme that knowledgeable investors can execute themselves with option strategies.  Credit spreads and collars on ETFs are a whole lot cheaper than some note underwritten by an investment bank.

Proprietary products IMHO accomplish two functions very much in the interest of brokerages.  They tie a client's assets to one firm and tie a broker's book of business to one firm.  Think about it.  A client who is dissatisfied with a broker and wants to move assets elsewhere won't normally be able to transfer the brokerage's proprietary products.  They must be liquidated, incurring a capital gain, if the client wants to move all of their assets.  This sets up the client for a very discouraging conversation with their existing wealth manager:  "Oh gee, you can't move all those structured notes I sold you because the gains will mess up your asset allocation.  You can't move your hedge funds either because you're locked in for five years."

A broker who wants to jump to another firm will face similar hurdles if she or he sold a bunch of proprietary stuff to a significant number of clients.  The top-producing big shot who just had their gross payout reduced will have to think hard after realizing that proprietary products aren't portable from one firm to another.  They are a crude form of "sticky" money that stays with a firm regardless of a broker's customer service skills.

Smart investors ignore sales pitches for the in-house favorite funds and notes.  They cost a premium, which firms and salespeople like to collect, but add little to a well-diversified portfolio (i.e., large and small caps, laddered fixed income, hard assets, etc.).

Smart brokers ignore the internal bonuses paid for sales of proprietary products.  They keep their books of business portable by focusing on widely held fund families and individual securities that any brokerage can hold.

I used to be stupid about proprietary products but I eventually got smart.  I have not owned proprietary products since 2006.  I tried to sell them to prospects when I was a financial advisor in 2005-2006; no one bought them from me.  One prospect even ran away screaming when I described how a principal-protected note worked.  I learned about structured notes' stickiness the hard way when I moved my assets from the full-service firm that fired me to a discount brokerage.  The structured notes wouldn't move until I sold them.  They netted out to just about zero gain after transaction costs.  I will never invest in proprietary products again.

Financial Sarcasm Roundup for 03/18/13

Prepare yourselves . . . for sarcasm.

The Cyprus deposit theft is egregious.  Anyone who read what I wrote yesterday knows this is bad and that natural gas as bailout collateral would have been a far less damaging option.  If you read about what I did with my money today, you'll know I believe this bailout-theft is a marker on the road to the euro's dissolution.  Eurocrats wargamed the tamest possible parameters in their bank stress tests because they are afraid to model a six-sigma event like a retail bank run or a chained series of popular revolts.

The IMF's push for a European banking union is an effort to close the barn door after the horses have escaped and the barn has caught fire.  There may not be much of a European banking system left after the events set in motion by the Cyprus debacle this week have run their full course.  The IMF might have more credibility if it renamed itself "Impossible Missions Force" because that is the task it is setting for itself.

Stupid institutional investors rushed into U.S. Treasuries out of fear.  The point of seeking security from deposit confiscation in an asset class that cannot keep up with inflation escapes me.  Professional money managers will be stuck on stupid until their portfolios are devastated and they are starving in the street.

It's cute that young students want relationship management roles in financial services.  I'd tell them that wealthy clients don't want them but the youngsters won't listen.  The only relationships most of them will handle in a wealth management office involve answering phones and fetching coffee.  Clients want one and only thing from a relationship manager, and that is wealth.  Whipper-snappers fresh out of college don't have wealth unless they come from wealthy families, in which case they will be handed all the relationship management work they ever wanted without lifting a finger.  Mommy and daddy's little broker makes the country club geezers proud.

Are you prepared yet?  Don't answer me.  Just prepare for more sarcasm.

UBS Pays Bonus to Execs Who Lost Money

It doesn't get any dumber than this at one of my previous employers.  UBS lost $2.6B in 2012 but paid its executives exactly that much in bonuses.  I do give the Swiss credit for precision in matching the bonus to the loss amount.  The supervisors I witnessed there in 2005-06 were sometimes competent and sometimes clueless.  They should note that moving up the ladder will require them to be more clueless than ever.

UBS also paid its new head i-banker $26M before he even showed up.  I'm not sure what this guy did at BofA to justify that kind of incentive, since BofA has only survived the last five years thanks to government handouts.  The clawback provisions won't matter because they won't be used.  The promise of future M+A action will largely go unfulfilled as the global economy re-enters recession.

The financial sector is the only part of our economy that rewards leaders who do not deliver shareholder value.

Full disclosure:  No position in UBS at this time.

UBS Loses Footing In Europe Thanks To Tax Authorities

UBS just can't do anything right lately.  They lost a couple of billion dollars a few months ago when a rogue London trader made a wrong-way bet.  JPM's "London Whale" had nothing to fear from that dude; he harpooned himself.  Anyway, UBS's latest headache comes from non-Swiss tax collectors cracking down on scofflaw clients.  They can say goodbye to a bunch of well-heeled clients who thought they could avoid prying eyes.

I used to work at UBS and I had zero success at doing business their way, so of course I relish watching them squirm.  I believe many of their problems stem from the consulting geniuses they brought on in the mid-2000s to run many of their global departments.  These whiz kids in their 30s had zero experience in traditional Swiss banking but they didn't let that stand in the way of their transformation efforts.  I'm still waiting for the full effects of their genius to bear fruit.  We shall see just how exposed UBS truly is to the Eurozone's debt crisis and whether the whiz kids did a bang-up job at erasing internal risk controls.  Forget UBS.

Criminal clients who want to hide assets from the developed world's tax authorities are going to have a rough go.  No Swiss-branded private bank can shelter them anymore because Swiss banking privacy laws are now full of more holes than Swiss cheese.  I predict we'll see more billionaire tax cheats buying their way outright into the good graces of "frontier" economies' ruling elites.  Oh, BTW, legitimate law-abiding clients won't benefit much from UBS either.  There's nothing there in product or service that you can't get cheaper somewhere else.

Full disclosure:  No position in UBS or JPM at this time.  

The Haiku of Finance for 04/14/12

Swiss bank surrender
Staff not shielded from tax probes
No more secrecy

People Lie About Wanting Financial Advice From Ex-Military

I don't enjoy being angry.  I read something today that made me boiling mad.  Some survey claims that Americans value military veterans as financial advisers, and that this estimation increases with a respondent's affluence.  I need to state for the record that nothing could be further from the truth.

I spent over a year as a financial advisor at a major wealth management firm.  I worked harder than I ever have in my life to acquire clients.  Every prospect I encountered - with two exceptions - completely ignored my military experience as a selling point for my abilities.  The two exceptions were unique; one had very little liquid net worth to invest and the other was a phony who had zero net worth.  All of the other prospects regarded my military background as something to disregard.

People with serious money to invest want it managed by someone who's achieved a comparable level of success.  I find it telling that the Edward Jones survey above mentioned households with incomes of $100K or so.  I hate to break this to the 1300 ex-military advisors they employ, but their careers will be short if they focus on acquiring people at that income level.  Wealth management firms are increasingly discarding advisors who pursue clients with net worth under $1M.  Making $100K/year isn't going to get anyone to millionaire status in an America beset by price inflation, equity overvaluation, creeping hyperinflation, and a rapacious elite bent on regulatory capture and financial repression.

I employed all of my military-acquired skills to establish trust, build rapport, demonstrate an extreme work ethic, prove my integrity, and persevere in the face of adversity.  All of those traits turned off people with serious money.  All of those attributes got me terminated.  Most veterans hired as financial advisors don't realize that they're just filling an affirmative action quota and will be gone in a year.  That's why brokerages can afford to brag that some percent of their sales force is comprised of veterans.  They know that annual turnover for lack of production enables them to keep hiring and firing unsuspecting veterans over and over again.  Americans who say they want military veterans as financial advisors probably don't make enough money to afford an advisor in the first place.  Too many people just don't know what they're talking about.  

Morgan Stanley Salivates Over Smith Barney

Another brand name brokerage may be headed for complete absorption by a long-time rival, in this case Smith Barney.  Morgan Stanley is reportedly hungry to devour the chunk of Smith Barney it doesn't already own.  That would be the final unraveling of the house that Citi built during the late 1990s in its bid to become the first true global financial supermarket.  Its acquisitions of Smith Barney and the Travelers insurance group proved to be so unwise that it has unwound much of what it bought since then just to raise enough capital to survive.

I recall doing a case study of Citi in 2002 for my MBA class in M+A.  I was the lone voice in the class arguing that Citi's mergers would prove to be a strategic disaster and I was able to sway my teammates to agree with me.  Another team gave a competing presentation arguing Citi's mergers would work out great, relying exclusively on DCF projections and other quantitative estimates without any qualitative assessments of strategic fit.  Ah, memories.  It goes to show that academic rote only gets you so far.  Truly insightful analysis often requires an intuitive leap.

Citigroup would be wise to sell its stake now before the renewed recession hits retail investors' portfolios and Smith Barney's revenue.  Oh, BTW, none of these firms ever seriously wanted to hire me so I wouldn't be terribly bothered if they all suffer.

Full disclosure:  No positions in MS or C at this time.

UBS Not Minding The Store While Trader Wipes Out $2B

I can't resist taking a swipe at a former employer that treated me poorly.  A loose cannon at UBS decided to play some unauthorized games with the firm's capital and lost $2B.  I think that's just great.  I'm not surprised at all given the lack of competent people there.  If you're dumb enough to gamble with somebody else's money with no regard for consequences, work at UBS.  If you don't know how to design risk management systems that can catch irregular trades, work at UBS.  This firm touted its Dillon Read internal fund while I was there and had to fold it up a year later because the people running the fund were clueless.

Go down hard, UBS.  You've had it coming for the longest time. 

Full disclosure:  No position in UBS at this time. 

Financial Brands That Should Disappear

The folks at 24/7 Wall St do a great job stirring up controversy with their annual list of familiar brands that are in danger of disappearing.  It takes guts to go out on a limb and claim that some venerable companies are on their way down the tubes.  In the spirit of the moment, let's think about why some financial brands that should have disappeared are still around. 

Merrill Lynch.  These guys were spiraling down pretty hard in late 2008 until Bank of America agreed to buy them out.  The deal made little sense for BofA; they already had a presence in wealth management and investment banking and would have been stronger had they just stayed away from Merrill Lynch.  This is where ego trumps business sense.  CEOs who want to be known for closing the biggest possible deals retain the prerogative of throwing due diligence out the window.  Way to go, BofA.  Grabbing Mother Merrill did nothing but make your TARP bailout needs grow. 

Goldman Sachs.  Do a web search on this firm and you'll see its tentacles in every business sector on the planet.  The firm is insanely profitable but the way they do business raises questions about whether the firm has a conscience.  "Vampire squid" pretty much nails it.  Warren Buffett considers GS to be a good investment precisely because its amorality enables it to be so dominant in the financial markets.  Amorality is not necessarily a recipe for immortality.  Someday their enemies list will reach a critical mass and their moles at Treasury and the SEC won't be able to save them. 

AIG.  The continued existence of this firm is a strong argument that U.S. financial markets are rigged by the government.  The firm's credit default swaps in 2008 were so radioactive that they almost single-handedly took down the economy.  Hundreds of billions in TARP assistance later and taxpayers still hasn't received a decent return on their "investment." 

Compiling this list is depressing.  These firms will probably be around for a while.  That doesn't mean I have to do business with them. 

Rich Is A Quarter Million Annual Income

Right now I'm listening to the weekend edition of Marketplace on NPR.  There's a lot of discussion on the mentality of the wealthy.  Many rich folks don't seem to think they're rich, even if they're centimillionaires.  That's funny.  I would definitely think of myself as rich if I reported that kind of adjusted gross income on my IRS Form 1040.  I'll go with the argument that a $250,000 annual income qualifies an American as rich.

Pundits spent a lot of bandwith defending extension of the previous Administration's tax cuts.  The focus was on redefining wealth upward to portray quarter-million incomes as non-rich.  The meme won thanks to help from mass email lists and the blogosphere. 

The Census has a detailed breakdown of thresholds for relative affluence based on educational attainment.  The data for holders of master's degrees imply that I'm affluent.  I'll buy that.  The odd part is that the people I meet at the San Francisco Opera probably consider me to be unworthy of being affluent.  I'll buy that too.  I'll also buy their real estate out from under them when deflation wipes out their bond portfolios and hyperinflation leaves them too illiquid to pay their bills.

RIP Roy Neuberger

It's rare to see passion for the arts and finance combined in a single human life.  Roy Neuberger, founder of investment firm Neuberger Berman, lived such a life.  Mr. Neuberger passed away recently at the age of 107.

I honor him for achieving his stated life goal of using a finance career to promote the arts.  Too many investment professionals get those priorities reversed, using connections in the arts community merely to further their own pecuniary interests.  He was fortunate to begin his career with substantial wealth, and lucky enough to preserve it through the Great Depression.  Luck is an inescapable part of all success.  That luck later enabled him to support the work of countless artists. 

Good job, Mr. Neuberger. 

You And BS Dress Code Hilarity

I couldn't pass this one up:

It took no fewer than 43 pages for the human resources department at the Swiss bank UBS AG to establish what bank personnel should consider acceptable corporate attire.

The spoiled brats and trust fund babies running You and BS think a detailed dress code can make up for years of poor strategy and illegal tax advice.  Flesh-colored pantyhose would make the perfect stocking stuffer for a certain Victoria's Secret beach bunny manager type I used to know when I worked there.  Good luck getting senior managers to give up cuff links. 

I used to work in one of their San Francisco offices several years ago.  The rich preppies running the show despised my honesty and competence.  They thought I was a joke.  Actually, their dress code is the real joke. 

Nota bene:  I have no position in UBS stock.