The Insolvency of Robo-Advice

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The Insolvency of Robo-Advice

Stockholm syndrome: A psychological phenomenon described in 1973 in which hostages express empathy and sympathy and have positive feelings towards their captors, sometimes to the point of defending and identifying with the captors.
 

It’s an age old question:  “How much should I have in stocks?”

An equally old trick to answer it was to reply with the following:

“100 minus your age is how much you should have in stocks.”

So if you were 60 years old, you should have 40% in stocks.

It’s a pretty simple quick-fix to address a rather complex portfolio optimization problem.  It is also actually quite accurate.

The PhDs reading this post this might be frustrated, but this quick fix (100 minus your age) will be more than mathematically sufficient.

Why?  Because there is a larger inherent mathematical irony that no one wants to talk about:  8% returns may be gone forever.  Warren Buffett has said this at many Berkshire Hathaway annual meetings, and McKinsey just highlighted this in their latest paper (Click here to read it).

What McKinsey has said is that decades of actuarial tables used in calculating what a fiduciary/prudent man would do when investing are now no longer viable.  Previously used 8% US stock returns may now be between 4.00%-6.50%.  US bond yields, previously assumed at 5.00%, may now be between 0.00% to 2.00%.

That’s a significant change of expectations.  Let me give you an example from another perspective.

Several years ago, I did a segment on CNBC (click here to see it) wherein I showed that the Dow Jones Industrial Average would need to be over 23,000 for pensioners to break even.  That was several years ago…look at the DJIA now.  Are we even close?

How did I arrive at this?  I took the market levels (high and low) from 2007 and extrapolated them out using an 8% equity return.

That is what everyone did with their financial planner/broker/wealth advisor then in 2007.  Obviously the math did not work, nor did the markets cooperate.

And what have we done today?

We have programmed the robo-advisors to do the same calculation.  The robos are using the exact same actuarial tables with the same expected market returns.

What does that mean for pensioners?  By default, they will allocate a large portion of their portfolio (remember, it is 100 minus your age) to very low yielding bonds.  The remainder will be in low return equities.

These are the same low yielding bonds that almost guarantee they cannot live on their pension distributions. Simply put, the interest rates are too low and they will spend their retirement faster than they expected.

Yet the robo-advisor will calmly and accurately drive them to that outcome.  And, they will do it for very low fees.

So the pensioner, will slowly and methodically be driven to insolvency.

The young millennials get hit twice.  One, by the actual lower market returns achieved, and two as society taxes them more, and saddles them with more debt, to make up for the pension shortfalls.

What should the robo-advisor do, or have done?  It should tell its users to save more, work longer, and cut costs.

But, which robo-advisor tells you to not invest?

One last question for you to solve as you consider the above: What do you think the quick answer should be now?  Is it “100 minus your age?” or is it something lower? Maybe 70?  Let me know what you calculate.

In the interim, we can watch the robo-advisors economically and efficiently drive the pensioners in our global society to almost certain insolvency.

 

 

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The Fin-Tech Fallacy

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The Fin-Tech Fallacy

You call it procrastination? I call it thinking
Aaron Sorkin
 

As the public markets trade sideways, investors have worked themselves into a frenzy over “FinTech”. The FinTech assumption is that financial institutions are absolutely incapable of innovation, and are being mercilessly out-maneuvered by young innovators and disruptors.

Or are they?

Let me challenge the current euphoria, and use the innovators own material as a basis for comparison.

Case in point: original thinking.

TED talks recently had a fantastic talk about “The surprising habits of original thinkers” by Adam Grant. The link to it can be found by clicking here or below:

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In it, Grant highlights three key facets to original thinking and “Originals”:

  1. They procrastinate
  2. They feel fear and doubt
  3. They have lots of bad ideas

 

Let’s look at this via a well-known example. Apple launched a unique GUI with the first Mac. Great product. Great advertising. Great buzz. But no commercial viability.

Microsoft watched and carefully followed Grant’s paradigm of original thinking. From that came Windows and Bill Gates ...the wealthiest man in the world.

As Grant says: “Different and Better”.

Who learned from that? Steve Jobs.

The next time, Jobs applied his creativity differently, pragmatically and ultimately succeeded. Look no further than Apple’s market capitalization today.

As we look at FinTech, and overlay original thinking, the fallacy lay in several key themes:

  1. Are any of the technologies truly unique?
  2. Is there any viable path to profitability?
  3. Does it have the balance sheet to withstand regulatory scrutiny?

 

Or, is the FinTech reality one simple truth: lower prices/costs.
Challenge me. Take a hard look at each FinTech vertical: Peer-to-peer, crowdfunding, robo-advice, block chain, etc. Show me one that negates the three themes that I have highlighted.
Or, is the FinTech reality about cheap human capital, iterating in isolation, whilst the financial institutions wait, and then do something different and better?

…I think you know the answer.

In the weeks and months ahead, I look forward to sharing with you the success stories of the improvers as they simply make things different and better.

 

Frank Troise is one of South East Asia's leading voices on FinTech. He is a Managing Director and Head of Digital Distribution (Asia) for Leonteq (SWX: LEON)  He is an active advisor to many of Asia’s leading financial firms, management consulting firms, technology companies, venture capital funds, hedge funds, and start-ups. 

 

 

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Nyquil Market Musings

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Nyquil Market Musings

Been fighting a nasty cold this past week, so forgive the quick bullets. But here’s what’s resonated with me these past few weeks (watch my latest CNBC appearance):

  • China stated lower growth, US stated higher rates…why is anyone surprised about the market’s reaction?
  • Oil at these levels is historically stimulative…where’s the bid (or demand)?  With a "2" handle it gets interesting.
  • Nastiest FinTech quote of the week: “Robo-advisors are “SaS” models…Should ‘a Sold”. Ouch.
  • Harvard 5-year case study in the making on reserve management: Buy treasuries when yields are high and when your currency is strong. Sell treasuries when yields are lower and your currency is weaker. Then watch everyone vilify you. Who we talking about? China.
  • Another funny quote: “Why don’t we hear anymore buzz and PR about P2P debt?”…”Maybe ‘cause they are making money…
  • The Standard Oil Trade of the Month: Buy Fracker High Yield. Who is buying? PE. Who is the $$ behind the PE? You guessed it. Classic JD Rockefeller playbook. My production costs are lower than yours…
  • Compare China to Canada, South Africa, Japan, and Australia. Who really devalued?
  • Amazing watching Japan preaching to China about capital controls.
  • Low oil targeted three problems: Iran, Putin, and alternative energy. When does Putin get upset? When the dollar weakens. Watch for him to wake up soon...
  • Are we nervous now? No.
  • Get bullish folks. Want to play? Buy FANG (Facebook, Apple/Amazon, Netflix, Google)
  • The set it and forget it trade? Buy Alibaba and sell any bank leveraged to the teeth

…Back to my Nyquil. Nite!

 

Frank Troise is one of South East Asia's leading voices on FinTech. He is an active advisor to many of Asia’s leading financial firms, start-ups and technology firms. 

Mr. Troise has over twenty years of experience managing multi-billion dollar portfolios for corporations, endowments, foundations, and high net worth individuals.

Mr. Troise’s research, work op-eds, and career have been published in The Economist, Institutional Investor, The Wall Street Journal, Barrons, The Sacramento Bee, The Pacific Coast Business Times, Noozhawk, Derivatives Weekly, Pension & Investments, and Investment News. His investment letter has over 12,000 accredited readers and he is a frequent commentator on CNBC in the USA and Asia regarding market strategy for Squawk on the Street, The New Retirement Series, Power Lunch, Capital Connection, and Street Signs.

He is married, has two young children and relocated with his family to Singapore. He is extending his family office experience to South East Asian families. He is originally from New York and remains a devoted (frustrated) Yankees fan. He has an MBA in Finance from New York University and a B.S. in Managerial Economics from Carnegie Mellon University.

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2016's Top FinTech Predictions

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2016's Top FinTech Predictions

Coming into the 2015 year-end I thought several notes would be of value relative to what I, and my colleagues, have seen this year in FinTech that warrants focus going into 2016.  As a prelude, let me begin with this quote:  "Remember, in a death-match, Dragons Eat Unicorns."

That said, and in no particular order:

Remember, in a death-match, Dragons Eat Unicorns

 My advice? If you are a small institution, sell. If you are a large firm, innovate yourself out of business (look to Aviva as a model for constructive disruption), and acquire the small innovators. If possible, move to Asia immediately...Singapore and Hong Kong are your beach heads.

From a user experience standpoint, remember: the innovation is the removal of the legacy process. Think how Uber removed the payment experience…there is none. That was the innovation.

Lastly, as I begin my second holiday season in Singapore, I want to send my very best to everyone worldwide whom I have had the opportunity to work with in 2015. Your insights, honest feedback, and global perspective were invaluable. I wish you and your families the very best this holiday season and I look forward to our collaboration in 2016!

Frank Troise is one of South East Asia's leading voices on FinTech. He is an active advisor to many of Asia’s leading financial firms, start-ups and technology firms. He is the founder of SoHo Capital LLC a US-based Registered Investment Advisor and holding company. 

Mr. Troise has over twenty years of experience managing multi-billion dollar portfolios for corporations, endowments, foundations, and high net worth individuals.

Mr. Troise’s research, work op-eds, and career have been published in The Economist, Institutional Investor, The Wall Street Journal, Barrons, The Sacramento Bee, The Pacific Coast Business Times, Noozhawk, Derivatives Weekly, Pension & Investments, and Investment News. His investment letter has over 12,000 accredited readers and he is a frequent commentator on CNBC in the USA and Asia regarding market strategy for Squawk on the Street, The New Retirement Series, Power Lunch, and Street Signs.

He is married, has two young children and recently relocated with his family to Singapore. He is extending his family office experience to South East Asian families. He is originally from New York and remains a devoted (frustrated) Yankees fan. He has an MBA in Finance from New York University and a B.S. in Managerial Economics from Carnegie Mellon University.

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The Fiduciary Hypocrisy

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The Fiduciary Hypocrisy

I like all of the talk regarding fiduciaries.

Especially in light of the number of senior citizens who are in deep trouble right now.

How does one explain a fiduciary to a retiree?

Think about it.  The DJIA should be somewhere between 22,000 to 26,000 if we use 8% returns from either the high or low in 2007.

So, that means everyone is WAY below their retirement target.  REALLY way below.

That means we would need a level of unprecedented market returns to get back to "whole".  That is not going to happen.

Are any fiduciaries telling retirees that?  Or are they simply collecting fees?

As a fiduciary, what is your primary mission?

According to Wikipedia, a fiduciary:

In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice or protection is sought in some matter.; [2] In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

Let's go back to the retiree.  

They expected 8% per annum in equities.  That's gone.

Let's look at the yield curve: Ten Year Treasuries at 2.26%.  Not good.

So there is no other mathematical outcome that works for the fiduciary to explain, other than to terminate themselves.

Think about that for a second.

Under ANY asset allocation scenario using "prudent man" measures, the fiduciary is GUARANTEEING that the retiree cannot make their goal.

All of the old "100 minus your age" formulas get tossed in the garbage.

The TRUE fiduciary would tell their client that they have to take more risk.  BUT that violates every tenet of a fiduciary.

Imagine telling a senior citizen that they need to take more equity risk?

Ironically, and mathematically, that is what has to happen.  But a true fiduciary cannot do that.

So, a true fiduciary is in a lose/lose.

One last point. In light of the return numbers reflected above...what does that make a robo-advisor?

*I am personally curious who can reply to this in a manner that their compliance departments will allow*


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