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Why pay for anything in financial services?

Some time ago, in a coffee shop in Stamford, I had the pleasure of meeting with one of the consultants affiliated with Bridgewater.  Our conversation centered around the definition of "alpha".

"Their focus is so intense it is mind boggling," I was told.  "They literally look at all of their operational costs, as small and obscure as some of them are, as contributors to alpha."

That comment resonated with me.  All operational costs...even those that were small and obscure.

Ray Dalio has run one of the world's most efficient engines of alpha. (Click here for a writeup of his recent outperformance)

Why would you treat your life any differently?  Why not treat everything as a source of alpha?

Now in P2P lending we have the opportunity to compete disintermediate banks.  We can lend to one another.  Alongside that there is a whole cottage industry skilled portfolio managers who are exceptionally proficient in this space (here is one).

What about FREE mutual funds?  Yes, this is true.  Check out the folks at Replicas who are completely disintermediating mutual funds with Motif.

All of these vocational components of the financial services industry are going away.  Irrevocably going away.

Whats remaining?  Those that can truly create alpha.


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As MP3 players were to the iPod, Wealth Managers are to...


Lot of good blog content this week on comparing Kodak to the wealth management industry.  It's a correct comparison.  The lecture below by Piter Diamandis simply nails it:

Kodak was a well established brand that leased photo processing equipment to local franchisees.  These franchises were the folks that did all the photo work for your kids little league.  Bought the pizzas.  Had the banner with their name on it in the outfield.  Etc.  True pillars of any local US community.

Where did they go?  Literally, in the span of one year they were gone.  Abandoned their leases.  Left the equipment and closed up shop.  How much support did they garner from their local neighborhoods ...when people realized they could do it all cheaper on a phone?  For FREE?  Not much support at all if any.

That's where we are now in the financial advisory business.  It will not happen overnight, but a substantial portion of the business has been brutally commoditized.  It is irrevocably going away.

How long before investors stop paying 1-2% for a "friend"?

Here however, there is one difference.  "Kodak" woke up.  In this case, that's the custodians.  More specifically, Schwab.

Schwab's model is quite clever and practical.  As long as the franchises still keep feeding the mother ship, give them the tools to do so.  In effect, allow the Kodak franchise to sell digital cameras.  

Why don't the franchises see the obvious?  Their dependency on their legacy revenue streams.  They simply cannot pivot out of this.  Tragically, they have become the frog in the pot of boiling water.

For me this is actually the smaller trend to watch.  

The larger one to watch is when the behemoths see that the IRRs work.  These gorillas are really good at creating consumer products globally.  And when they figure it is time (it is inevitable that they will), their entrance will be game over.

So for now, watch the advent of multiple "digital cameras", but really keep an eye for when Apple, Facebook, and Google decide to play ball.

...just too bad they don't buy pizza and banners for the outfield!