This is the second installment in a series of questions I asked other financial bloggers (listed alphabetically). You can see responses to the first question here.
What issue in the world of finance isn’t getting enough attention?
There are people that cover it on a regular basis, but I still think there aren’t enough people that pay attention to personal finance and all that it entails. It’s boring but having your finances in order can be such a huge stress reliever. So you can never have enough material on how to make better decisions with your money. The markets are more exciting, but getting your personal finances under control and systematized is much more important for the majority of people.
As defined benefit plans become a relic from the past, getting individuals to save and invest more on their own behalf. According to the Government Accountability Office, the median retirement savings for individuals aged 55-64 is just over $100k, good for roughly $4k in annual spending.
That hardly anything matters except for your savings rate. Your asset allocation, which robo advisor you choose, active vs passive, asset location decisions, Traditional vs. Roth, all this stuff pales in comparison to your savings rate. Want to be financially independent? The only real secret is to make a huge gap between your income and your expenses. Do that however you’d like – live modestly, make tons of money, choose your strategy. But the gap – the gap is everything.
Probably the effect that investor preference is having on the way the market behaves. We forget that markets are driven by the way investors are taking action in large numbers and by the strategies and vehicles they use to gain exposure. A lot of the action over the last 8 years can be explained by the mass exodus to passive strategies, index products and fee-based advisors. Dip-buying and rebalancing are now a religion, which has undoubtedly changed the way stocks react to negative news and the duration / severity of volatility bouts.
The biggest for me is always the strange fact that almost no one thinks about or even knows how much they pay in financial fees, since they’re priced in basis points (which most investors can’t contextualize) and deducted from your account automatically, where they’re out of sight out of mind. There are people for whom financial fees are one of their largest monthly expenses who literally don’t think they’re paying any fees. This isn’t anecdotal: Two studies have shown that upwards of half of individual investors claim they don’t pay anything in fees for their mutual funds and financial advisors. If you flipped this around and investors got a monthly invoice for their fund fees that they had to write a check for, you’d see a revolution.
Despite the massive outflows out of traditional active funds and into passive and factor-based strategies, there are still several thousand too many investment products. Inertia is an unbelievably powerful force but I still believe strongly that the asset management industry will go through a transformative period of fee compression and massive consolidation. When exactly this will happen I have no idea.
The financial services industry is still very much in a ‘product’ mindset. The flourishing in factor, or smart beta, ETFs shows a general disregard for the true needs of investors. Investors need solutions, not products. That is why the robo-advisor trend is so welcome. It provides for investors a solution to a particular set of issues, namely how to invest a portfolio. Now the industry needs to push forward with solutions to the entire range of financial issues that we all face over our lifetimes.
I am interested in understanding technology’s role in potentially disintermediating financial services. Technology is quickly developing capabilities in peer-to-peer lending, investment advisory, equity capital raising, and underwriting. The financial blogosphere is following this topic, but many of my friends outside of the “finance blog/twitter bubble” are a bit oblivious.