Flows Before Pros

Posted: March 8, 2021

Cell phone and computer being used to monitor GameStop stock

This is not another article about Reddit, robos, and Robinhood.

Well actually, it a little bit is. But hear me out: We’ll be light on the pontification (you don’t need a 4,000th article on GameStop) but heavy on the conundrum financial advisors face and the trump card held by providers of financial advice.

Adaptation or Creative Disruption?

Economist Joseph Schumpeter coined the phrase “creative destruction” in the 1940s to describe how innovation often improves the lives of many at the expense of a relative few.

A prime example is the invention of the automobile, which expanded travel capabilities for a wide range of people but put many horse traders and buggy manufacturers out of business. And I haven’t even mentioned the fate of the horses…

In the age of Reddit, robos, and Robinhood, many financial advisors now face the same conundrum as buggy makers.

The question is whether they will adapt and thus remain essential (and reap the rewards) or succumb to the forces rendering a good portion of their offering obsolete.

We believe advisors have insurmountable advantages against these forces but also face major threats, depending on where they place their focus.

The Democratization of Investing

Value investing and the 60/40 have long been the go-to investment philosophies guiding advisors as they help clients reach their goals. However, these principles appear at odds with the current zeitgeist driving markets. Not to mention, the growth factor has outperformed value for nearly a decade, and the “40” in the 60/40 equation has been buoyed for decades by accommodative monetary policy driving rates to zero.

Now you have a situation marked by:

  • A growing number of retail investors who don’t care about value
  • Technology that offers finger-tip access to DIY investment tools
  • Interest rates with hardly anywhere to go but up

It makes me think of a phrase we began using several years ago: “the democratization of investing.” For us, it was applied primarily to the sometimes-esoteric area of systematic investing. We wanted to take the approach made famous by a handful of hedge fund managers and apply it using instruments that all advisors could access for their clients. What we didn’t realize would happen so quickly is that this idea would bypass advisors altogether – threatening rather than elevating their practices.

Watch out Mortimer and Randolph…this spells trouble for the old guard.

The new phrase we have observed is: “flows before pros.” This is the idea that the momentum created by retail investors through passive index investing, active behavior as we saw with GameStop, and investing platforms such as Robinhood is more powerful (and potentially more profitable) than old-school portfolio management techniques like value investing and the 60/40 portfolio.

A Strategy King Solomon Would Love

“What has been will be again, what has been done will be done again; there is nothing new under the sun.”

Ecclesiastes 1:9

Advisors who might feel threatened by the current landscape should remember they possess something that provides a wide moat against robos, Reddit, and Robinhood: relationships. This is the trump card for providers of financial advice.

People may come to an advisor seeking investment advice, but they stay based on relationship and client service. If advisors can turn their chair away from the computer and toward their client (literally in an in-person world, and figuratively in a socially distanced one), and if they can provide competitive financial planning and portfolio management, then there is nothing to fear.

In short, advisors who build solid relationships and select sound investment strategies are better equipped to go with the flow.

Speaking of Going with the Flow…

Nobody goes with the flow better than a trend follower. By focusing on price, trend followers like Blueprint Investment Partners react to what IS rather than what anyone prognosticates. So, if value is dead, our systems will adapt. Likewise, if the 60/40 has gone the way of the Walkman, then that’s fine with us too.

In that vein, one of the things we have observed in almost all precursors to bear markets is the belief that “this time is different.” From an investment perspective, when we originally designed our investment strategy – and as we continue to enhance and maintain it – our focus is on making it timeless. When trying to survive in a harsh environment, adaptation is key. This is true for all species.

Well, there are few environments harsher for humans than financial markets. We believe that elegant rules focused on the most basic factor (i.e., price) have and will continue to provide the best odds of surviving the ongoing evolution or mutation of markets.

So, if this time is really different, then great. Or, if this is just the next chapter in the longstanding boom/bust cycle of markets, then that’s just fine too.

We hope all advisors can feel as confident as we do.

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