The Irrationality of Humans, Investors, And… Watch-Buyers?

Posted: September 3, 2020

Wrist watches

My husband recently nearly talked me into purchasing his definition of “a decent” wristwatch — and it was a reminder of how we, as humans, are completely irrational.

My thinking on watches is simple: What’s wrong with the classic, battery-powered quartz watch I’ve had for years? It has fewer parts, I don’t have to send it off to one of the handful of experts who specialize in servicing my specific kind of watch every time it needs a repair, and it’s more accurate at keeping time (isn’t this the stated objective of a watch, after all?). Win-win-win in my book.

If the less complicated nature of a quartz watch isn’t good enough, they’re also less expensive than the self-winding or automatic watches my husband is always showing me on Hodinkee or Watchonista.

But, automatic watches are so cool — so the counterargument goes — gears, calibers, and craftsmanship, oh my!

Yet, if the whole purpose of a wristwatch is to tell me the time, and if quartz keeps better time at a lower cost, then are automatic watches the definition of a Veblen good (a product for which demand rises as the price increases)?

Veblen Goods In Financial Services?

This question leads me to another: How many Veblen-good-esque products are in circulation today in the financial services industry?

Our industry has plenty of investment offerings wrapped in a cloak of opacity that benefits the asset manager, not the investor. Reforms like the 1940 Act and Dodd-Frank pulled the rug out from under some egregious offenders, but let’s face it, there are still plenty of products marketed as being crème de la crème financial instruments, something complex for the everyday-yet-also-elite investor.

Many of these products do not efficiently or consistently achieve their stated objectives — due to poor investment decisions, being strangled by management or “other” fees, or both.

Layered on top is the fact that the market environment in 2020 has thus far provided a unique set of facts for many investments (the complex ones, the vanilla ones, and everything in between).

Risk assets year to date have experienced significant volatility and large drawdowns. Generally speaking, this represents a market environment where more expensive, alternative-type strategies should outperform. On the other hand, the context for these market moves has been one that is largely unprecedented in market history, notwithstanding the record-breaking recovery back to new all-time highs. All indications thus far do not support that more expensive “shiny objects” resulted in better investment outcomes.

Conspicuous Consumption is Not in the Best Interest of Your Clients     

So why do financial advisors tolerate these outcomes when recommending expensive and/or complex investment options to their clients? Is it because the bells and whistles are more important than the stated objective of providing risk-managed returns, outperforming a benchmark, or protecting capital? One would hope not.

As I would argue is also the case with wristwatches: Financial advisors should choose the strategies that are best suited to achieve the client’s objectives, because conspicuous consumption is not in the best interest of the client.

At Blueprint Investment Partners, we consider our investment methodology to be analogous to an attractive and staple quartz watch. I’d call us the Citizen Eco-Drive of asset managers. We may not have a porcelain dial that’s hand-painted in Japan, we may not sparkle with gemstones placed using precision tweezers, but even an automatic watch enthusiast like my husband would admit we’re an excellent option to consider for everyday wear. We get the job done, we make you look good, and you feel good about our story.

Because we have a systematic investment process that utilizes liquid, non-esoteric holdings in most of our strategies, our solutions are easier to explain due to their rules-based and cost-effective characteristics.

This matters more than ever in a COVID-19 world, because investors’ stress levels are justifiably high, even if the S&P 500 has pared its losses from March. We know very well from our advisor clients that, even if investors are trying to play it cool, they are on high alert these days. It is therefore imperative for financial advisors to be able to simply explain a strategy. Opacity is not your friend.

As a financial advisor, you owe it to your clients to be able to recommend a solution that has clear objectives and the ability to achieve them efficiently and consistently.

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