Where Are The Customers’ Yachts?
This anecdote has been told in various ways over the years. In 1940, Fred Schwed Jr. wrote a book by the title. Here's how it appears in his book.
Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
"Look, those are the bankers' and brokers' yachts."
"Where are the customers' yachts?" asked the naive visitor.
I have seen a lot implied by this story in various writings. Let me reproduce some:
- There is far more money in providing financial advice than there is in receiving financial advice.
- They sell to you. They make commissions off you. They get brokerage when you trade. They get the lifestyle they want. Buyer beware.
- Wall Street is not in the business of making you money, it’s in the business of making money at your cost.
- The more you transact, the more someone earns.
- Bankers, brokers or anyone else perceived as having valuable information will just naturally attract money.
Mark LaMonica, director of individual research at Morningstar, brings out two implications that are certainly worth paying attention to.
NEVER be negligent of costs/fees.
Trading platforms and investment products are a means to an end. An ETF provider would rather have you in a thematic ETF like the ASIA Technology Tigers ETF which charges .67% than a broad index ETF that tracks the ASX 300 like the Vanguard MSCI International ETF with a fee of .18%.
We can see the impact of the fee difference if we consider the growth of an investment of $10k in each ETF with 8% annual returns.
- A decade: $21,207 (Vanguard), $20,198 (ASIA)
- 2 decades: $44,972 (Vanguard), $40,798 (ASIA)
- 3 decades: $95,369 (Vanguard), $82,405 (ASIA).
You get the point. The difference in your account balance will far exceed the actual amount that you pay in fees. That is because you have less money each year to grow. And that compounds over the long-term.
Christine Benz, Morningstar's director of personal finance, reminds us that fund expenses aren't the only cost investors face. There are brokerage costs. Fees if you rely on a financial professional for advice. Capital gains tax. All these can be a drag on bottom-line returns. All of these expenses look pretty innocuous on a stand-alone basis, especially because they're often expressed in percentage rather than rupee terms, so they don't look like real money. But compounded over a typical investing time horizon of decades, they can mean the difference between a plan that's on solid footing and one that's on shaky ground.
NEVER focus on the product.
Look around. The financial services industry is all about products.
Have an investing problem? Try the new improved ETF which tracks a back-tested, newly created index.
Want to achieve your goals? You need a trading platform specialising in small caps.
The notion of a company selling products to try and generate profits is not exactly something that gives me pause. The problem is that many seem to have internalised the industry view that the answer to every problem is a product. When the real issue is that many investors have no idea as to what is the outcome they want to achieve. I think that many investors spend their time arguing about the best brokerage platform to avoid the truth of the matter - they have no idea what they want to achieve.
To be clear, ‘getting rich’ or ‘having the most money possible’ is not a goal. It doesn’t work. If you are simply trying to ‘get rich’, then logic dictates that you should always be in the best performing product. That is a perfect approach for an industry that wants you to trade as much as possible and give into the temptation of the compelling narrative attached to the newest ETF.
Care about outcomes, not products.
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