The Winner’s Game by Charles D. Ellis

The Winner's Game

  1. Charles Ellis argues that financial advisors have gotten off track recently due to the overpromising of beating the market, focusing more on own firm’s profit and margins over client’s wellbeing and getting away from thorough and proper investment advice to the clients.
Key Takeaways
  1. Part of the problem is that investors make mistakes. But they are not alone. As investment professionals, we need to recognize that much of the real fault lies not with our clients but with ourselves—the unhappy consequence of three major systemic errors. Fortunately, we can—and so should—make changes to help ensure investing is, both for our client investors and for ourselves, truly a winners’ game.  For all its amazing complexity, the field of investment management really has only two major parts. One is the profession—doing what is best for investment clients—and the other is the business— doing what is best for investment managers …Today, investment management differs from many other professions in one most unfortunate way: We are losing the struggle to put our professional values and responsibilities first and our business objectives second.  We can stop losing the struggle if we redefine our mission to emphasize the investment counseling values of our profession—and our understanding of investors and investing—to help clients focus on playing the investment game that they can win and that is worth winning. Fortunately, what is good for our professional fulfillment can, in the long run, be good for business
  2. Three errors of the investment profession
    1. Falsely Defining Our Mission – “beating the market” is the wrong definition and in today’s more competitive landscape, is hardly possible in the long-run. With wide spread of information, markets have become more  efficient.
      • Inherent risk – the “losers” underperform the market by twice as much as the “winners” outperform
      • By simply removing two biases in the “data” as conventionally presented— backdating and survivor bias—the apparent record on managers monitored by consultants often shifts down from “better-than-the-market” appearances to “below-the-market” realities.
      • Most investors have not yet caught on to the fact that they would be better off if they put most of, if not all, their investments in low-cost index funds or index-matching exchange-traded funds
      • Because investors can get virtually guaranteed market returns through index funds for less than 10 bps, what they really “buy” when retaining active managers is risk-adjusted incremental returns. Calibrated as a percentage of risk-adjusted incremental returns, investment management fees are not low; they are high.
      • Successful counselors will help each client understand the risks of investing, set realistic investment objectives, be realistic about saving and spending, select the appropriate asset classes, allocate their assets appropriately, and most importantly, not overreact to market highs or lows
    2. Incorrectly Ordering Our Priorities –  have allowed the values of our profession to become increasingly dominated by the economics of our business.
      • Investment management a great business with great margins and growth potentials. As these companies grow, their focus shifts more to profit generation for themselves
    3. Dropping Rigorous Counseling – many investment firms have veered away from offering sound and consistent investment advice. Clients need help understanding the long-term and intermediate prospects for different kinds of investments – risk, volatility and return
      • Investment organizations that are shifting from product-centric to service-centric strategies report highly favorable professional and business results.
  3. Increasing the fit of investment service to the longterm objectives of each investor—moving from caveat emptor “product” sales to more durable, shared-understanding service relationships— would increase the duration or “loyalty” and thereby the economic value of client–manager relationships
What I got out of it
  1. Interesting read on the duties and obligations of financial advising professionals.
Found here

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