What's In A Name?

Can We Be Better Investors By Learning Something From Juliet and Shakespeare?

The title of this blog is from the following line from Shakespeare’s Romeo and Juliet.

What’s in a name? That which we call a rose
By any other name would smell as sweet;
So Romeo would, were he not Romeo called

In this line, Juliet’s lamenting the fact that her family has deemed Romeo as inappropriate based solely on the Montague name or brand. Even though Juliet has just met Romeo at this point, she is looking beyond the brand and making decisions based on her own independent valuations, not the madness of the crowds (in this case the large family feud).

What does this have to do with investing?

Well, just as Shakespeare gives us good investing thoughts on the importance of diversification in theMerchant of Venice when he writes

My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year: Therefore
My merchandise makes me not sad.

Maybe in Romeo and Juliet he is telling us to not follow the emotions of the crowd or make decisions based on a brand or the perception of value.

Over the years, I have seen many investors make decisions based on the emotional power of brands. Top Wall Street houses understand this well and often employ well-healed and articulate professionals to deliver emotional pitches, prognostications and presentations.

As we have written in some previous posts, such as Pavlov’s Brokers , If We Had a Chief Economist We Would Have to Pay Them or Say It Ain’t So, Joe (the names give some of the punch lines away), incentives can drive firms to sell predictions and products that sometimes do not add much value, especially after fees and taxes.

Why do so many investors, large and small, consistently buy branded products that don’t add much value?

I could write a lot about psychological studies such as those discussed in behavioral finance but to keep it simple, I think it often comes down to a lack of information or in one word, transparency.

A few recent stories related to transparency prompted me to write this literary themed piece.

Over the past few months a lot of heated debate has been in the financial press about proposed fiduciary standard rules from the Department of Labor (DOL). The industry is largely up in arms about the DOL wanting to hold Wall Street firms to a higher standard of care, which would make them be more transparent and go to greater lengths to make sure that they were putting clients’ best interests first.

As I wrote in Is Bad For Business Sometimes Good , analysts are projecting that these changes might reduce the profits of some asset management firms. As would be expected when a change is proposed that might negatively impact profits or disrupt existing business models, the Wall Street lobbying machine is protesting loudly and using a lot of emotionally charged arguments to preserve the status quo. Maybe this was what got me thinking about Shakespeare because it seems appropriate for someone to say to the industry, “Thou doth protest too much.”

A recent Barron’s article highlights the current rarity of investment fee transparency. In a pieced titled Overpaying For Financial Advice , Robert Milburn highlights information from a recent Morgan Stanley (MS) regulatory filing. It shines a bright light on what brokerage firms pay for investment products versus the fees that are charged to clients.

To have a little fun with a Shakepeare quote, “What’s In A Fee?”

Maybe more profit than you realize, or would be comfortable with, when you look beyond the brand.

According to the Barron’s article, some MS clients are paying as much as 2.5% for active equity managers that only cost 0.42% (yes, a 6 X mark-up of the manager before resale).

For elite, bespoke and separately-managed fixed income portfolios (sounds good and valuable doesn’t it?), MS is only paying the “elite managers” 0.23% for what is sold to clients at 2.5% (a mark-up of over 10 times).

Think about that.

At many brokerage and wealth management firms HNW and UHNW investors are sold what are often presented as boutique, alpha-generating separate account managers. Pitches often suggest that investors need to pay-up for valuable managers. What the Barron’s article lays bare is that the vast majority of the fee can be going to the broker-dealer, not the “valuable alpha manager” (over 90% in some cases for fixed income strategies, as disclosed in the Barron’s article).

Investors think they are paying high fees for the manager. In reality, however, they are paying high fees for the broker-dealer business platform, marketing, sales management and commissions to brokers.

Is it suitable to sell a client a product at a fee that includes a mark-up of as much as 10 times? The regulatory answer is “yes”.

But while high mark-ups may be deemed by firms to be suitable, is it appropriate to sell clients on the idea that they are paying for one thing (alpha generating investment managers) when they are in fact paying the majority of the fee for something else (branding, marketing, sales and commissions)?

This is a bigger question and would require a much longer blog. I think it is very safe to say, however, that clients are due greater transparency in what they are actually paying for than they have currently.

So, how does this all leave us back at Juliet?

Don’t be star-crossed and fall in love with a brand when entering into what can be an emotional relationship (money matters can be highly charged).

Some find comfort in established brands and nothing is wrong with businesses having solid profit margins, especially if value is being provided.

All we’re suggesting is that, like Juliet, investors should avoid making decisions on brand alone.

Maybe someday regulations similar to the fiduciary rules being proposed by the DOL will come to pass and raise the bar for disclosures and increased transparency.

In the meantime, ask more questions about fees, business models, profit margins and incentives. If more investors demand transparency then, regardless of regulations, change will come.

What is in a name? In the investment industry, maybe more fees and mark-ups than you think.