Use “Self-Distancing” To Make Better Decisions
March 10, 2015
by Dan Solin
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Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
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Before I became a consultant and coach to a number of financial planning firms, I used to run my own investment advisory firm. I believe the advice I give today is far superior to the actions I took when I managed my own firm. Now I understand why.
Decisions confronting advisors
This is, undoubtedly, a challenging time to be an investment advisor. New technology is changing the business and significantly reducing costs. Ric Edelman, chairman and CEO of Edelman Financial Services, recently predicted that robo-advisors will put most of the current crop of investment advisers “out of business.”
Whether or not that dire outlook proves true, it’s very clear that the landscape is changing. Pure “investment advice” is becoming more of a commodity. As such, much of the work advisors do can be relegated to algorithms and implemented online.
Compounding the problem, the costs of increased regulation make it difficult for smaller firms to maintain profitability. This combination of price competition and higher expenses is putting traditional advisory firms under intense pressure.
According to Michael Kitces, the average profit margin of a “typical” advisory firm is 22%. The looming possibility of a market correction could decrease profits at advisory firms by as much as 25%. Kitces believes that “the greatest risk for most firms may be that their profit margins are still too small to withstand the next bear market when it comes along.”
Given all these issues, advisory firms are confronted with many decisions that will impact the future of their business. As a result, it’s increasingly important to maximize the possibility of making the right choice.
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