Nassim Taleb, the author and scholar best known for The Black Swan (2007), predicted an extraordinary market event would happen because too many players had no skin in the game. They suffered no personal consequences for bad advice, mistakes and greed. His new book, Skin in the Game, drills down on this idea and helps us consider whether your advisor is really on your side.
Skin In The Game defined
Does your advisor have skin in the game? Taleb would phrase it this way: “Pay attention to what they do and how much of their necks they are putting on the line.” Are your interests aligned? Do they prosper when you do, and feel the pain when you get hurt? If not, “hidden asymmetries” are working against you.
Applying Taleb’s advice and measures to investment advisors is a fair exercise, since you count on your advisor to protect and grow the assets you’ve worked a lifetime to amass. You want that connection that skin in the game creates.
Here are four ways you can evaluate how much skin your advisor has in the game:
1. Your advisor owns the same things as you. I was the first client of Osbon Capital and I treat all clients in the way I would want my family treated.
2. Your advisor is only paid by you. Selling investment products for commissions, referral fees or other compensation paid by the product issuer is a clear asymmetry. For registered investment advisors like Osbon Capital, commission based product sales are forbidden by law. However, this practice is allowed if the registered investment advisor is owned by a broker-dealer. JPMorgan, UBS and Morgan Stanley are broker-dealers. Buyer beware.
3.Your advisor favors custom, simple solutions. This one seems so obvious. Yet clients are talked to in Finance 101 lingo or by someone at the general license level in most cases. Very little skin in the game there.
4. Your advisor treats you like the boss. Osbon Capital was established in 2005 as an independent firm. We’ve grown our client list every year by doing what’s right for all of our employers.
Soul In The Game
Skin in the game is crucial. So is soul. Taleb describes this ethical idea using the negative tense to describe something positive. Those with soul in the game would never do certain things, no matter how much money they were paid. Soul describes where you set your boundaries.
Soul is a relatively new idea in the financial industry. Soul talk would have been considered naïve nonsense when I worked on Wall Street. Today, soul has a fair chance. Signs of soul in your advisor are: no revenue except that paid by the client, no product sales commissions, and no referral fees to their network. In other words, standard fiduciary rules applied to financial management. It sounds obvious, but don’t take it for granted.
A fifth measure
Nassim Taleb is a multicultural intellectual. He sounds like a fun guy to have a conversation with, especially if he is doing most of the talking. Based on his book and background, I suggest a fifth measure for your advisor and I think Taleb would approve.
Is your advisor culturally diverse? Has he/she ever lived overseas, does he/she play a musical instrument, write, invest in friends so their businesses can be successful, support a cause with time and money, and introduce you to activities you wouldn’t normally do? That would be an interesting series of subjects to discuss with your advisor. You can certainly talk to us about it.
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