Average is Over

June 5, 2015

Tyler Cowen’s book Average Is Over provided me some important insight into the ever-changing nature of our global economy—and particular insight into why some financial advisors are seeing their businesses thrive and others are struggling to stay afloat.  Growing income inequality seems to be a hard trend that economists and politicians have debated ad nauseam in recent decades.  Consider Cowen’s take on why this growing disparity is taking place and where we go from here:

This imbalance in technological growth will have some surprising implications.  For instance, workers more and more will come to be classified into two categories.  The key questions will be:  Are you good at working with intelligent machines or not?  Are your skills a complement to the skills of the computer, or is the computer doing better without you?  Worst of all, are you competing against the computer?

…If you and your skills are a complement to the computer, your wage and labor market prospects are likely to be cheery.  If your skills do not complement the computer, you may want to address that mismatch.  Ever more people are starting to fall on one side of the divide or the other.  That’s why average is over.

Surely, we in the financial services industry can attest that this is true.  Those advisors who have embraced technology have likely seen their businesses rapidly expand over the past decade.  They find themselves to be significantly more productive, able to manage much more money with seemingly less effort, and better able to stay connected to their growing number of clients in meaningful ways.  Those advisors who have not embraced technology, still trying to do business the way they did it in years past, are being left behind.

Subscribers of DWA research are keenly aware that there has been a wee bit (ok an enormous amount) of innovation over the years in our research database.  The core PnF principles from decades past are still there (supply and demand still determine price just like they always have).  However, this method that once involved hand charting stocks on a piece of graph paper has been computerized.  Now, our research is focused on rules-based asset allocation models, guided ETF models, and relative strength matrices that allow advisors to customize and systematize their own investment strategies at the click of a mouse.

We have also seen our assets under advisement take giant leaps forward…yet the firm still has about the same number of employees we had a decade ago.  How is this possible?  We are managing money with a reliance on systematized relative strength models which allow for tremendous efficiency and, we believe, better investment results that non-systematized approaches to investing.  Are there still money management firms that employ vast armies of analysts feeding data to investment committees who regularly meet for long meetings to debate investment strategy?  Yes, but those are among the people that Cowen is talking about when he asks, “are you competing against the computer?”

The future is very bright for those advisors who stay on the right side of technology.  For those that don’t, they are going to find it harder and harder to stay average.

A relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.

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