Uncomfortable Realities

By Brad Thomason, CPA

​When you look at the size and scale of the modern financial industry it would be easy to think that you are witnessing the refined, ultimate expression of the ‘right way’ to do financial services.  If you buy into the notion that form follows function, surely a modern financial behemoth is a best-of-class example of the principle.
 
Well, it might be.  But the function that lead to the form may be something different than what you think it is.
 
This is not a piece about questioning the motives of large corporations or implying that they are secretly out to get you.  But I am going to point out a few things which, in the end, though certainly a lot less malevolent, may nonetheless cause you some concern about relying on them too heavily.
 
1.        The form of the modern financial firm is based on providing services to a lot of people that have more or less similar needs.  Which is not the same thing as saying that the service offerings are the ones that best meet the needs of the customers.  The key to all large, corporate businesses comes down to repetition at scale.  They need to be able to do the same things, again and again, with a lot of efficiency.  So if efficiency and repeatability are the prime drivers of how they provide services, that sort of automatically knocks any notion of best fit out of the running, doesn’t it?  To make money they have to do a pretty good job (not a very good job, and certainly not a great job) of providing services which may confer some benefit – if not optimal benefit – at a high level of efficiency.  The service offering that is best for them, may not be the service offering that’s best for you - a principle which is ever on display at any restaurant that has a drive-thru window, by the way.  Same basic proposition.  McDonald’s can certainly keep you from starving, and adequately satisfy any food-is-fuel needs you may have.  But that doesn’t mean there aren’t other levels which could be attained were it not so necessary for them to book such a high quantity of iterations.
2.       Providing service at scale takes scale.  Which means people.  Lots of people.  What are the odds that every person that works at a large mutual fund company or bank is an actual financial expert?  When you call the service line, how do you really know if you reached such an expert, or whether the person who took your call has more training in being polite than they do in actual matters of finance?
3.       Are you representative of the typical client of a large financial firm?  Do you fit the same mold as the typical person that they are usually dealing with?  Public statistics, going back decades, clearly show that the average person doesn’t have anywhere near enough savings to even make a meaningful start at a prosperous retirement.  If you are actually working to properly endow your retirement and set the stage for a success that spans decades, you are materially different than the bulk of the people that they provide service to.  That may not mean that they can’t deliver something of benefit, but it does further the idea that what you really need may be something very different than what they are offering.  The typical person they talk to day in and day out probably differs from you in substantial and important ways.
4.       Do the large firms actually have a track record of success?  That is to say, client success stories?  What percentage empty their accounts over a few years and go away?  Seems like it would have to be a large portion.  But even if the ones that didn’t have to spend everything, how many of those occurred simply because the person didn’t live that long?  I know that’s an uncomfortable question, but it raises an important consideration; not just for financial firm clients, but in general.  How often, when a retirement failure doesn’t occur, is that the result of the person not living long enough for the retirement plan to be truly tested in the first place?  The clients of large firms that live a long time and have adequate resources for the whole thing are the ones who had a lot of resources in the first place.  It’s not fair to say that the firm played no role whatsoever in the positive outcome.  But it is fair to wonder if the outcome was in the cards even without the firm’s input.  In the case of large portfolios, it seems plausible that such could be the case.
  
I don’t assume from the start that the financial industry is evil, per se.  I’ve seen some things over the years that convince me that everything is not pristine.  But I’ve known some good people who worked hard and truly cared about their clients, too.
 
So better we skip over the question of good and evil and focus instead on the substance of what’s there.  Obviously you would rather work with a firm that is successful than one that is struggling.  But don’t automatically assume that their success is a reflection of a set of service offerings which rises to the level of best-available for your needs.  They can succeed by doing pretty well for a lot of people that have some of the same needs you do.  Between that reality and ‘what’s best for you’ there’s quite a bit of space; and its space that can exist even if you are dealing with folks who aren’t actively out to get you.
 
If you go to McDonald’s, you aren’t going for prime rib and aged Bourdeaux.  The difference is, with McDonald’s you realize that going in.  Make sure to realize it when you deal with a large provider of financial services, too.