Here's another excerpt from Wealth by Stuart Lucas. I liked the book -- giving it 6 stars. So it's my pleasure to offer this excerpt from Chapter 5:
So how does one effectively navigate the wealth management industry today? It isn’t easy, but you can do it. I like to think of the industry today as being divided into three unique worlds. I describe these three worlds as “The Enchanted Forest,” “The Capital Kibbutz,” and “The Secret Society.”
The Enchanted Forest
I refer to the first world as “The Enchanted Forest.” It is an investment land populated by ambitious clients and equally ambitious wealth advisors, both looking for the secret formula to investment success.
On its face, The Enchanted Forest is a beautiful and alluring place—its people energetic, entrepreneurial, and gregarious. The wealth advisors who live in The Enchanted Forest, for example, are compelling salespeople who regale prospective investors with stories of their investment prowess and client success. They offer to act as financial guides to neophyte investors who can’t understand the markets and who don’t really want to understand the vagaries and complexities of investment, asset allocation, stock diversification, and wealth management goal setting.
For their part, the clients you find in The Enchanted Forest are usually in search of easy keys to prosperity and financial success. In many cases, newly (or soon to be) wealthy people are open to suggestions and vulnerable to persuasion—traits that can make them easy prey for advisors who overwhelm them with financial jargon and promises of quick market success.
As a result, marriages of convenience often take place in The Enchanted Forest—between ambitious wealth industry people on the one hand and eager and impressionable investors on the other.
The Secret Society
“The Secret Society” (not to be confused with some fraternity or elite military organization) is a domain for those who have figured out how to add value (“positive alpha”) to investment assets. It is the world of hedge funds, private equity funds, concentrated actively-managed mutual funds, and opportunistic real estate professionals that outperform standard investments. It is also the world of skilled business owners and people who leverage their careers to great business and financial advantage. Finally, it is a world widely speculated about in the pages of business and finance magazines because most of its players like to keep low profiles and actively avoid the press.
In the domain of The Secret Society, inhabitants have learned how to consistently add value through good investment performance. An investor is able to create this so-called “positive alpha” by identifying and extracting value from individual companies or securities, or by choosing other professionals who have this skill. This is a rare and highly-refined wealth management competence. Those who do it well have highly-developed instincts. They also have deep investment expertise and resources to measure investment performance. But you don’t know who these people are because they try to keep what they do secret. The last thing most of them want is competition.
The Capital Kibbutz
Finally, after The Enchanted Forest and The Secret Society, there’s a world of investing I call “The Capital Kibbutz.”
For those who don’t know what a kibbutz is, it is a form of communal living practiced in Israel in which everyone in the community shares in the resources and wealth that come to that community. There are actually kibbutz-like communities in many other parts of the world, including the U.S.
The Capital Kibbutz is an investment zone in which everyone who participates shares in the rewards and risks of investment together. It is populated by institutions and individual advisors that can help clients who want to participate in the growth of the global economy but who recognize that they don’t have sufficient expertise or resources to engage in Active Alpha Investing. It thus provides the perfect sanctuary for these investors to reside in.
For all practical purposes, The Capital Kibbutz is the world of indexed mutual funds, exchange traded funds, and term life insurance. It is a rather safe and tame investment world—one where the investor is taken care of but in which the investor rarely, if ever, gets a chance to take big risks.
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I never knew I lived in an investment kibbutz. But I do like being taken care of and not having to take big risks. ;-)
More on this topic tomorrow.
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