Fiduciaries, Vultures and Metrics

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Nothing in this column is ever investing advice, but sometimes people who know that I write about finance ask me for investing advice, and then I am forced to contort my body into an elaborate series of shrugs. How should I know what you should do with your money? I may or may not know your particular circumstances, but -- and here is the really important thing -- I do not know which stocks will go up or down. If I tell you to put all your money into solar stocks, or lean hogs, or bitcoins, and those things go down, you will be mad at me. And even if I tell you to do something sensible like put all your money into low-fee diversified index funds, sometimes those go down too. My boring Vanguard Total Stock Market Index Fund is down about 3.5 percent so far this year.

This is an irremediable problem with giving investing advice to individuals. Oh, sure, you can give the advice that is generally accepted as "good" -- diversify, save for the long run, take sensible risks, don't pay too much in fees, don't pay too much in taxes, avoid Ponzi schemes -- but even the best advice in the world can turn out to be wrong ex post. And then your client will be sad, because he wanted you to recommend things that would go up, not down.

Here is a good Wall Street Journal article on the coming of the fiduciary standard for brokers who advise retirement accounts. The high-level overview is that many brokers sell mutual funds to their clients, and are paid through a combination of commissions and payments from the funds. This combination creates bad incentives. The new rules would make it harder for them to get paid like that, which will probably cause many brokers to shift to a fee-based model where their clients pay them transparent fees, based on assets under management, for their advice. These fees will create good, or at least neutral, incentives, and the requirement that the brokers put their clients' interests ahead of their own will further improve things.

The argument against the rules is that the costs of advising will go up, driving small investors away from advisers. Some of this is true (there will be more compliance requirements, and so more compliance costs), and some of it is illusory (shifting costs from mutual-fund sales kickbacks to disclosed broker fees doesn't necessarily increase those costs, it just makes them more transparent), but I assume that brokers aren't lying when they say that fee-based advising might be tough for small accounts:

However, that shift may not be practical for small IRAs. Brokers would have to spend more time understanding a client’s full financial situation to fulfill their responsibilities as fiduciaries, industry officials say. And that might not be profitable on an account of, say, $50,000, where a standard 1% fee would be just $500 a year.

One thing to ponder is: How do those $50,000 accounts work now? Does the broker get paid more than $500 a year, by churning the account to create excessive commissions? Or does he get paid $500 or less, but not spend "time understanding a client’s full financial situation"?

There is an obvious solution for small clients, which is that they shouldn't be charged massive fees, they shouldn't be steered to overpriced funds based on payments to brokers, and their brokers shouldn't spend much time trying to understand them. Sorry! You get the understanding you pay for. Fortunately financial markets are reasonably efficient, modern portfolio theory is reasonably well understood, and there are plenty of computers and low-cost index funds. A robot could give you investing advice, or you could just buy index funds on your own, and it will probably work out fine.

But the old attitudes die hard. The notion that investing advice needs to be personalized advice -- that "understanding a client’s full financial situation" is essential to telling him how to invest -- is deeply ingrained, and not exactly wrong. But I suspect that it's overrated: People mostly want investments that go up, and it's hard for any advice to guarantee that. It's easy to just charge less. Deep understanding is nice, but it is also a luxury; if its costs are transparent, investors might reasonably conclude that they're too high.


Here is the Agreement in Principle settling the long-running debt dispute between Argentina and its main holdouts, led by NML Capital and Aurelius Capital, which was filed with the court yesterday. The main elements are pretty straightforward: Argentina will pay the holdouts $6 billion and change, and the holdouts will stop suing Argentina. But there is also a very detailed discussion (paragraph 7) of exactly how Argentina is allowed to raise money to pay back the holdouts, is not allowed to raise money for other purposes until the holdouts get paid, and is required to escrow the proceeds of any capital raise for the holdouts. The Argentine debt dispute has moved past the stage of disagreeing over how much the holdouts should get paid; it is now in the stage of coordinating the exact order of operations to pay the holdouts the agreed amounts.

But after 15 years of fighting on the first question, no one quite trusts each other on the second. So the agreement has two pages on these mechanics, and even that doesn't resolve the main questions: The holdouts "are appealing a judge’s order Wednesday that drops injunctions blocking Argentina from issuing new debt," because their preferred order of operations would involve lifting the injunction only after they get paid. Everyone has agreed on how much they'll get paid and when, but they are still suing each other over it. I suppose it is possible that the injunction will be lifted and Argentina will tear up the Agreement in Principle, cackling maniacally and refusing to pay the holdouts. Perhaps President Mauricio Macri will rip off a mask and reveal that he's actually been Cristina Fernández de Kirchner all along. At this point I do not particularly expect that? But I can see how NML and Aurelius might be a bit paranoid.

Elsewhere, here is a report that Argentina will issue $15 billion of bonds in April to pay the holdouts, with terms of 5, 10 and 30 years, at least a B credit rating, and interest rates of between 7 and 7.5 percent. And here is a report that "tens of thousands of shiny black beetles" are swarming Argentine beaches.


I still don't quite know what to make of the fact that Herbalife accidentally overstated its "active new member" numbers for several quarters, though I think I agree with Bloomberg Gadfly's Max Nisen: "The mistake is undeniably sloppy," and "not a boost to Herbalife management's credibility," but "it's tough to draw a line from this to the most important of Ackman's accusations -- that the company is an illegal pyramid scheme taking advantage of impoverished people." 

But I want to object to this claim from David Reilly at the Wall Street Journal:

Aside from Herbalife, the incident highlights yet again that investors who rely on pro-forma metrics, which often include things companies would prefer to ignore such as stock-compensation expense or that paint results in a more flattering light, often do so at their own peril.

Herbalife's metric was "active new members." It is true that this metric was not defined, and there is some subjectivity to words like "active," and "new," and even "member." But, you know. The metric is, we count up how many new members we added, and then we tell you. That's not pro-forma accounting flim-flam. That's just counting. They counted wrong! It happens. But this is not a story about using made-up numbers to obscure financial results reported under generally accepted accounting principles. This is about reporting operational numbers -- people using the product -- that are not required by GAAP, because those operational numbers give investors additional insight into how the business works. (Unless those numbers are wildly wrong, as they happen to have been.)

Reilly compares Herbalife's busted metric to "the days of the dot-com bust, when investors who once bid up web companies based on the number of eyeballs they attracted," and certainly investors today focus on non-GAAP active-user numbers from social media companies. But those are all real operational metrics, and they are of interest to investors not because they obfuscate the story told by the GAAP earnings numbers, but because they tell a different story, a story about the company's popularity as a social network rather than about its profitability as a business.

I will go further: Non-GAAP financial metrics might be fake, but GAAP financial results are also fake, because no system of accounting can fully and accurately reflect the economic reality of the underlying business. Every accounting system has arbitrary rules that try to capture that reality as plausibly as possible, but they will inevitably fall short. 

But if you just count up how many members you have, that's how many members you have! (Usually!) There is no intermediating convention; it's just the thing itself. Believe me I realize that that does not quite capture how, e.g., social media companies count their monthly active users, but I think the intuition is right. Investors like these user metrics because they connect so directly with reality, with a tangible fact of the underlying business, even if that fact happens not to be, you know, its profitability.

Bank employment.

The bad news at Goldman Sachs is that it "plans to eliminate more than 5 percent of traders and salespeople in its fixed-income business." It "typically eliminates the bottom 5 percent of performers around this time each year" anyway, but this year's cull is "more than 5 percent," though still "less than 10 percent." I should disclose that I used to work at Goldman Sachs and never really noticed the 5 percent cull -- and I like to think I knew some underperformers! -- but I read about it so consistently that I assume it's true.

The good news at Goldman is that young analysts who are "having a hard time finding a sense of purpose underneath their pitch books and spreadsheets" are now being offered the opportunity to make some more pitch books and spreadsheets, but for a cause:

The firm announced on Thursday that it had started a competition for young analysts to compete for donations to a charity of their choosing. As they would with a deal proposal, bankers and other employees at the firm can form teams and pitch their nonprofit. The winner, chosen by a committee, will receive a grant for their organization of $100,000; second place will receive $50,000, and third place, $25,000.

The competition will judge partly the nonprofit and partly the pitch. So be careful with the formatting!

The bad news at Bank of America is that it "plans to dismiss about 150 trading and investment-banking employees next week," though those dismissal are both part of a "push to reduce expenses" and "part of the firm's periodic cull of low performers." The bad news at Deutsche Bank is that it is extending the deferral periods on its bonuses.

Social media.

Here is a Bloomberg Businessweek story about Snapchat, its business model, how it represents the future of media, and how it is "confusing olds." I can at least vouch for that last part. Every time someone writes a "how to understand Snapchat if you are over 30" feature, it is like "You just splorble your beezox over the ploombanator, and then ooblish the galaxial snorbnox, couldn't be easier!" Just thinking about it gives me a back spasm. If you gave me fifteen minutes I could probably figure out how to type a key emoji on Twitter, but that seems to be the outer limit of my social media savvy. But enjoy your Snapchat, young people! 

Also here is Rando, "a messaging app that generates the messages randomly," for when you have mastered Snapchat but you crave further nihilistic thrills to fill the void at the center of your social media presence.

Food Stuff.

Early 2016 was all about the inexorable rise of the bowl, but the spring trends in food marketing aren't so vessel-centric, or even food-centric:

Panda Express is looking to expand its social media strategy from a food-centric approach to a more holistic one around its values, such as gratitude and generosity. "We want to have deeper conversations on social media," added Mr. Wallinga, "and believe me I want to sell orange chicken, but we want people to understand Panda as a brand, and we think our values help create that understanding more than anything."

Never change, food marketers. Or, I mean, change, frequently, but keep talking about orange chicken like you're poet-sociologists.

Speaking of food sociology, Wall Street steakhouses are hurting: "Although a 'lousy' day on Wall Street could bring more after-work drinkers, it’s usually at the expense of lunch." Maybe try putting the steak in bowls? Or the drinks, for that matter.

People are worried about unicorns.

"Mutual Funds Sour on Startup Investments," reports the Wall Street Journal; they "are cutting the value of their startup investments at an accelerating pace and are making fewer new investments." Meanwhile, a study has found that housing costs and traffic in the Enchanted Forest are becoming unbearable:

But the cost of living has become a critical issue. Silicon Valley home prices increased 13% to a median value of $870,000 between August 2014 and August 2015, higher than all other regions the study looked at. Meanwhile, transportation has gotten worse. In 2014, the average Silicon Valley commuter lost 67 hours in traffic congestion, an increase of 13.6% from 2010, the study says.

Last year was "the first time Silicon Valley has lost more U.S. residents than it has gained since 2011," as smaller enchanted groves in Seattle and Austin seem to be attracting unicorns fleeing the stresses of the Enchanted Forest. And there is always Alaska:

Alaska has poured more than $280 million into three biotech startups, huge bets in a field where the average venture capital investment is less than $15 million.

People are worried about bond market liquidity.

One simple model of bond market liquidity is that banks used to cushion price moves by trading against the rest of the market, but now they can't, because of regulation. And mutual funds, which face the risk of daily redemptions by flighty investors, are now a bigger part of the bond market, which means there are more flows for banks not to trade against. Who will take the other side of dislocated markets, then? Maybe hedge funds? Which have longer lockups than mutual funds, fewer regulatory pressures than banks, and a mandate to find value in contrarian ways?

Maybe, but that makes recent hedge-fund redemptions a problem:

That has led to a dropoff in bond market liquidity, as funds which might have snapped up bonds as their prices fell, instead steer clear, says Mark Heppenstall, chief investment officer of Penn Mutual Asset Management.

"Hedge funds were a backstop for the markets and helped provide that liquidity," said Heppenstall, who oversees over $20 billion in assets managing the investment arm of Penn Mutual Insurance. "So when they started to underperform for awhile and started to shift into risk off, it eliminated that."

Elsewhere, high-yield bonds are volatile.

Things happen.

Bob Diamond might buy Barclays's African operations. Samsonite is buying Tumi. AMC Entertainment is buying Carmike Cinemas. Yahoo Still Searching for Ideas as It Adds Advisers to Help. China Said to Intervene in Stocks Ahead of Annual Policy Meeting. Elliott Discloses Stake in Qlik Technologies. Delta Lloyd Locked in Dispute With Highfields Over Rights Issue. Aubrey McClendon, Restless and Reckless Wildcatter, Was Deal-Making to the End. McClendon’s Death Casts Cloud Over Probe. Facebook Set to Pay More British Tax After Criticism. JPMorgan released an open-source "election-type" blockchain with a smart contract language. Harvard-Trained Mutual Fund Manager Convicted of Securities Fraud and Obstruction of Justice. CFTC, SEC Inch Closer to Full Strength With Nominations Moves. First Latina Cravath partner. How French Elite Schools Are Disrupting Themselves. Trump University. Data falsificationHow big are the rats? Unsmellable snake.

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(Also banking job cuts, social media and orange chicken.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at

To contact the editor responsible for this story:
James Greiff at