One of the most famous movie quotes comes from Jerry Maguire: “Show me the money”. In my industry, I hear so many stories about making money in stocks that make me want to shout at the teller “Show me the money!” I want the authors or story tellers to show me their strategy really works. Recently, I received a new white paper from Northern Trust that was titled “Getting Paid to Lower Your Risk”. The authors were credentialed (PhD and CFAs); These are intelligent people. I wanted to see how Northern Trust was paying their clients to lower their risk.
I custody my client accounts at Interactive Brokers, who started the “zero commission” wars – apparently to force some competitors out of business, and it seems to be working. Ameritrade has gone to Charles Schwab and eTrade has combined with Morgan Stanley. But this paper seemed to claim by its title that Northern Trust was taking it a step beyond by paying you to open an account. I had to read it.
You will not be surprised to discover the title was “clickbait”, in other words it was misleading. It was not what it seemed. Actually, the entire white paper was. It was, in my opinion, a Potemkin Village. If you are not familiar with the term let me fill you in. In the 1700s, Catherine the Great of Russia invited dignitaries from around the world to come to Russia. Apparently embarrassed by the poverty of the masses, she instructed Field Marshall Gregori Potemkin to build a new village. The village had to look prosperous to impress the visitors with how well off the people of Russia were. Thus, a Potemkin Village is today any descriptive or false construct created to deceive the readers or viewers.
The paper, to me, was a Potemkin Village. Northern Trust was not going to pay people to open accounts at the brokerage. The paper proposed only that investing in low volatility stocks, those that fluctuated less than average, would do better than higher volatility stocks and would do better after the market sold off and then rallied. That was their insight.
They had hypothetical models and graphs and tables to show how it was that low volatility stocks did better during and after the sell-off than high volatility stocks. The key thing to note is that the models, graphs and tables were all hypothetical.
To summarize, Northern Trust said: When the market went down 25%, the high volatility stocks would go down 25% but their low volatility stocks would only go down 4%. When the market turned up and the high volatility stocks got to break-even, their low volatility stocks would actually be up over 3% and making money for their clients.
“Voila!” as the French would say.
According to their hypothetical models, clients will make more money by owning low volatility stocks.
I do not believe it is difficult to show actual performance. We house our portfolios at Interactive Brokers and hire Morningstar to track and calculate account performance for all of our clients on a quarterly basis. Those accounts are compiled into a composite performance which we post on our website. We calculate our performance with an algorithm, computer-driven math without human intervention.
Northern Trust is perfectly able to do that as well. Then they could show how their claim really works. Just as Jerry Maguire said, “Show me the money!” Show that it works in reality, not just with hypotheticals.
I have talked to Northern Trust clients who have not seen their accounts do better than mine. I am not sure as of the end of May the values had reached breakeven with the December 31, 2019 values. My client accounts were well above the December 31, 2019 values.
So what gives?
I worked for 18 years at major brokerage houses that employ thousands of financial advisors. This type white paper is typical of what I used to see. The purpose of these Potemkin Villages is to convey a message to the firm’s financial advisors and, through them, to their clients. In this case, the firm would like their clients to invest in low volatility stocks.
The question is, why would the firm want to produce a white paper that is based on hypothesis that does not seem to be supported by actual client data? Like so many of the papers and marketing materials I saw during my tenure at these big firms, it seems the real motivation is to protect the firm. When the losses are smaller, there is less chance of being sued – and if sued the losses will be less. When there are client losses there are those clients who will sue.
Just guessing, but if they cannot show it really works with client accounts then why would they write such a white paper?
Unfortunately, this is not the only white paper like this. I see these from firms big and small. Usually I simply delete them without ever opening, but this paper caught my eye with its too-good-to-be-true offer. I was not surprised, just disappointed.
Each and every time I see papers or strategies like this I want to scream, “SHOW ME THE MONEY!” I want to see actual composites of client accounts that prove what the paper says is true. I want to know I am not being shown a Potemkin Village.
Is your account is still lagging the value it was on December 31, 2019? Is the advice you are getting serving your best interest, or your advisor’s. Is the advice you are getting based on provable and verifiable composites of client accounts or just a good story? Are you really getting value for what you have paid? Shouldn’t you be asking if it is a time for a change? Isn’t it time to seek someone who can show you the money?
 Hunstad, Michael, PhD, Jordan Dekhayser, CFA, and Robert Lehnherr, CFA, “Getting Paid to Lower Your Risk”, Northern Trust White Paper (Feb 20, 2020).