Davis Janowski gets scooped up by Wealthfront
The longtime IN technology voice will now straddle Silicon Valley and the East Coast in a new role
It is interesting that technologist think they can be relevent with out an indepth broad based understanding advisory services, when the problem the industry faces is simplifing high level advice which is not remotely close IARs selling advice products.
Isn’t the real problem that technologist try to make advice a product IARs sell, yet to facilitate fiduciary standing advice must be an expert authenticated prudent investment process that advisors magage. The difference is a broker is a sales agent versus an advisor’s expert professional standing. It is like comparing a book keeper aspiring to be an accountant to a CPA.
Wealthfront has an important role to play but it better have a very big check book as the simplifing enabling resources have yet to be developed and require indepth understanding of advisory services that presently does not exist in a brokerage or custodial format. It is not a simple question of integration. It entails significant development of enabling resources not presently existant.
I wish my colleagues from the Stanford University Graduate School of Business the best wishes in Wealthfront but would like to point out:
“Academic finance has evolved a long way since the efficient markets theory was widely considered proved beyond doubt. In 1973,... Burton Malkiel’s book, A Random Walk Down Wall Street, appeared…The efficient market’s model, for the aggregate stock market, has still never been supported by any study linking stock market fundamentals with subsequent fundamentals.” – Robert J. Shiller, Yale economics professor. (“From Efficient Markets Theory to Behavioral Finance,” 2003.)
Utilizing the modern portfolio theory requires the use of mean-variance optimization:
“Unfortunately, the mean-variance optimization approach provides little useful guidance in choosing a portfolio.” – David Swensen, CIO, Yale University, Pioneering Portfolio Management.
Selecting famous academics who promote failed theories may be good for raising money from VCs, but will that serve the public?
It is not so much a question of failed theory, but failed execution, as the theory is not locked in time but its application seems to be. When advances in MPT are made, they are not adopted because either the old theory was good enough or the enhansements were too complex to execute. Thus the curse we all know,as if the initial iteration of MPT is the only thing the user knows, then it is good enough, even though a series of subsequent enhancements greatly improves on what was known decades earlier.
The important thing is there is a base point body of knowledge from which we continueally increase our understanding of what works and what can be improved upon.
A lot of the push back on innovation is that in its early stages it is too complex too execute. Thus our challenge as an idustry is to make it digestable and easy to use which often entails a different delivery format than one advisor limited to their own devices. Large scale institutional support has not yet emerged and is not likely to come from the brokerage industry which thwarts innovation.
This is not an academic exercise Gents. It is a practical, real world application of academic theory as a starting point supplemented with a great deal of engineering. Part of what has led me to join Wealthfront is the fact that two-thirds of the staff are composed of engineers, quants and developers. It is not burdened with a large C-suite or bunch of execs or a mass of divergently-thinking investment managers. Rather a staff dedicated and inspired to build something that has not been built before to serve the under-served.
“Wealthfront determines the optimal mix of our chosen asset classes by solving the “Efficient Frontier” using Mean-Variance Optimization (MVO).” – Wealthfront Investment Methodology White Paper (https://www.wealthfront.com/whitepapers/investment-methodology#1-introduction)
Here’s what Meir Statman, who is on Wealthfront’s investment team, wrote in July 2013, “End the Charade…” http://www.fpanet.org/journal/EndtheCharade/
“The usual application of the mean-variance optimizer is a charade, “an absurd pretense intended to create a pleasant or respectable appearance,” according to OxfordDictionaries.com. Charades are fun, but they are not funny when we are blind to their pretense.
“Here is how the charade is played within the context of portfolio theory. We assemble estimates of parameters for the mean-variance optimizer: expected returns, standard deviations, and correlations. We assemble the estimates from historical returns or from seemingly sophisticated methods, such as those invoking Bayes theorem or “resampling.” We place the estimated parameters in the mean-variance optimizer and give it a spin. Out comes an efficient frontier with portfolios such as the one with 70 percent in European stocks and 30 percent in gold. We find this portfolio unappealing, so we push down the estimated return of European stocks or add a constraint that limits European stocks to 10 percent of portfolios. We give the optimizer another spin and get another efficient frontier. We continue spinning until we get an efficient frontier with portfolios that really appeal to us, the ones we wanted all along. The result is that we can now pretend that we have found them on the 'scientific’ efficient frontier.”
I don’t see this as an academic exercise but a real question about not only Wealthfront’s investment approach, but how portfolios should be selected and managed by advisors. I have made my case that portfolio strategy should not be 'static’ selections of assets but rather should be risk-managed to minimized drawdowns to investors’ tolerance levels, which is much different than the buy, hold, and rebalance single period solution of MPT.
I like the engineering focus of Wealthfront too.
P.S. In the article, it states that: “Thought leadership is an important part of our marketing and he’ll lead that,” says Andy Rachleff.
So I figured it was appropriate to talk about Wealthfront’s investment approach and thought leadership in that regard.
Best wishes, we all are sure of your good intentions.
Having worked with leading edge academics of note and top engineers, the one thing they are not known for is synthesizing and simplifying a broad range of intellectual capital in to an expert, easy to use system.
There are significant intellectual capital holes top be filled, best practices to be advanced and enabled and the overarching fiduciary construct required for professional standing which are not a simple extrapolation of planning software or the brokerage advice model. An impressive array of desparate calculators with no simplifing overarching construct that results in professional standing creates the false allusion of advice and does not hold up to the statutory duties required. Depending on the granularity of expert counsel desired, there are at least 265 duites required in real time for the continuous comprehensive counsel of fiduciary standing. This is perfectly suited for technologist to enable, the unresolved question is simplifing it all so it is safe, scalable, easy to execute and manage as a high margin business at the advisor level.
This sort of enterprise engineering entailing expert authenticated prudent process, advanced approaches to portfolio construction, work flow management and resourcing, conflict management may not be rocket science but as they say the devil is in the details. It all depends on the outcome you wish to accomplish.
So far advisor practices are not scalable, can not be authenticated for professional standing, do not advance modern approches to portfolio construction and do not offer an effective means to either manage their value proposition or margins. When that occurs we have a profession. All of which requires a simplifying expert overarching process (asset/liability study, investment policy, portfolio construction, monitoring and management) non-existant in any planning software suitable for professional standing.
The solution is not a planning solution but an advisory enterprise solution in accord with professional standing based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters with best practices to delineate skill..
Love to see what you come up with.
Meir Statman is getting pretty close by recognizing today’s optimizers are poorly constructed and executed. Dick Michaud is famous for the comment that today’s optimizers are used only to get the answer one is looking for. The management of uncertainty should entail a little humility. The penchant for mathmatical precision to the 9th decimal point just illustrates how misunderstood and mis-used optimizers are.
Capital markets assumptions are far more determinative than the historical performance characteristic of asset classes.
Dick Michaud’s actual quote is “ opimizers are tortured until they give up the right answer, which defeats their purpose.”
Statman, I am sure, is of the same thinking as he cites Michaud.
Yet, there is still the question of a simplifing overarching process that does not dumb down fiduciary duty—which has yet to be acknowledged or resolved which brings expert fiduciary standing with in reach of every advisor. Very powerful transformative achievement that outdates the brokerage business model as it is faster, better, cheaper, in the consumers best interest and pays 50% more.
Think of financial planning as an adjunct of investment policy, not a complete advisory services solution.
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