LessonObservationIncentivesInvesting
Follow the fee before you follow the advice
Fred Schwed Jr. · Where Are the Customers' Yachts?
The idea
Schwed's 1940 book asks where the customers' yachts are, having seen the brokers'. The joke has not dated because the structure has not: in most of finance the adviser is paid whether or not the advice works, and often paid more for the advice that generates activity. The lesson is not cynicism about everyone. It is a habit of reading the fee before the recommendation, because the fee tells you what the recommender is optimising for. Buffett's Gotrocks parable makes the same point with arithmetic sixty-five years later.
Before weighing advice, work out how the adviser is paid and what that pays them to say.
When it works
Evaluating any product, fund or recommendation, and in interviews about asset management economics.
When it may fail
Fees pay for real work, and a cheap product can still be a bad one. The habit is to see the fee clearly, not to assume it is always the whole story.
How to use it
For any fund, write the fee as a share of the expected return rather than of assets. A two percent fee on an asset expected to return six percent is a third of the return, which is the number to discuss.
Where it came from
Book Where Are the Customers' Yachts? · Fred Schwed Jr.
What the source says. A 1940 book about fees and incentives that has not dated in a single respect: short, funny and quietly the most cynical thing on the list.
Connected ideas
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The Gotrocks family: how helpers take a fifth of what the owners earnInvestors as a group earn what businesses earn minus what they pay to helpers; every layer of advice is a claim on that pool.
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Concepts
Put it to work on L3VLUP
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