February 18, 2020
Gold prices, which continue to bounce near the USD $1,600 per ounce level, are at record levels in dozens of currencies. However, they continue to trade about 20% off their all-time highs in U.S. dollar terms.
Yet the yellow metal has been one of the top-performing asset classes since the year 2000, far outpacing stocks, bonds, and housing.
The bad news is that top investment advisors appear to have missed the boat.
According to Jeff Christian of CPM Group, the research firm’s Gold Yearbook shows that gold holdings as a percentage of total private financial assets remain less than 1%.
No commissions, no sales
Much of it has to do with the environment in which today’s investment advisors work, says Elisabeth Préfontaine, founder of Octonomics, an independent research and consulting firm that specializes in financial technologies. “The large investment firms rate advisors based on the commission income and fees they bring in, not on how much money they earn for clients,” explains Préfontaine. “This creates skewed incentives, which leave investors shortchanged.”
Préfontaine, who headed wealth sales at BlackRock iShares before heading out on her own, should know. Much of her recent research has been in bitcoin, which is not yet regarded as a traditional asset class but which also delivered substantial outperformance.
Préfontaine sees many parallels between the crypto asset and physical gold. “Many of the larger firms simply don’t have products that enable their clients to get exposure,” says Préfontaine. “They often end up just ignoring them.”
Individual financial advisors aren’t completely off the hook.
If they inform clients about products that the firm doesn’t offer, they take the risk their clients might move assets elsewhere. Although clients would win, the advisor would lose revenues.
This creates dramatic conflicts of interests. “Investment advisors today are essentially glorified salesmen,” says Préfontaine. “They have no incentive to recommend gold and bitcoin.”
Big banks block access to key data
Incentives would change substantially if clients had a way of measuring the performance of advisors. “Institutional money managers have all sorts of statistics to compare their risk-adjusted returns, net of fees, with peer groups,” says Préfontaine. “But retail investors have nothing.”
Préfontaine has been an activist for investor rights for many years.
One of her early initiatives was an attempt to create a fintech tool named Rative, which would compile data on individual advisors so that investors could compare their performance with other investors that had similar profiles.
It hardly comes as a surprise that the Big Banks, which control Canada’s largest financial institutions, blocked access to key data that Préfontaine needed to assess advisor performance. This stopped her project cold.
“It makes no sense,” says Préfontaine. “It’s the equivalent of a golfer who wants to be recognized as a professional but who refuses to count his strokes. We even have statistics about the performance of vacuum cleaners. It’s time for the investment industry to catch up.”
Financial advisors: increasingly replaced by robots
One major signal of possible excessive fees and investment advisor sub-par performance is the increasing popularity of robo-advisors.
But there, too, Préfontaine has questions.
“We know they are cheaper, but are they better? That is far from clear,” says the veteran researcher. “The only way to determine that would be to have access to the data.”
Until that happens, Préfontaine advises investors to get second opinions and to do their own research.
“There are no short cuts,” says Préfontaine. “It’s your future. If you want it to turn out the way you’d like, you need to take charge of it.”