Asymmetrical Relationships Don’t Work for Investors

Posted by Frank Parker on 4/20/18 8:30 AM
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One-sided relationships rarely work for one of the individuals in the relationship. Unfortunately, sometimes these types of relationships exist in our personal lives as well as in our investing lives. In asymmetrical relationships, information is not shared by the party that possesses a greater material knowledge than the other. For example, perhaps an advisor from a broker-dealer or wire house doesn’t share all the relevant information with the client. When new clients come to SWS Partners, many times they’re escaping this type of relationship.

The lemons problem

Consumers and business marketplaces have a long history with one-sided deals. It was popularized in the 1970s, when George Akerlof, an economist and professor at the University of California, Berkley, referred it to as the lemons problem. The lemons problem refers to the disparity of an investment’s perceived value due to unequal information that is available . Of course, the phrase itself is more commonly associated with defective used cars, but the reality is that asymmetrical relationships related to your investment portfolio can be more detrimental than the purchase of used car.

Investing decisions in an asymmetrical relationship are much worse than if the client had the same information as the advisor. At SWS Partners, we believe clients should have access to the same information we do. That’s why we provide our clients with technology that gives them transparency to their investments anytime they want to access it. Financial inclusion is something we are ardent believers in and we think our relationships are better for it.

When clients have the same information that we do as advisors, they’re able to divert their worst impulses to be over-reactive in a down market. Accessing information anytime and not just once each quarter puts you in a better position as an investor to make informed decisions. The types of technology we use provide 24/7 access, but are no means a way of putting your investments on auto-pilot. Technology coupled with human guidance is best option for the client and our firm. Each client brings specific problems, emotions, and experiences to us, which requires us to be responsive to market conditions and client needs.

One-sided or asymmetrical relationships are a thing of the past in most industries. Financial technology should also make it a thing of the past in financial services.

Topics: Transparency in Investing

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