The Dumb Money Is Getting Smarter

Those who work in financial services have long had a tendency to regard their clients with a mixture of scorn and disdain. After all, their supposed facility with money is why they get houses in the Hamptons or the south of France and you get a staycation in the backyard.

Smurfs, greater fools - and the dumb money - are among the ways that those who pay others for their financial expertise are referred to.

The Dumb Money, in particular, has traditionally been applied to the big institutional investors - pension funds, regional bank trust departments and all of those others to whom the unsuspecting turned over their savings in hopes of, mostly, not losing it and, if the gods smiled, maybe made a few bucks. They, in turn, would hand over the lucre to those closer to the action, not have to do much beyond issuing quarterly reports either claiming credit for gains or holding a few hands while uttering unctuous bromides about the unknowability of markets when things went south.

But ever since the financial crisis revealed that maybe the smart guys in the sharp suits didnt know quite as much as they let on, or were simply even less ethical than anyone's worst fears, the dumb money has set about educating itself. Lots of investors simply withdrew from the markets, not trusting a process that gives insiders first looks at the good investments. Some refused to pay brokers or advisers and flocked to do-it-yourself online options that turned out to be just about as good - especially after subtracting the latter's fees.

The culmination of this trend may have recently occurred when Calpers, the California Public Employees Retirement System, the biggest of the big funds, announced that it was terminating all of its hedge fund investments and would no longer partake in that game. The reason was the growing complexity, rising fees and declining performance of said smart guys. This is momentous news because there would be no hedge fund or private equity industry without funds like Calpers. So the fact that they are saying 'enough' is sufficient to rattle even the most clubbable of Princeton-educated wealth advisers.

The irony is that after years of using technology to steal a march on the rest of the investing public and selling its virtues besides, the financial services smart money may be finding that those tools are being employed to disintermediate those who thought the laws of economics and technology did not apply to them. JL
 
Ben Steverman reports in Bloomberg:

The dumb money falls for investing fads, sells into market panics and pays ridiculous fees. The smart money doesn't.

In the parlance of Wall Street, there's the "smart money" and the "dumb money." The dumb money falls for investing fads, sells into market panics and pays ridiculous fees. The smart money doesn't.
It's getting a lot harder to tell the two apart
More amateur investors have given up on trying to outsmart the market. And even the most sophisticated investors are rejecting strategies that require Ph.D-level math and managers with million-dollar salaries.
The U.S.'s largest pension. The $298-billion California Public Employees' Retirement System, or Calpers, is ditching all of its hedge funds -- $4 billion worth. The dramatic move isn’t tied to performance, though that's been lousy. It's to "reduce the complexity [and] costs in the program," interim chief investment officer Ted Eliopoulos told Bloomberg.
Cut cost and complexity -- it’s a slogan that fits on a bumper sticker, and it’s being adopted by investors large and small. It took a while for this argument to go mainstream. Index fund advocate John Bogle founded low-cost fund firm Vanguard Group Inc. in 1975. Now trillions of dollars are following Bogle's advice. The Boston Consulting Group estimates the market share of index funds and exchange-traded funds, designed for simplicity and low fees, has doubled since 2003. Vanguard itself has almost $3 trillion in assets, making it the world's second-biggest money manager after BlackRock Inc., the biggest provider of ETFs.
Investing programs are getting easier than pie. With a target-date fund, for example, a 401(k) investor no longer needs to know the difference between a stock and bond. These all-in-one funds, which automatically adjust risk levels as workers approach retirement, are taking over retirement plans, and are the favorite of young workers. At the end of last year, $618 billion sat in target-date funds, the Investment Company Institute (ICI) says, up from $160 billion in 2008.
The ultimate in idiot-proof investing is a new raft of start-up online advisers, sometimes called “robo-advisors.” These firms, which include Wealthfront and Betterment, design extremely simple and slimmed-down web sites and put all clients in cheap, basic index funds and exchange-traded funds.
Unlike established discount brokers such as Charles Schwab Corp., the new firms pare away "a million features that only five percent of the user base actually wants," says Grant Easterbrook of consulting firm Corporate Insight. Eleven start-ups were advising $15.7 billion in assets in July, Corporate Insight says. That's a small slice of the investing universe. But that’s a 36.5 percent gain since April, which works out to an annual growth rate of 250 percent. And major brokers have noticed. Schwab has hinted it’s working on its own robo-adviser platform.
Both big established players like Calpers and the hot new start-ups use the same investing mantra: Cut costs and simplify. It’s working. Fees are falling, with the average expense ratio on an equity mutual fund down 25 percent in 10 years, ICI data show. That means even dumb-as-a-post investors get to keep more of their money. And that's pretty smart.