Elasticity

Last week’s tumultuous market moves caused me to revisit an old economics concept of elasticity of demand. Don’t worry there won’t be a test at the end of our post, but we want to examine several real world concepts that impact the wealth advisory world.  Unfortunately the academic concepts and other rules of thumb aren’t helpful in the real world.

Fees

Most business relationships start and continue with a fee analysis.  The only guaranteed fee reduction is to cut out the middleman.  Once the client identifies the Middleman we can start focussing on the fees that matter.  ETFs and The Internet have been effective disrupters of the Middleman.  The challenge for clients and advisors is that indiscriminately cutting fees can leave us with a poor solution.  We need to understand what is provided for each fee so we don’t end up driving a car that runs but is embarrassing.

Tariffs 

The trade war with China was one of the many reasons for the market selloff.  Whether the President is correct or tariffs will get passed through to customers matters.  The impact on prices should trigger elasticity and have an impact on demand. Unfortunately price increases scare us and demand like stock prices will fall.  Inelasticity of demand trumps (pun intended) elasticity every time.  Maybe millinnials are on to something and prices matter for the Gig Economy.

Profits

The recent IPOs have shown that profits don’t matter as much as they used to.  The markets seem to believe in Elasticty and that lower prices and lower profits will translate into more customers.  The wealth advisory business is taking a different approach.  Recent advisor surveys show that the number one factor in going independent is a higher payout.  Advisors have been conditioned by Wall Street metrics and unfortunately these metrics don’t equate to profits.  Independent firms don’t have the ability to offer high margin products like their Wall Street brethren.  A un-conflicted business works for clients but conflicts with higher profits. Independence is elastic but advisors need to realize that you can’t grow your way out of an unprofitable business structure.  Someone forgot to share this reality with elasticity economists and recent IPO investors.  200 CEOs of public companies realize this and are proposing a pivot from Milton Friedman’s shareholder value focus and adjusting it to focus on employees.  Herb Kelleher understood this reality years ago.  We miss you Herb.

 As we transition to Millennials and the Gig Economy we need to realize that caring for others is the ultimate elastic demand.