The Investment Marketing Game: How Industry Tactics Prey On Your Wallet
For much of the investment management industry marketing *is* quite a dirty part of the business
I used to think of marketing as a dirty word. Something to be ashamed of. It took me a while, but I finally understood why I felt that way, and also why it’s the wrong mindset.
For much of the investment management industry marketing is quite a dirty part of the business. Why? Let’s examine how the industry typically does marketing. The thing I want you to pay attention to is how in these cases it’s done with an almost adversarial mentality of the customer as someone to profit from rather than to help.
Industry Marketing Tactic #1: The field of a hundred funds blooming
This one works as follows: a mutual fund complex launches 100 funds. Five have standout 1 to 3 year results, so the marketing apparatus sells the heck out of those to unsuspecting customers. When the inevitable reversion to the mean (mean being equal to market returns less fees) occurs, they find another five funds to market in the same fashion.
The hope is to always keep bringing in new customers, and to try to minimize the churn among the disappointed ones by keeping them within the mutual fund complex and selling them the new “fund of the year.” Hopefully you can see how this ends: customers make a return that’s equal to roughly market minus fees, and the mutual fund complex skims its 0.5% to 1% off the top for no value added. Where are the customers’ yachts, indeed.
Industry Marketing Tactic #2: Shooting star
A hot-shot hedge fund manager launches a modest-sized fund. He sits relatively quietly until he hits a stretch of 2-3 years of great returns. Perhaps he even invests in a way to take large risks to achieve the possibility of big gains that he can market. Perhaps not and he is simply waiting for positive randomness, it doesn’t matter.
Having hit the lucky streak, he goes on a marketing rampage. Of course, he supplements the amazing recent results with a narrative. Nothing sells like a story about the “special sauce” that he uses to produce these amazing results. The performance-chasing customers pile in, just in time for the reversion to the mean. The result is that on an asset-weighted basis his customers have a result ranging from terrible to mediocre, whereas the manager makes a killing for himself. Ouch.
Industry Marketing Tactic #3: Don’t think for yourself
This is done by marketing ninjas skilled in the black arts of behavioral persuasion. It usually involves some combination of the following:
Social Proof – “Did you know that [big name XYZ] invested with us?”
Scarcity – “This is only available for the next 2 months, closing the fund soon, we are so successful.”
Group Affinity – “Trust us, we are part of the same group.”
Reciprocity – “We like you, now like us back.”
Switch The Question – “Don’t answer whether you think we will do well with your investments, answer a different question, such as do you like us, are we well dressed and look the part, etc?”
The point of all of this is for you to stop using the rational part of your brain and to switch to the “reptilian” brain which uses short-cuts that favor the persuader to get the prospects to make quick decisions.
What do all of these methods have in common? The customer is the “mark” that exists primarily to provide wealth to the investment manager. They can’t be too smart or thorough in their decision-making process, as these tactics work best on those chasing trailing performance and the easily persuadable who make impulsive decisions. Sadly, there seems to be no shortage of customers who fit these characteristics and fall for these tactics.
Don’t be one of them. At least not if you care about your long-term wealth.
If you liked this article, please “like” and share this article. If you are interested in learning more about the investment process at Silver Ring Value Partners, you can request an Owner’s Manual here.
About the author
Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.