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10/10/12 – Gatekeepers and Sturgeon’s Law

Written by Brad McMillan, CFA®, CFP® | Oct 10, 2012 12:16:25 PM

The reason the posts are late today is that I was sitting on a panel at a conference, discussing the role of gatekeepers in the industry. For those who don’t know, a research department at a broker/dealer typically reviews myriad products and provides opinions on them for the broker/dealer’s advisors. Investment products that are considered “very good,” based on the research department’s analysis, may end up being recommended. As such, we analysts are considered the gatekeepers that product sponsors would like to have on their side. At the very least, they’d like to avoid getting a negative review.

Much of the discussion at the conference centered on the opportunities that exist for product sponsors to create new products to better serve advisors and clients, which is all to the good. We love to see new and innovative products. Other discussion was less edifying, though; it had to do with how companies can essentially get in with products that are, at best, about the same as every other product out there.

This is a common problem, because, unfortunately, it is nearly impossible to be the best in every area. So, while a company may have one or several excellent products, its other investments may not be as good, and some may not be good at all. Our job as gatekeepers is to apply Sturgeon’s Law and recommend only the good ones.

Sturgeon’s Law, named after science fiction writer Ted Sturgeon, states that “Ninety percent of everything is crap.” That’s a bit harsh, so to put a gentler spin on it, the financial markets are not Lake Wobegon, but, mathematically, you know that 50 percent of all investment products have to be below average.

Moreover, beyond selecting good investments, the problem of building a proper portfolio—and, hardest of all, sticking with it when times get tough—is not easy. As gatekeepers, our job is to help advisors do this.

At a time when the financial industry is taking a lot of heat, I think it is important to remember the real value that we analysts create for advisors, as well as the value that advisors create for their clients. What we and they do is not easy, and we do not always get it right, but over time, we are helping people pursue their goals and lead better lives.