
True Link (YC S13) is launching an investment division - howsilly
https://medium.com/@kaistinchcombe/why-true-link-is-launching-an-investment-division-today-1bd30aff34a4
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n00b101
The glide path shown here [1] seems to advise being ~90% in cash at age 61 and
then ramping up risk until you're ~90% in equities by age 86. What's the logic
behind that?

[1] [https://cdn-
images-1.medium.com/max/600/1*TnBmuHLdCi1VGwBMS7...](https://cdn-
images-1.medium.com/max/600/1*TnBmuHLdCi1VGwBMS72s1Q.png)

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nandemo
I don't know this particular company's methodology but, in a nutshell, usually
they consider a number of glide paths and then run Monte Carlo simulations for
each, then choose the best performing one. The goal is to minimize the
probability of running out of money before dying, assuming the retiree
withdraws a constant amount every year. Some studies concluded that a rising-
equity path performs better.

Of course it's more complicated than that. There's a lot of assumptions
embedded in those simulations: life expectancy, bonds and stocks returns, etc.
See below for more info.

 _The Case for Increasing Stock Exposure in Retirement_
[https://www.aier.org/research/case-increasing-stock-
exposure...](https://www.aier.org/research/case-increasing-stock-exposure-
retirement)

 _Reducing Retirement Risk with a Rising Equity Glide Path_
[https://www.onefpa.org/journal/Pages/Reducing%20Retirement%2...](https://www.onefpa.org/journal/Pages/Reducing%20Retirement%20Risk%20with%20a%20Rising%20Equity%20Glide%20Path.aspx)

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pmiller2
That's interesting, because increasing the percentage of equities over time is
literally the opposite of what most other investment advice sources preach.
Thanks for the links. :)

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ikeboy
I've long been interested in an investment company that had a variable cut
that was directly based on the customers' preferences. Ultimately you'd want
the managers incentives based on the fees to be exactly aligned with the
customers' needs, which means that different fee structures are needed for
different kinds of customers.

Basically the hedge fund fee structure extended. So someone who wanted more
risk would give a higher cut of fees for higher gains and a lower cut of fees
for lower gains, and vice versa. The average expected value to the manager
should be a constant percentage of assets, but the distribution changes for
each customer.

One cool thing that naturally falls out of this idea is negative fees: if
someone is risk averse enough, then the incentives require the manager to lose
money if the customer loses, which causes the manager to be risk averse as
well for those funds.

(I have more detailed thoughts on this that this margin is too small to
contain; feel free to email me for some disorganized elaboration on the
above.)

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kaistinchcombe
The place this ends up sticky is that a manager with multiple clients can
jointly maximize fees – e.g. instead of properly hedging a bet within each
client's portfolio, you can put the bet in one client's portfolio and the
hedge in another's. If risk preferences are divergent enough the manager can
basically be making one-way bets – and frankly the point of this is it could
be socially efficient for two of your clients to bet against each other,
that's the _point_ , but for almost any nonlinear compensation structure you
dream up (even just sharing a little bit in upside, like venture) you can
figure out that the manager maximizes his/her own risk adjusted return by
playing clients off against each other or creating scenarios that sometimes
throw a client under the bus.

To be clear, a flat fee is the ULTIMATE one-way bet… but making the one-way
bet simple rather than complex means that it doesn't incentivize one type of
behavior over another, you get the one-way bet even without throwing a client
under the bus. And maybe at the end of the day your broker or advisor is a
good human and, barring any incentive to the contrary, will do his/her best
for the client. Kind of a crazy bet, but…

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ikeboy
>frankly the point of this is it could be socially efficient for two of your
clients to bet against each other

So I did think of your scenario, and actually one worse (directly moving money
from clients who don't value the next marginal dollar as much as clients who
do). A couple of points I thought of in response:

1\. Require clients funds to be transparent, so no moving money around after
the allocation decisions have been made (this protects more against my problem
than yours)

2\. Assume the manager's utility is linear in money, in which case hedging
their own fees doesn't make sense. If it's not linear in money, then this all
becomes more complicated. I got to the point of saying something like "get a
model for client utility and for manager utility of various amounts of money,
then set the fee to align incentives". If the manager's utility is linear,
then fees should be proportional to utility the client gained. If not, it
becomes more complicated and perhaps gaming like you describe is inevitable,
this is ultimately a math question for which I haven't modelled everything out
and so don't know. You may be able to still define a fee structure that gives
a proportional increase of utility to the manager for an increase of utility
to the client, but I don't know for sure how that would work for multiple
clients.

3\. If fees represent utility, and utility is maximized, then wouldn't it be
good anyway? (Kind of the point you made in the part I quoted.)

4\. Another point to keep in mind is how various kinds of returns are expected
to attract or repel customers, which factors into manager utility in a sort of
"side-channel". If that's significant enough, it might make the whole
incentives not work.

There are a lot of interesting math questions that go into this. I don't have
too many answers, but I feel like I have a good grasp of the questions.

Some other points I see in my notes on this:

1\. it could be that various kinds of existing funds already cover most of
what investors really want, and this won't be enough of an improvement to
justify the overhead. Investors who want a small chance of a large win go to
hedge funds, investors who want the whole market buy index funds, etc, could
be there's no room for innovation there

2\. incentive structures need to be very specified, won't just be a fee for
various amounts but need to take time dimension into account

3\. For that matter, utility is time-sensitive, so we need a complex model
just to determine utility, and maybe quizzing investors on utility won't
actually get the "truth"

I like to think of this as a combination of the insights behind insurance and
hedge funds, basically skewed utility curves.

I'd love to talk further if you're interested. I ended up starting a retail
startup instead of working on this idea because it's easier to break into, but
I'd be thrilled if someone turned it into a real company or incorporated it
into an existing one, and you guys seem to be capable of doing something like
that.

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kaistinchcombe
Love to help you out on this if I can. The other thing to note is that because
of the fear of double dealing there's a lot of stuff on the regulatory side
about what kind of fees you can charge – my sense is, even saying, "any
quarter in which you lose money, I'll just waive my fee" is illegal (perhaps
because it would push the advisor to focus on preventing loss rather than
tracking the market). But it's something that to a typical retail investor
seems incredibly obvious – why do you get paid for losing me money?? – and I'm
kind of sympathetic to, like I'm happy to share the pain in a down market (and
to retain the customer). And saying "I actually have to charge a fee in a down
market because it's in your best interest for me not to try too hard to avoid
bad quarters…" well… there's only so much game theory your typical retail
client wants to be doing sitting there in your office.

My gmail address is the same as my HN name. :)

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qwrusz
There's a big challenge for RIAs trying to do right by their clients and offer
appropriate glide path investment portfolios:

 _The products and potential returns that honest legit RIAs discuss with
potential clients will always be unappealing compared what competitor,
dishonest RIAs (who are willing to exaggerate) will be offering._

One lesson from the election: it's hard to convince people of a reality they
don't want to hear and warn them of others who are promising wildly optimistic
scenarios are not being totally honest with them. Potential investors want to
believe exaggerated talk of huge returns by dishonest RIAS and honest RIAs
lose clients because of this.

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kaistinchcombe
RRG YES

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qwrusz
RRG?

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tptacek
How is this better than a Vanguard Target Retirement fund?

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kaistinchcombe
Great question. It's a lot like a target date fund, but you actually want your
fund a lot more personalized. E.g. a man or a woman both 70 years old today
would be in the same 2015 target date fund, but she's going to live longer and
so has a longer time horizon and should be one or two percent more in equities
maybe. But this also varies based on whether you have equity in your home as a
cushion, have long term care insurance (which pushes financial needs sooner),
are married (especially to someone older or younger), have a separate tax-
advantaged account (that should be spent later, typically, meaning you
actually have a very short horizon on your non-tax-advantaged account), etc.

The point is, you'd be surprised how different two people are in terms of
investment needs even if they retired the same year.

As an aside, we model our investment model most closely after target date
funds and annuities. Annuities offer a guarantee (subject to to the insurance
company's solvency) but high fees and low flexibility, while target date funds
offer good market participation and low fees but don't have the guarantee
component. We include a similar blend of securities as a target date fund
might, but also include an annuity component for the guarantee.

