Charles B. Brown
Portfolio Manager and Financial Advisor
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I recently finished reading Nassim Taleb’s newest book: “Skin In The Game: Hidden Asymmetries In Everyday Life“. The phrase “skin in the game” refers to having a personal stake in something (a decision, policy, advice given, etc…). That “stake” can be monetary, reputation or something else, but Taleb believes that people should be exposed to both the upside and downside of their decisions.
As Taleb himself puts it:
“It is not just that skin in the game is necessary for fairness, commercial efficiency, and risk management: skin in the game is necessary to understand the world”
The financial crisis is a great example of skin in the game, or lack thereof. Bank executives who oversaw failed leveraged bets on housing loans were eventually bailed out by the American taxpayer. Not only were many allowed to keep their jobs, but many received massive bonuses in 2008* and 2009**. This is the opposite of skin in the game – all upside, no downside.
In my world (coming from an ex-trader where I had skin in the game all day every day), there are financial advisors with skin in the game and some with none. If an advisor charges a certain percentage on assets under management, that implies (at least) some skin in the game. If the client’s account rises by 10%, the advisor receives 10% more in fees. If the account goes down by 10%, the advisor receives 10% less. This aligns the goals of the client with the goals of the advisor – to maximize returns, minimize risk and provide quality client service.
What about an advisor who “sells” a mutual fund, annuity or whole life policy where the commission is paid in full after the sale? There is little further incentive to service the product sold and certainly the advisor has little downside if the product sold does poorly. In essence, there is no skin in the game.
Taleb believes that skin in the game applies to everyday life as well. Take two average suburban teenagers for instance. Each of them receive a brand new Jeep Wrangler for their 16th birthday. The first set of parents give the teen a new car AND pays for gas, maintenance, any speeding tickets and insurance – everything is covered by the parents. The second set of parents give the car on the condition that the teen must be financially responsible for gas, maintenance, tickets and insurance – they require the teen to have skin in the game. Which teen do you think will take better care of the car? Which teen will be more respectful of the car? Which teen is less likely to drive like a maniac and eventually wrap the car around a telephone pole? Taleb would argue that its the teen with skin in the game.
*https://www.nytimes.com/2009/01/29/business/29bonus.html
**https://www.cbsnews.com/news/wall-street-doled-20b-in-bonuses-in-2009/
***The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
****Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates and Ausdal Financial Partners are independently owned and operated