Why the Customers Don’t Have Yachts, and Why it Doesn’t Matter

The oft-repeated phrase ‘Where Are the Customer’s Yachts?’, the the title of Fred Schwed’s 1940 classic book on investing, has become something of a cultural refrain for greed and self-interest in the financial industry (but also in other industries), of how brokers allegedly intentionally enrich themselves at the expense of their clients.

The origin of the phrase is described by the anecdote:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,

“Look, those are the bankers’ and brokers’ yachts.”

“Where are the customers’ yachts?” asked the naïve visitor.

So the question, more tersely is, why are the customers/clients not as rich as their brokers/advisers?

That is a pretty nonsensical question…what if it were rephrased, but with different examples: why are people who buy Nike shoes not a rich as Phil Knight or Michael Jordan? I bought golf clubs…why am I not as rich as Tiger Woods? That is literally the same logic. Brokers provide a service to clients by managing money. Some do a better job than others. Whether or not such services are worth the fees is a matter of debate though (I generally believe they are not, but that is another story). But expecting the recipients of a service to be as wealthy as whoever is providing them betrays common logic.

Someone who is entrusting their money to billionaire hedge fund manager Ray Dalio or billionaire bond trader Bill Gross, does not reasonably expect to become as wealthy as either.

Whether or not the manger does a good job, such as by beating a certain benchmark or preserving capital during a recession or crisis, matters most to the client.

Consider a money manger who is really successful, returning 15% a year (13% after fees), and he collects $10 billion in capital total from 10,000 clients (each putting in $1 million). Each client makes $130,000/year, which is not nearly enough to buy a yacht, but the clients are happy anyway because they are beating the benchmark. Now if the fund manager collects 2% off the top, he earns $200,000,000/year, enough to buy a yacht, but he’s helping his 10,000 clients too, who would have made less had they invested on their own. The more people the manger helps, the more money he makes…what’s wrong with that? Why should the broker’s compensation not be proportional to the number of clients he has, just as Nike’s revenue is proportional to the number of shoes it sells?

But what if the manager does a poor job…the capitalistic system stipulates that he should still get paid, because he is still rendering a service (but not doing a very good job at it), but clients have the power to manage their own money (to vote their with wallets), and if enough do so, mangers will either charge smaller fees or possibly even cease to exist.

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