April 15, 2018
To: Customers & Friends
From: Christopher Weil & Company, Inc.
One quick, and superficial way of characterizing the success of many dominant technology-driven enterprises (for example, Amazon, Uber and AirBnB) is to attribute such success to the death of the traditional middleman. (Recognizing the importance of language, I’ll use the term middle-person.) With this death, it is claimed, comes more efficiencies and less costs for the consumer. Consider big box retail. It is not a stretch to describe bricks and mortar retail as traditional “middle-people,” providing the marketplaces where buyers and sellers meet. With the advent of e-commerce, the traditional middle-person role has, so it is said, become obsolete. Buyers and sellers can now “meet” directly (via electronic connectivity) and do unmediated transactions.
Well, maybe. Without getting lost in a thicket of subtleties, I am pretty sure that the middle-person role in commerce is morphing, not ending. In some cases though, the conversion of shopping centers to “lifestyle centers” and strip malls to “neighborhood centers” for example, there is no morphing at all. Owners are actually doubling down on their physical locations. A major European property company has just agreed to acquire Westfield Centers for almost $16 billion. At that price, the Westfield shopping center portfolio is valued at a 5% capitalization rate, which suggests assets that are currently in great shape operationally and have, as well, very promising futures. So there is no “disappearing” middle-person here, just more of the same except more so.
But even where it appears that the middle-person is disappearing, appearances are deceptive. What is actually happening, in many cases, is that the form the traditional middle-person has taken is changing. So often now, the middle-person is actually the technology which connects buyers and sellers. This is not a new phenomenon, just a massively expanded one. Today’s smartphone is, among its other uses, a “technology that connects buyers and sellers.”
‘So what?’ I hear you ask.
Remember the saying that he who controls the agenda controls the meeting? Electronic middle-persons are controllers of the agenda. And just as all traditional middle-persons have their biases (he who pays the piper calls the tune, after all, and most middle-persons are beholden to some seller somewhere), it is no secret that electronic middle-persons are deliberately programmed to guide, nudge and focus users/buyers toward a (seller preferred) outcome.
This is not new news. But what is new is the extraordinary capacity electronic middle-persons have (and will have in spades going forward) to influence buying decisions, a capacity far beyond that associated with conventional intermediaries.
Consider the current controversy over net neutrality. Whatever your opinion may be as to the merits of the respective arguments, it seems clear to me that those who favor the position of the Internet Service Providers (ISPs being classic electronic middle-persons and, to confuse matters further, product suppliers as well) are de facto defending the right of these middle-persons to control access (or at least provide most-favored access) to the “product” on offer by sellers, and to do so based on the ability to pay. Current government support of the ISPs’ opposition to net neutrality arises, it seems to me, from an ideological position that the race should always go to the strong and that it is the function of government to clear the way for the strong to get stronger. And if you argue that the market will solve this problem, should the ISPs prevail, then the government invites you to take your business to an ISP that offers net neutrality. Personally, I believe there will be no such animal.
Do you doubt the enhanced capacity of electronic middle-persons to influence buying decisions? The 800pound gorilla in the Great Artificial Intelligence (AI) Development Race is the (often unspoken) understanding (on the part of all who are paying attention) that AI applications have, or will have, the actual and potential ability to move buyers (who may believe themselves to be neutral) to decisions favorable to the site “sponsor.” This is not the result of some sinister conspiracy. It is the natural consequence of AI development. AI technology can aggregate massive amounts of data about individual attitudes and practices (political, religious, health, financial, consumption and so on), “digest” and instantly “feedback” this data to any (middle-person) technology platform. When anyone, anywhere (in theory and increasingly in practice) seeks to make, say, an online buying decision, the intermediary will instantly “know” how to “design” site content to conform to (actually cater to) the buyer’s buying habits and preferences.
I will leave it to you to consider the implications inherent in the AI phenomenon. I suppose you could argue that insofar as commerce is concerned, its impact is relatively benign. Even if you accept this, there are any number of applications, or potential applications that have the very real potential for corrupting the relationships between buyers and sellers, governors and governed, educational institutions and students, tax authorities and tax payers -the possibilities are endless. It isn’t science fiction to imagine a case where a group of dedicated “conspirators,” determined to affect some particular economic or political outcome, secure control of a powerful AI installation and corrupt the communications process. We have already had a flavor of this, for example, in the placement of fake/misleading/incendiary items on Facebook by Russian sources seeking to influence the recent presidential election.
There is, I believe, one phenomenon on which all these possible developments are founded, and which in effect make these developments feasible. This is the well understood concept of scale. Without scalability (that is, the possibility of massive volume) there would be no such thing as a “technology driven enterprise” or, for that matter, any enterprise, public or private, in which the business model contemplates millions, and ultimately millions of millions, of (iterative) transactions. Scalability of operations is the Holy Grail of enterprise and is always, for example, prominently featured whenever a venture capital opportunity is pitched. The dream of enterprise scalability is one that resides in virtually every entrepreneur who hopes to build a great business, and virtually every investor who hopes to catch the next “unicorn” (a start-up company valued at more than a billion dollars).
Concentration, said J.M. Keynes, is the secret of economic success. Yes, but concentration in what? Obviously, in a perfect world, concentration in an enterprise that is going to go from very small to very large (that is, a business whose operations are scalable) with a corresponding breakout in stock price.
At CWC, we are not immune to this dream ourselves, which is why we have allocated some time, talent and capital to investment in venture capital and private equity.
In the process of thinking through (indeed, living with) this whole question of scale and its implications for investors, managers and advisors (all of which we are), we have discovered what seems to us to be a serious conflict between the demands of enterprise scalability and the way we think our business should be run.
The last thing that entrepreneurs and investors seeking enterprise scalability can tolerate is undue product and/or service customization. Customization is like a monkey wrench thrown into an otherwise well-functioning machine. It slows everything down --not to mention the inevitable additional costs necessarily incurred. The “perfect” business model for a potentially rapid-growth business is one in which whatever the business does is done the same way, over and over, with a minimum of variability.
I have oversimplified. But I would argue that if you analyze any great growth company, no matter how complex its operations, the spoken or unspoken focus that conditions its strategic decisions is the demand for uniformity in its core business functions (insofar as this is possible).
At CWC, we are no different than almost any other business. We view growth as desirable. But we know that our success, as a business, is founded on a cohort of satisfied clients. We also know that it is only at a very superficial level that people are the same and that, therefore, if we are to do right by the people with whom we do business we must be prepared to relate to each based on his or her particular, indeed unique, “objective” circumstances (financial condition, family and business situation and so on) as well as “subjective” circumstances (temperament, risk/reward attitude and so on).
But not all clients have the same needs, and clients who may have the same needs will almost certainly not have them at the same time. So to do our job, and fulfill our financial advisory service delivery promises, we have to maintain the components of our service delivery platform (and pay the costs associated therewith) in readiness for their utilization, as and when demand arises. This is no small matter when you consider that, at CWC, the provision of financial advisory services includes estate planning, private investment opportunities, liquid and illiquid asset portfolio management, retirement planning, philanthropic consulting, inter-generational wealth planning, customized portfolio management, trustee services, property management services and just about anything else clients throw at us in the way of personal and business finance issues.
On top of that, we only hire people who adhere to our high standard for best practices. For example, we hold ourselves to investment criteria whereby we ‘eat our own cooking.’ That is to say we buy for our own accounts (personal and otherwise) only what we offer and buy for our clients.
This is no way to run a business if maximum scalability is your objective.
Over the last few years, a great deal of thought and discussion has gone into creating a solid financial, corporate and cultural foundation at CWC. We are clear on our priorities. Serving the needs of clients first, last and always. We will scale what can be scaled and customize what needs to be customized, but will absolutely not compromise our client service delivery capabilities to any supposed firm growth “imperative.” And we will absolutely not adopt a one-size-fits-all service delivery methodology, no matter how tempting the associated growth prospects might be.
We have enjoyed a fair amount of slow, controlled growth in the last years. The result has been that we have expanded our team of financial advisors by three in the last four years, doubling the number of people dedicated to relationship management. Our assets under management have grown and so too has our investment management team allowing us to expand our research, investment deployment and asset allocation capabilities. Likewise, we’ve expanded both our Real Estate Management department and Communications team. As always, we continue to keep our eyes open for good, smart people who might add value to our platform. And as a bonus, as we’ve worked to insure our own business continuation, we’ve become more proficient at understanding the intergenerational transition issues facing our client families as well.
I seem to have done a good deal of jumping around in this report but there is a theme that ties it all together. The world, or at least the world of commerce, is increasingly focused on what I characterize as “massification” and “commoditization”: generally, good news for investors and bad news for clients in a progressively more complex world of financial services. At CWC, we have decided to “stay custom” (that is, focus on the best interests of our clients), and if this means we don’t scale or grow at what might otherwise be an optimum pace, so be it.
I leave you with a snapshot of the CWC staff, grouped by teams and indicating the year they joined the firm. You’ll notice a theme of people working across multiple platforms. This interdisciplinary approach lends itself to better collaboration and ultimately more comprehensive advice. We all join together in wishing you and your family a prosperous, healthy and happy new year.
Chris Weil
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