Monday, September 27th, 2010
fill or kill

Investopedia defines the “fill or kill” order as one “to fill a transaction immediately and completely or not at all.”  There are those who have adopted the phrase for non-market communication (much to the confusion of spouses or others); it could a simple “let’s just get this thing done” or could be a “put up or shut up” ultimatum.  We may be on the verge of seeing the equivalent of “fill or kill” orders like those being issued throughout the market ecosystem.

Many investors are confused and seem to be getting a bit angry too.  There are similarities with what is happening on the political front, where the old “throw the bums out” mentality has morphed into something else entirely.A couple of folks showed up outside the tiny post office just behind my building with a large photo of President Obama adorned with a Hitler mustache and placards full of “isms”; their signs that railed against the banks and bailouts showed that they didn’t understand the political history of what happened but also didn’t much care. The rage is messy and nonspecific, but it is undeniably there.

As with voters who hate Congress but keep voting for the incumbent, many rail against our financial system and its big-name players but personally like the financial advisor that they use.  They don’t understand the difference between an advisor that is held to a “fiduciary standard” and one that operates on a “suitability standard” — they have assumed that their interests come first, even when that’s not the case.  And they didn’t care too much about high fees or subpar returns when there was enough return to go around for everyone.  But things haven’t turned out as planned and they are starting to think they’ve been sold a bill of goods.

The Baby Boomers in particular feel that time is running out.  The “lost decade” of returns on big stocks (in which they undoubtedly had the most faith) turned out to be inconveniently located on their investing time line, and rosy projections have turned into brutal realities.  “Fill or kill,” they might say to the conventional wisdom, and drastically rework their investment behavior for good.

There is much debate these days about whether we are starting to see the effects of that now, and whether the May 6 “flash crash” represented the tipping point, when misgivings about the “cult of equities” became a concern that it all was a rigged game in which amateurs were fodder for the pros and their machines.  Some argue that sliding volume and money flowing out of stocks will be long-term phenomena, as the “silver tsunami” reconsiders the philosophy it embraced and liquidates its beliefs in a hurry and its positions over time.

Such rethinking is not limited to individuals, however.  Pension plans find themselves on the rocks due to optimistic assumptions and heavy exposure to “risk assets” that didn’t deliver on the return side of the higher-risk-higher-return calculus.  Foundations and endowments that adopted “the endowment model” found that investing for perpetuity can be theoretically attractive and practically dangerous.  Fiduciaries who have relied on investment consultants and other advisors for guidance are getting itchy, and might just write that “fill or kill” ticket too and adjust their approach.

The investment cohort least ready to give the FOK to the past way of business are the large asset managers and investment banks — they have a standing market order for the way things were.  The habits of the golden years remain ingrained, and if there is to be real change, it is unlikely to come from those firms, which will be dragged into a new reality by the actions of others.

All of this provides some opportunities.  Right now, firms that recognize the changing landscape and can capitalize on it with recast business models and offerings should be able to grab market share from the established players.  And investors who step carefully may find that if a distaste for risk replaces a taste for risk, long-term values will be created that will sow the seeds for good returns in the future.

The order to be filled is for expectations to be met.  Circumstances may allow that to happen or they may not.  But time is running out — a wave of “kill” orders are on the horizon.  Once they trigger, new habits and relationships and expectations will be formed, and the investment landscape will change significantly.