Skin in the game?

by Tim Dier

Launch of SpaceX rocket

Do we have skin in the right game?

The concept of skin in the game was popularised by Warren Buffet and more recently by Nassim Nicholas Taleb, author of The Black Swan. The idea revolves around having something personal at stake in the outcome of a situation, helping to align the interests of the principal with the agent. When it comes to executives, they can talk all they want, but the best vote of confidence is putting one’s own money on the line.

It is disappointingly rare for financial services executives to have skin in the game, or more precisely, skin in the right game.  Many are handsomely rewarded for peddling often unnecessarily complicated and expensive products or services with little to no comeback if they are inappropriate or perform abysmally. With the notable exception of fund managers who invest in the funds they manage, they do not ‘eat their own cooking’, as the saying goes.

People who are bred, selected and compensated to find complicated solutions do not have an incentive to implement simplified ones.

Nassim Nicholas Taleb, Skin in the Game

When it comes to overly complicated products, often with opaque fees or large bid-offer spreads, the chances are the proposer was incentivised to sell them over and above simpler and potentially more appropriate solutions. Similarly, where a fee is guaranteed for the provider but the outcome for you is far from certain, their interests are not aligned with yours and they reap rewards for taking little or no risk. They do not have skin in the right game.

How can we achieve better outcomes for investors?

Aligning incentives and achieving cost optimisation requires a continuous process of refinement and targeted simplification across value chains. Look at Steve Jobs’ relentless efforts or look at how Elon Musk runs SpaceX/Starbase and Tesla. The stripping out unnecessary requirements and processes and relentlessly focussing efforts on priorities. These approaches also benefit from an effective virtuous circle: your team witnesses tangible gains first-hand, fostering a culture of high-performance execution which in turn further compounds returns to your bottom line.

This is where OptimX can help. We combine industry knowledge and experience with innovative technologies to identify and optimise transaction costs, all without you having to add new resources. Trusted by investors, managers, and boards, OptimX’s independence puts it in a unique position to help you improve efficiency. We are rewarded by creating value for you and your investors, not on arbitrary volumes or platform fees. We have skin in the right game.