It appears at least once a week there is yet another piece in the financial press about the risks to investors when they seek professional investment advice. Whom can you trust? How can you invest with the confidence that you are being well-served in an industry that is divided and extremely diverse? There is broad, and heated, disagreement when it comes to responsibilities, oversight and possible conflicts of interest when sales people sell “advice.” In the past few days alone the WSJ reported “J.P. Morgan Faces More Questions on Conflicts of Interest” and Bloomberg news reported “Brokers Lure Soldiers Out of Low-Fee Federal Retirement Plan.” Things must be heating up, which can only be good news for private investors as we are drawn again to the discussion of what constitutes financial advice and the motives of the advisor doling out that advice.
Many large institutions with billions and billions of client assets “under management,” the household names of the banks, brokerage, and insurance firms, do not want to accept fiduciary responsibility when undertaking what is a giant responsibility of advising individuals on how to invest their retirement assets, their children’s college funds, and other savings assets. They want to recommend (and sell) “suitable” investments (the Suitability Rule) rather than accept Fiduciary Responsibility and put their clients’ interests ahead of their own by recommending (and selecting) investments that better serve the investor’s interest, not the “advisor’s.”
Why do I put “advisors” in quotes? Because whether we are talking about JPM or other banks, brokerage firms, insurance companies, etc there are many types of investment “advisors” out there and in the thirty-odd years I have been a professional fiduciary money manager I have rarely met a private investor who knew the difference between a “financial advisor” selling variable annuities, stocks, or underperforming high fee load funds, a “financial advisor” implementing a financial plan, or a “financial advisor” who was a professional investor making performance driven decisions on a client’s portfolio. Isn’t it time we empower individual investors and clear this fog? If we illuminate, what emerges is the conversation about objectives and results.
In fact, I have heard “financial advisors” say that a performance-driven approach, where the measuring stick is an index of the market, doesn’t matter because clients are not interested in managing to an index return. Really? How can professionals in the investment business actually convince themselves, then a client, that market performance doesn’t matter? In what alternate universe does performance not matter? And if in the US equity universe the benchmark to measure performance is an index like the Russell 3000, an index of large, medium and small stocks of growth, core and value companies, then why on Earth would an equity market investor not want to at least aspire to have her US equity portfolio earn at least close to “market” performance vs that index? Every professional plan sponsor and hedge fund manager on the planet, literally, uses a benchmark as a guide so why don’t individual investors benefit from that same wisdom? I have never met an investor of any age, gender, background, or professional level who did not share my enthusiasm for managing to an index once I explained the concept. Sadly, that concept is unmentionable, or worse dismissed, by the “relationship manager” Private Banker types who are not Fiduciaries.
And what does any of this have to do with the responsibility of these emperors, the Private Bankers, Wealth Managers and Financial Advisors out there? That depends upon the raison d’être of any one financial professional. If the financial professional is in the business of selling securities, then is her responsibility to the client or the firm for which she works? If the financial professional is a Fiduciary, then the responsibility lies with that advisor putting her clients’ interests ahead of her own, attempting to deliver the best performance in line with each client’s risk tolerances and other objectives, and measured vs. a relevant index, not vs. similar and equally underperforming mutual funds in any one sector.
Best of the worst performance is not a bar to which I aspire, and neither should you. There are 20k+ mutual funds out there and there are not many that consistently, over at least 5 years, even match the performance of their respective index once you net out all of the fees the industry charges. So why does the media assuage investors’ concerns by noting that one firm’s funds or another’s has outperformed their peers? Someone whose livelihood doesn’t depend upon maintaining the ruse needs to begin to change the conversation – it is of no use to outperform peers – the only performance that counts is market performance and for that you need to compare the index fund or ETF as a benchmark.
Despite what the banking and brokerage industry tell, or neglect to tell, their clients, performance matters, results matter, returns matter. Is there any reason to invest your money, other than to have a bigger pile of it at the end?
Back in the 1980’s I was reprimanded by the CEO of a firm for which I worked because I told him I would treat him and our portfolio as if they were my largest and most important client. He boomed that I had damn well better treat him like my boss instead. How sad that he didn’t understand that to a Fiduciary, a client is more important than a boss. And that nearly thirty years later it is still not widely understood that attempting to deliver competitive risk appropriate returns on that client’s portfolio is the only reason an advisor exists.