Advisors, investors fall prey to mutual-fund mirage

Advisors, investors fall prey to mutual-fund mirage

Advisors, investors fall prey to mutual-fund mirage

The ballooning number of mutual funds on the Canadian market are little more than a tool to convince investors to hire commission-based advisors, says one fee-only player, arguing financial advisors are themselves victims to that system.

Loaded with complicated terminology, the 15,000 or so funds available across North America are set up intentionally to confuse investors, so they reach out to a wealth management professionals for advice, says Mike Bayer of Strategic Analysis Capital Management Inc. in Mississauga.  

“The confusing terminology is to intimidate people,” he explains. “It convinces them (investors) that they can’t manage or control their investment portfolio. A lot of that is done on purpose.”

Ironically, the status quo also hurts advisors wedded to the traditional model, says Bayer, offering the same sort of analysis of a growing number of industry vets.

“I feel for advisors, I really do. There is a lot of cognitive dissonance. They know they are not doing the best thing for their clients, but they’re locked into this system,” he says. “A lot of advisors want to do the right thing, but they can’t because they’ll get fired.” (continued on Page 2.)


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3 Comments
  • Gordon Anderson 2013-11-04 6:17:50 PM
    Accusations and generalizations without any evidence are seldom helpful. This is especially true if the source of the accusations and negative generalizations is someone ( a competitor perhaps ) who might increase their opportunity for profit should the unsubstantiated comments be accepted as true by a large number of people. It is as if Chicken Little is selling umbrellas. Unfortunately this article says things are bad but does not offer any help.

    The suggestion that funds are set up to intentionally confuse investors is on a level with suggesting that car manufacturers introduce new safety and convenience features to confuse consumers and make vehicle maintenance at home difficult to impossible, thus forcing consumers to hire a professional mechanic ; or that the guarantee language purposely serves a similar underhanded purpose. Car manufacturers are trying to make the best car they can at a competitive price so they can sell more. Fund manufacturers improve & diversify for the same reason.

    Very few people not trained or experienced have the knowledge and skill to do their own vehicle maintenance. Very few have what it takes to do their own financial planning or manage their own investments. I expect that it would not be difficult to find evidence to support the suggestion that most people should seek out professional help for vehicle maintenance , financial planning & investment management. There are many different & competing professionals capable of assisting consumers with these tasks. Of course some do not have their clients best interest as their highest priority. Finding a good garage or a good financial planner is within the ability of most. Ask friends and co-workers & family to recommend someone they trust. Check their credentials. Try them with a little at first –get to know them and see if you are comfortable with the way they work.

    Mr. Bayer makes a couple of more questionable generalizations when he says that 1) incubated funds will have great results in the first year or two & then their performance will be pathetic & 2) that active managers never stick to their mandate. Neither of these are likely to be supported by evidence.
    Post a reply
  • Gordon Anderson 2013-11-04 6:44:20 PM
    Accusations and generalizations without any evidence are seldom helpful. This is especially true if the source of the accusations and negative generalizations is someone ( a competitor perhaps ) who might increase their opportunity for profit should the unsubstantiated comments be accepted as true by a large number of people. It is as if Chicken Little is selling umbrellas. Unfortunately this article says things are bad but does not offer any help.

    The suggestion that funds are set up to intentionally confuse investors is on a level with suggesting that car manufacturers introduce new safety and convenience features to confuse consumers and make vehicle maintenance at home difficult to impossible, thus forcing consumers to hire a professional mechanic ; or that the guarantee language purposely serves a similar underhanded purpose. Car manufacturers are trying to make the best car they can at a competitive price so they can sell more. Fund manufacturers improve & diversify for the same reason.

    Very few people not trained or experienced have the knowledge and skill to do their own vehicle maintenance. Very few have what it takes to do their own financial planning or manage their own investments. I expect that it would not be difficult to find evidence to support the suggestion that most people should seek out professional help for vehicle maintenance , financial planning & investment management. There are many different & competing professionals capable of assisting consumers with these tasks. Of course some do not have their clients best interest as their highest priority. Finding a good garage or a good financial planner is within the ability of most. Ask friends and co-workers & family to recommend someone they trust. Check their credentials. Try them with a little at first –get to know them and see if you are comfortable with the way they work.

    Mr. Bayer makes a couple of more questionable generalizations when he says that 1) incubated funds will have great results in the first year or two & then their performance will be pathetic & 2) that active managers never stick to their mandate. Neither of these are likely to be supported by evidence.
    Post a reply
  • Mike Bayer, CIM, CFP, FCSI 2013-11-05 7:48:29 AM
    Hello Gordon,

    Perhaps I should have chosen my words more carefully. I was not misquoted but the article does not have my full comments.

    There is little or no evidence that I have seen that shows the great performance of incubated funds will persist into the future.

    Style drift is a fact of life. It will occur even if the manager does not trade. Very, very, very few funds hold a consistent style factor exposure over long periods of time.

    https://stuwww.uvt.nl/fat/files/library/Carhart,%20Mark%20M.%20-%20On%20Persistence%20in%20Mutual%20Fund%20Performance%20(1997).pdf

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=290463

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024259

    http://finance.martinsewell.com/fund-performance/EltonGruberBlake1996a.pdf

    http://www.ifa.com/12steps/step6/step6page2.asp

    https://app.box.com/s/cx6qoxxg146rhhwco2jj
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