Advisors, investors fall prey to mutual-fund mirage

Advisors, investors fall prey to mutual-fund mirage

Advisors, investors fall prey to mutual-fund mirage

Bayer also feels the fees associated with mutual funds are too high, especially when there is no way to accurately predict how well (or badly) these products will perform over the long term. He says that the industry is driven by profit alone, inevitably placing the client’s needs in the backseat.

“Incubated funds will have great results for the first year or two and then, of course, after a few years their performance will be pathetic,” he says. “Active managers never stick to their mandate ... they go with their intuition, or forecast or whatever their crystal ball tells them to do…It’s about revenue, that’s their primary concern and pleasing the executives and their shareholders.”

Although, Marta Stiteler, a Hamilton-based independent financial planner, agrees fees are too high, she says the industry is shifting in a positive direction and that investors, over time, will see fees come down. Stiteler – who considers herself a solution-driven educator, not a sales person – believes the advice she offers is invaluable and worth every penny her clients spend.

“People outside (the industry) are looking in to throw stones, but we have to get paid somehow,” she says, adding that many of her clients are surprised by how little she makes on the products she sells. “People have to get used to the idea that if you want help, you have to pay for it.”

Bayer – who shifted to fee-based advising in 2002, and strictly fee-only in 2012 – isn’t convinced self-professed altruism is widespread, suggesting 95 per cent of commission-based financial advisors act as salespeople because the industry demands it.
 


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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
    Post a reply