12b-1 Fees/Revenue Sharing Come Under Increased Scrutiny

As a local  independent registered investment advisory firm – we’re the good guys – my firm resides in a world dominated by Big Box Insurance and Big Box Brokerage firms. That’s good because they are weak competitors. Though they have a bigger megaphone, their quality and value of services are very low compared to RIA firms like ours.  That’s why I started my firm – I saw the people getting poor service and saw that I could start a firm that on “day one” is near the top in services, trustworthiness, etc. Not many industries where you can be on top immediately! And my RIA firm is arguably stronger than most other RIA firms. Recently an industry looking at my firm as a potential acquisition concluded, “You’re over-serving your clients.”  Yes, sir, guilty as charged. Yes, we do over-serve and we are very proud of that. So, it’s nice to see the rest of the world – and even our own U.S. government – exposing the questionable (at best) and should be illegal (at worst) practices of the Big Box firms. This article, 12b-1 Fees/Revenue Sharing Come Under Increased Scrutiny, click here, is focusing on 401(k) retirement plans. However, the exact same issues exist in the world of individual/family investing. So when you read this article, know that a nearly identical set of issues is present for individuals and families deal with the Big Box Insurance/Brokerages.  ...

Misleading Headlines, Financial Journalists getting played; how we report honestly

March 11, 2015: Headline: Wall St. ends down for 2nd session on rate concerns Well, yes, the Dow Jones and NASDAQ which essentially are a proxy for large US stocks, were down slightly, around 0.15 to 0.2%. But indexes that follow international stock other than USA and that follow small US Stocks were up from 0.6 to 0.76% – a very good day. The reverse happens as well – large stocks up, other very important major market dimensions down. Couldn’t they take a few more seconds to tell us how small stocks, international and emerging markets performed that day? These are three additional very important dimensions of the market that any prudent investor should own! Barry Ritholtz wrote the article Financial Journalists Need to Understand Numbers Better If They Want to Avoid Getting Played (click for article). He goes through several examples of the media reporting misleading numbers. In our numbers that we report to the public, we go back as far as we can (17+ years) based on availability of appropriate indexes that accurately model funds in our portfolios. We would go back further if we didn’t lose an important data source. We think like statisticians – the more data, the more statistically sound the comparison. We’re admitted math nerds, not financial product salespersons. In the first few years of that time frame, the S&P500 is in favor and beats our models. (We come back to win in the end including now except for our 3 most conservative portfolios which are not expected to challenge the S&P500 since they have more fixed income.) A few years later, the S&P500 goes into disfavor...

Watch out for “experts” – book review

Please see Larry Swedroe’s article at etf.com at this link and text below. I am so compelled that I just ordered the book he is referring to called “Wrong”. Once I read it, I will edit this post to include my thoughts on the book. Larry Swedroe’s article click here. Text: Many individual investors have seen their portfolios devastated, despite having followed the advice of “experts.” They are left wondering, “What went wrong?” As you may have already guessed, the answer is that following the advice of “future tellers” disguised as investment pros is the wrong strategy. As Jim Cramer once famously said to Jon Stewart of The Daily Show, “I got a lot wrong.” Investment legend Warren Buffett put it this way: “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.” Distorted Expertise David Freedman, in his outstanding book, “Wrong,” shows us that experts are often the reason we get into big messes, whether they occur in the field of medicine, investing, science, psychology, raising children, dieting or business management. With sometimes frightening examples, Freedman exposes the biases and career pressures that frequently lead experts to arrive at their advice in dangerously distorted ways. Since much of the book is devoted to the field of medicine, it can be a terrifying read that leaves you uncertain about what and who to believe. Freedman notes how biases and corruption can play a role in expert recommendations. He explains: “Most of us think of scientists as being devoted to uncovering truths, not...

How Many Mutual Funds Routinely Rout the Market? Zero

Great New York Times article, found here, written by Jeff Sommer, and the text is below. This article came out March 14, 2015. The bull market in stocks turned six last Monday, and despite some rocky stretches — like last week, when the market fell — it has generally been a very pleasant time for money managers, who have often posted good numbers. Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years. In fact, based on the updated findings and definitions of a particular study, it appears that no mutual fund managers have. I wrote about the initial findings of that study last summer. It is called “Does Past Performance Matter? The Persistence Scorecard,” and it is conducted by S.&P. Dow Jones Indices twice a year. The edition of the study that I focused on began in March 2009, the start of the bull market. It included 2,862 broad, actively managed domestic stock mutual funds that were in operation for the 12 months through 2010. The S.&P. Dow Jones team winnowed the funds based on performance. It selected the 25 percent of funds with the best returns over those 12 months — and then asked how many of those funds actually remained in the top quarter in each of the four succeeding 12-month periods through March 2014. The answer was remarkably low: two. Just two funds — the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund — managed to hold on to...

What is a “financial advisor”?

The 1940 Investment Advisors Act established registered investment advisors (RIA).  RIA’s are required to always put their client’s interests ahead of their own interests. Part of the requirements is that they have to very clearly reveal any conflicts of interest that may exist. That’s why many RIA’s, including our firm, prefer to eliminate investing related conflicts. However, a little-known regulation called the “Merrill Lynch rule” exempts brokers who offer financial advice from registering as investment advisors, as long as the financial advice they provide is “solely incidental” to their business.  Yes, it was the highly paid lobbyists employed by big profit-driven Wall Street firms that influenced our elected officials that put this in place. Thanks a lot. This rule essentially allows anyone to call themselves a “financial advisor”. Then by law the Big Box brokerage/insurance firms must add the following fine print somewhere on the documents: Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time. “Our interests may not always be the same as yours?”  Excuse me?! Pretty clever, heh? This is today’s financial services world and people are paying a lot for a little and often there is a weasel on the other side of the table. Most...