I entered the investment business in 1965, long before the investment industry grew to its current majestic size. We now have banks, brokerage firms and mutual fund houses managing trillions of dollars for hundreds of millions of people all across the globe.
We have a growing force of individual investment advisors, managing money for individuals, charities and other entities that are independent from and not associated with any investment product. It is into this last group that I chose to spend most of my career.
I began my career in the investment business selling mutual funds and tracking clients’ investments as best I could before the advent of computers and sophisticated software programs. I initiated several computer efforts to track client holdings and report their results in the late 60’s (on an IBM System/360) and again in the 70’s on a later system and then in the early 80’s on Tandy’s TRS-80 computers followed by Compaq’s multi-user systems with software written locally. We now have systems run by RBC (our clearing firm) and Power Advisor (an independent provider of investment management software). Enough history!
I am still appalled by the mutual fund industry’s inability to report personal investment performance to its shareholders compared to other investment alternatives, and to report openly and transparently the fees that shareholders are charged for the services they provide.
While mutual funds publish their management fees and sales charges, they do not report transaction fees or other expenses related to investment research and reporting to shareholders. These expenses are lumped into the price per share of the mutual fund and are not disclosed to shareholders in any discernible way.
This lack of transparency can be misleading to investors. Many times mutual fund owners believe that the expense of managing their accounts is free simply because it is not disclosed.
By contrast, in my business as an independent investment advisor, all of our costs are up front and fully disclosed. To an almost annoying degree, we tell our clients every penny of our charges to their accounts.
We have lost a few accounts to annuities, mutual funds and others because our clients mistakenly believed that they will lower their costs by dealing with a large mutual fund organization or bank. As an industry observer for nearly 50 years, this just isn’t so.
Most likely they will be paying higher fees and won’t be aware of the deductions because they are not disclosed. This might be one of the reasons why 95% of mutual funds underperform the S&P 500 stock market average over time.
Perhaps more importantly, people believe that they are getting personal investment management when they buy mutual funds. Unfortunately, what they are buying is mutual fund management, not individual personal account management, and these are not the same.
Mutual fund investment professionals manage mutual funds according to guidelines and principles of the mutual fund prospectus. Often times these documents limit the ability of the mutual fund manager to avoid risk in a general market decline by limiting the amount of cash a mutual fund can hold as a percentage of it overall assets.
Other times, mutual funds fail to manage their managers, resulting in disaster for shareholders. In the late 80’s, a U.S. government bond fund operating out of Philadelphia declined 20% in a single day as a result of inappropriate investment management practices. Shareholders learned of the problem in retrospect, having digested the loss in their otherwise supposedly low risk investment.
In another instance, a well-known mutual fund firm incurred losses of over 90% for shareholders (who invested for retirement income) because of poor investment practices from novice managers and a lack of oversight by the mutual fund directors.
Subsequent lawsuits have recouped only a tiny fraction of shareholder losses. As a result, a number of investors in the area are still working, unable to retire because their retirement accounts were decimated. There was no warning from the mutual fund salespeople, their brokerage firm or the mutual fund organization to their customers or shareholders ahead of time. Shareholders woke up to a financial disaster because they did not have individual account management focused on their account, but were instead managed from the mutual fund portfolio manager level. These folks have interests counter to that of the fund shareholders. This can be a real problem.
Of course, personal investment advisors can also fail their clients by not paying attention to the markets and the investment industry. I contend that the safest and most transparent way to protect your invested funds is to utilize a personal investment advisor who details costs to you, as opposed to large institutional firms that dance to a different tune than that of your personal financial concerns.
Your attentive partnership with a personal investment advisor is a winning team that will avoid most of the problems and conflicts of interest that stem from blindly utilizing incorrectly perceived “inexpensive” mutual fund investment management.
