Don’t Be Fooled Anymore – Get The Audited Numbers on Your Performance, Based on a BenchmarkDunce Holding Paper Money

In this Blog we take you through the steps to learn how to:

  Compare a fund manager’s performance to the appropriate index.

  Learn how a mutual fund’s performance is regulated by the SEC, but your Advisor’s performance is not audited or regulated by the SEC.

In general, financial advisors are not actually managing your money. They place your money with various portfolio managers or some combination of passively managed exchange traded funds (ETF’s). In last week’s Blog we reviewed how America’s top “Advisor” is the best salesperson, according to Barron’s. Read the fine print of your contract. Once your Advisor selects an investment for you, your Advisor has no ongoing duty to monitor that investment, even if they are charging you a fee to do so!

What are the risks for having a salesman managing your nest egg?

As the SEC has warned, your advisor has no training, education or professional qualification to select these portfolio managers; it is not mandated by the SEC.  In its March 13, 2013 Report on the Regulation of Investment Advisers the SEC warned investors that:

“Unlike the laws of many other countries, the U.S. federal securities laws do not prescribe minimum experience or qualification requirements for persons providing investment advice.”

Your Advisor may pick one good ETF or Fund, but may also pick several that drag down the performance of the strong fund, due to lack of experience and training.

Your Advisor does not prepare audited returns that are filed with the SEC, so there is no benchmark to see how you are actually doing, based on the Advisor’s selections, for your retirement nest egg, after the Advisor’s fees.

Your Advisor does not continue to monitor the investments they place you in! It is your responsibility.

There are many Ponzi schemes because there are no standards for Advisors and many “crooks” thus enter this business and prey on your emotions and promise high returns. (Bernie Madoff has warned from jail – “Madoff, Other Felons Say Markets Unfair.”

Eliminate these great risks and investment directly with the Portfolio Manager in a mutual fund(s) that you select and can monitor, based on ongoing professional research and education.

The SEC has defined the benefits of a mutual fund at their website.

Professional Management. The fund managers do the research for you. They select the securities and monitor the performance.

Diversification or “Do not put all your eggs in one basket.” Mutual funds typically invest in a range of companies and industries. This helps to lower your risk if one company fails.

Affordability. Most mutual funds set a relatively low dollar amount for initial investment and subsequent purchases.

Liquidity. Mutual fund investors can easily redeem their shares at any time, for the current net asset value (NAV) plus any redemption fees.

Audited Performance Standards by Your Mutual Fund Portfolio Manager

Mutual funds are regulated by the Investment Company Act of 1940 which
requires:

  The mutual fund company must disclose publicly its financial health on a
regular basis.

  By law, each mutual fund is required to file a prospectus and regular
shareholder reports with the SEC

  It has to register with the SEC and file quarterly reports with the SEC.

  The mutual fund manager has a fiduciary duty to act in your best interests,
not hers, while the SEC permits your financial advisor to act in
their best interest

  There are strict controls for where the securities are held and who has access
to them, which is examined by an independent accountant at least three
times each year.  Do you know where your Advisor is placing your funds and how often it is audited by an accountant?

Here is the format that the SEC requires that the Mutual Fund adhere to for reporting:

Screen Shot 2013-07-29 at 7.02.09 AM

 

Not On My Nickel provides you monthly audited performance figures, per SEC standards (except for taxes, since they are not relevant until distribution in 401K or IRA) on a monthly basis for the mutual funds that you choose. In future Blog Posts we will show you how to determine your overall return if you are in multiple funds and give you a simple format to plug in your own numbers to watch your savings grow.

Here is an example of a researched NOMN balanced fund (Blue Line) and NOMN aggressive growth fund (Red Line) compared to a State Farm Target Date Fund (Green Line).  Do you know how to compare your performance, based on your Advisor’s recommendations in this graph?,  If not, it is time to take charge and get access to the best returns, at the lowest cost, based on audited performance standards.

Screen Shot 2013-07-29 at 8.49.29 AM

So, without audited performance, that the SEC mandates for SEC registered portfolio managers, but not financial advisors, you are throwing your money into the wind. Time to take charge, eliminate the redundant fees and place your money directly with the SEC fiduciary portfolio manager.

 

stock investment

As most would agree, the most important quality in selecting the doctor to operate on your heart is, “Is she the best? Is she technically qualified? Does she have my best interests in mind? Do I also want this amazing doctor to become my partner in life to coach me to do what is in my best interest…to help me with my home purchase, prepare my will or help me with my taxes?

As one well knows, the qualities that make your heart doctor the best in saving your life and operating on your heart—his years of experience and professional training are why you selected this doctor. You want your doctor to be continually focused on advancements in heart surgery, not advising you on how to structure a business venture.

The “wealth management” or “financial planning” industry has crafted the message that they are there for everything you need, insurance, budgeting, and expert investment advisor without professional training in any of these fields.

What are the Factors That Barron’s Uses to Rank the Top Advisors?
Barron’s Top Advisors – 2013

“Factors included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance isn’t an explicit component because not all advisors have audited results and because performance figures often are influenced more by clients’ risk tolerance than by an advisor’s investment-picking abilities”, according to this Barron’s article.

Here is the Red Flag: Investment performance –returns – is not a component in the rankings!

What does this survey tell you about the people managing your life savings?

1. The industry has decided for you the top advisor is the one who is best at sales and marketing. The top advisors are those advisors who have amassed the most assets under management and brought in the most revenue for the firm. Your results and the growth of your savings is not the most important issue.
2. There are no uniform professional standards for the “advisors” managing your money. No education requirements, no experience necessary – high school diploma, nice; but not necessary, college degree; the same. Yes, there are NO professional standards for who is managing your money. There are no government regulations on who can manage your retirement savings.
3. Is a CFP a trusted professional standard for managing your money? No. The CFP has but one basic course on “Investments”. A CFP is not a professional in managing investments or selecting the best investments for your retirement savings.
4. There are absolutely no performance standards for the investments that the financial advisor chooses which is why Barron’s provides no rankings for the MOST important criteria, audited quarterly performance.

Who Are the Professional Investment Managers?

SEC registered investment firms that manage your retirement savings, actively managed mutual funds, are the professional managers that you must place your money with directly so you can have audited professional results of your performance. Over $2 trillion dollars was lost in retirement savings during the last financial crisis. Why? Professionals were not managing retirement savings. Sales personnel were and they are paid less if they move your life savings out of the equity markets, even temporarily.

What Do I Need To Select the Top Investment Manager, Portfolio Manager?

• Audited, professional results compared against an agreed upon index
• 5, 10, 20 Year track record
• What is the professional background of the portfolio manager: Is his style consistent?
• Does the firm operate in my best interests and the interests of society overall?
• Are the investment management fees reasonable?

There are many claims today that active management is no longer viable. The problems with going with strictly passive management are several:

  • Who is going to choose the passive Exchange Traded Funds to put your retirement savings in? Are they professionals? What is their experience in doing so?
  • There are no audited statements and five and ten year histories on the selections of the multitudes of permutations and combinations of ETF’s. Most of the selections are based on computer algorithms that failed miserably in the 2008 financial crisis.
  • The new Target Date funds have high fees and are performing very poorly compared to the track records of the top active managers.

What is the Most Conservative Strategy Given the Failures of the Financial Services Industry?

Place your money directly with a professional money manager, who files regular reports with the SEC and who has multiple ratings from numerous rating services including Morningstar, Lipper, Zacks and Not On My Nickel.

Look at the audited performance returns against the relevant index before you place your money with this manager – Does this manager outperform the index over time? 5 years? 10 years?

Never trust a salesman, a “financial advisor” to select where you will place your retirement savings.

The Lesson

When selecting where to place your retirement savings, only trust the true professional:

Who provides you with quarterly audited performance statements

Whose only focus is on managing your money and watching the ever-changing global capital markets to determine how best to adjust your savings?

The myth that you need a “financial advisor” to hold your hand is not only a waste of money it is preventing you from placing your money directly with the top professional money managers.

Next Week’s Blog Post: Learn How to Compare Fund Manager’s Performance: How It is Audited and Regulated by the SEC, unlike Advisor’s Investment Selections, which are not audited or do not conform to any uniform indices for measurement.

 

How does a financial advisor advocate selling investors poorly performing index funds? It’s a case of the emperor having no clothes.

Financial Advisor Dan Solin states in a June 18, 2013, Huffington Post article, “Slick Tricks to Separate You From Your Money”:

Underestimating Your Intelligence: Wall Street hopes you won’t discover evidence-based investing. The entire premise of the brokerage industry — its predictive “expertise” — is flawed. There is a much better way, backed by peer-reviewed data. It does not rely on financial astrologers or other hype. It targets expected returns of the capital markets. Two leaders of this intelligent and responsible investing strategy are Dimensional Fund Advisors and Vanguard. Both are thriving as investors abandon actively managed funds. DFA explains how it invests in this excellent white paper. [Full disclosure: I am a wealth advisor with Buckingham Asset Management [BAM]. Buckingham recommends DFA funds to its clients]. John Bogle, the founder of Vanguard, explains the benefits of evidence-based investing in this lucid talk he gave in 2001.”

Before we go on, have a look at these returns from Yahoo Finance comparing one of Solin’s DFA funds with a Not On My Nickel-researched fund. The DFA Fund’s investment objective includes “Small Capitalization” stocks, so we have used a comparable Not On My Nickel fund.

evidence based investing

  • Green line – NOMN-researched fiduciary portfolio manager
  • Purple line – NASDAQ, unmanaged index
  • Blue line – Solin’s DEFOX, Dimensional Fund Advisors Core Equity 1
  • Red line – S&P 500, unmanaged index

Evidence based investing should be based on evidence

How can Solin, the “Investor Advocate” for the BAM Alliance, actually advocate selling funds that underperform?

He speaks in his article as if he is doing investors a favor, when he’s leading them to do exactly the opposite of what he states. He’s towing the company line to sell mutual funds that fill his pockets with profits, not investors’ retirement savings. It is interesting to note that these mutual funds can only be sold through an “advisor,” most of whom charge about 1.25% per year for an assets-under-management fee.

As you can see above, his DFA fund underperformed the Not On My Nickel-researched fund dramatically:

  • The NOMN-researched actively managed fund, according to Morningstar statistics, Total Annual Return for the 5-year period, ending July 1, 2013 — 15.81%
  • Solin’s “passively managed” fund, DFEOX, according to Morningstar statistics, Total Annual Return for the 5-year period, ending July 1, 2013 — 8.37%.
  • Solin’s recommended fund underperformed the NOMN-researched fund by over 7.4%, before his fees.
  • Now, add Solin’s advisory fees for selecting this passive fund for your portfolio (1.25% for assets up to $500,000, according to Buckingham Asset Management’s SEC filings) and you have lost 8.7% on your investment in opportunity costs with Solin’s advisory services. Seems he’s more of an advocate for his bottom line than his clients’.
  • Since Solin does not disclose actual past performance and advisory fees in his article, one could call this a “Smart Trick to Separate Your From Your Money.”

Solin goes on in the Huffington Post article to say:

“Market beating brokers and advisors are emperors with no clothes, touting an expertise they don’t have and taking advantage of their naive clients.” He’s right. He is an emperor without clothes. He is advocating funds when there exist better alternatives that deliver better performance and without his high fees.

What’s an investor to do?

NOMN believes in full transparency and straightforward explanations, whether one is an advocate for passive investing or active management. Both have a role in retirement investing today.

NOMN seeks to provide transparency for both active managers and passive managers and let the informed and engaged retirement investor make her own decision based on factual information, real evidence.

We don’t believe in charging 1.25% to place anyone in a passive fund, or active fund, like DFA and BAM do. This creates a conflict for the retirement investor. They don’t have a “fighting chance” to get ahead if their hard-earned savings fills an advisor’s pockets and guarantees returns at a passive index minus 1.25%.