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.
- 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%.