The new F word – Fiduciary – goes mainstream

The single most important question to ask when selecting a financial adviser is if they adhere to the Fiduciary Standard.  In other words – will they always put your interests ahead of theirs?

That seems like a question you would not have to ask. But the financial services business has been built upon selling complex, high fee products to investors.  Is the primary goal growing your account? No, it’s generating fees for them.

Earlier this year the Department of Labor enacted regulations forcing the Fiduciary Standard onto the financial services industry, applying only to retirement accounts (industry lobbyists fought off the requirement for regular brokerage accounts etc).

The Trump administration is reportedly looking to peel back the DOL regulations but as this Wall Street Journal story reports – it may be too late as the concept of the Fiduciary has been highlighted broadly to investors who are now demanding that of their advisers.

The less you pay for financial advice/products, the more you keep. Don’t accept anything other than a Fiduciary relationship with your adviser or brokerage account manager.


High Fees Under Pressure

One of the biggest trends in the investing world is what some have called “Vanguarding” after the immense pressure that Vanguard is placing on its competitors in the asset management business. Similar to the effect that Google has had in my old business – online ads – or that Amazon is having on traditional retailers, Vanguard has been dominating the asset management space. And it’s been doing so largely by offering the lowest cost investment options available.

Every dollar saved via lower fees accrues and compounds to investors’ benefit over time. Investors are slowly awakening to this fact. Even typical mutual funds with operating expenses of around 1.00% are seen as expensive. Vanguard index funds typically cost 90% less. Schwab has also been offering similarly low cost ETFs.

Two stories from the past week illustrate the fee pressure on the industry. First Josh Brown covers the story of a mutual fund company being sued by its own employees because their funds used in their retirement plan are seen as outrageously high.

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

As Brown says: “In other words, it’s fine for brokers across the country to sell these underperforming, overly expensive A-share vehicles to regular people – strangers – but not for us to own in our own retirement accounts.”

The second news item comes from Fidelity, the mutual fund pioneer that has long prospered by offering high cost, actively managed funds. Fidelity finally capitulated and has begun offering low cost index funds, while keeping their cash cow funds in place. Bloomberg:

“Still, it’s easy to see why Fidelity felt like it had to do something. Investors are increasingly demanding lower fees, which is somewhat problematic for a fund family like Fidelity that is widely associated with expensive, actively-managed funds. According to Fidelity, investors yanked close to $19 billion (net) last year from its actively-managed stock funds. At the same time, investors poured a record-breaking $236 billion into Vanguard, a bastion of low-cost, passively-managed funds.”

Relevant Links

Here are some interesting items from around the Web

From the “sketch guy” Carl Richards:

  • When it comes to investing, focus on the next five years, not the next five days. NY Times
  • The importance of keeping “stuff” to a minimum – de-cluttering is only half the battle. NY Times

Interesting take on the advantages of a liberal arts education from The Atlantic

Here is a great list of advice from the Motley Fool new grads in only five words.  My favorites:

Ben Carlson, A Wealth of Common Sense: Budget. Save. But enjoy yourself.

Josh Brown, Reformed Broker: Buy every month, never stop.

Cullen Roche, Pragmatic Capitalism: Your best investment is yourself.

Finally: Ten Questions for your Financial Advisor.  All are important, but if you could only ask one of them:  Are you a Fiduciary?


10 Principles of Investing from Jack Bogle

From Jack Bogle’s “The Clash of Cultures, Investment vs. Speculation”  below are 10 principles to follow when investing.  Cullen Roche at Pragmatic Capitalism wrote about this a while back and given the Brexit news it seems like a good time for a review.

Jack Bogle is the founder of Vanguard and the father of what is now known as “passive investing”.  Rather than paying high fees to a fund manager who tries to pick the best sub-set of stocks, Index Funds allow you to buy all stocks in any different category (e.g. small cap stocks , value stocks  etc) or in fact the entire stock market (VTI).

When Vanguard was started it managed well less than $100 million and today is managing over $3 trillion largely in the passive/indexing category.  Bogle’s words of wisdom are derived from his belief that no one can consistently outperform the market as an active stock picker, a view largely borne out in research on investing.

  1. Remember reversion to the mean.What’s hot today isn’t likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don’t follow the herd.
  2. Time is your friend, impulse is your enemy.Take advantage of compound interest and don’t be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.
  3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.
  4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.
  5. Forget the needle, buy the haystack.Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.
  6. Minimize the “croupier’s” take.Beating the stock market and the casino are both zero-sum games, before costs. You get what you don’t pay for.
  7. There’s no escaping risk. I’ve long searched for high returns without risk; despite the many claims that such investments exist, however, I haven’t found it. And a money market may be the ultimate risk because it will likely lag inflation.
  8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.
  9. Hedgehog beats the fox.Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its “price-less” concept.
  10. Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.


Brexit, the new Grexit

When the market hits a rough patch, the pessimists and doomsayers (who are always present) double down on their calls for some form of Armageddon. Last week people cited George Soros  selling stocks and going all in on Gold for fear of another global meltdown (nicely debunked here, and here). And there’s alway some exotic but horrible sounding crisis brewing. Today it’s Brexit, short for Britain leaving the EU. Before that it was Grexit – for Greece. Next month it will be something new (Italexit or Frexit?).

It’s always something and while these may be legitimate harbingers of trouble, the problem is there is no way to know with any reasonable level of surety. In January, markets were down sharply but have since rebounded (mostly). If you sold on that fear you missed that bounce. Markets will constantly try to shake out weak hands and throw head fakes to investors.

For the individual investor there is virtually no way to properly understand, interpret and act on macro global economic issues that have been driving markets in the past week or two. None of us can (or should) try to play that game. Goldman Sachs, JP Morgan et al employ legions of economists, strategists and analysts, few of whom accurately predict market action. And none can do it consistently, although they continue to put out market “notes” for their brokers to share with their clients in an effort to look smart and generate action – sales.

That’s not to say we should all stick our heads in the sand. There are sometimes good reasons to sell something in your portfolio: a stock has run up well past an estimation of fair market value, or its fundamental prospects have changed significantly for the worse.

A classic example of the former is Microsoft (see here) that hit a high in Dec 1999 at the tail of the dotcom bubble. It took over 15 years to trade at that level again. An example of the latter is Pitney Bowes (see here), the near monopolist in business mail systems, that also saw its all time high in 1999, right around the time that email was fully established as the corporate communications tool of choice. Today Pitney Bowes remains a near monopolist, only in a much smaller industry. But even those types of events are hard to see and act on.

So while there will always be uncertainty and concern in the future of the market, the reality is that it’s very hard to accurately interpret and act on macro events.  Being diversified with a long-term horizon is one way to ride through this noise.

Interesting things I read this week:

Jim Cramer Mad Money. Questionable Ethics. Or as one site put it “why does anyone listen to Jim Cramer? HuffPo

From Josh Brown – the perils of guessing what the next “hot sector” is going to be.  TRB

Quote:  there is any doubt in your mind about whether or not this is pure, pathetic performance chasing, let me ease your uncertainty. It is plain and simple, the most perfect form of performance chasing you’ll find. 

Never invest in anything you don’t totally understand – and other lessons shared by parents with their children. NY Times

How a $650,100 lunch with Warren Buffett changed one hedge fund manager’s life Yahoo Finance

Jason Zweig  on how today’s low-interest rates distort valuations WSJ

Quote:  “If you can only buy expensive things,” says Mr. Ilmanen, “at least buy a diverse set of them.”

Starting this Blog

I am starting this blog for several reasons. I’ve been interested in investing and personal finance issues for many years. Decades in fact. I read continuously – online, books, magazines – anything that can add to my knowledge of investing. Earlier this year I started my own Registered Investment Advisor firm as a way of helping others directly with their investments and finances. This is my personal blog – see disclaimer. But as some have said – I write so that I know what I think – so this will also help me crystallize my thoughts and therefore my ability to advise.

I will share my observations and lessons learned here, across investing and personal finance topics, as well as broader technology issues, as many changes in the world of finance are being driven by rapid technological change. The term FinTech has been coined to broadly cover a wide range of areas related to finance that are being disrupted by the application of technology. I spent 20 years in the Internet Media and Technology space – a field that came to be known as AdTech – and saw how technology changed and improved online advertising. FinTech therefore seems very appropriate as a back drop to my new business as an RIA.

But the primary focus will be trying to explain and simplify the world of investing and personal finance. It’s an area where complexity and jargon have prevailed, as a key part of company’s business plans. By mystifying and un-necessarily complicating the issues, it is possible to act as the expert and to charge high fees. That model is being turned on its head and I hope to add my two cents to the effort.