In yesterday’s WSJ, the “Intelligent Investor” Jason Zweig has a good article (with the title above) about the general unwillingness and/or inability of the large majority of financial advisers to provide their investment performance record to existing or potential clients. Here’s an excerpt:
If you want to know the track record of a mutual fund or exchange-traded fund, you can easily look it up in a matter of seconds online. But what about the track record of a financial adviser who is offering to pick investments for you?
While some financial advisers who cater to individual investors are willing to calculate and report their own average historical returns, the vast majority still don’t—and probably won’t until investors smarten up and start demanding it.
“It’s baffling to me,” says Tim Medley, president of Medley & Brown, a financial adviser in Jackson, Miss., who manages $575 million and publicly updates its performance monthly online. “The advisory business has grown dramatically, and I would have guessed that by now a lot more advisers would be posting their rates of return on their websites.”
Mind you, every client opens and closes accounts at different times, in a variety of investments, with various levels of risk. But that doesn’t mean an advisory firm can’t calculate the average return it earns for its clients. Every investor in a given mutual fund also is unique, but all mutual funds report their past returns in the same standardized format.
Of course, much of the value of a financial adviser can’t be captured by measuring the track record of his investment picks alone. By reducing your taxes, planning your estate and retirement, cutting your debt and adjusting your insurance coverage, an adviser can make you much richer and more secure.
Those benefits often can’t be quantified. But that still shouldn’t exempt advisers from reporting results that can be quantified, like investment returns.
A reason advisers don’t make these disclosures may be that they don’t know—or even want to know—their returns. “Advisers want to have confidence in themselves,” says Joachim Klement, chief investment officer at Wellershoff & Partners. “Knowing their own performance numbers might give them a sense of insecurity instead.”
Before you hire a financial adviser, ask to see his track record in writing. That shouldn’t be just the results of a single client, a cherry-picked handful of lucky stock picks or market calls, or a short-term snapshot that starts in early 2009 at the beginning of an epic bull market.
It should instead present a composite of how large numbers of clients’ portfolios fared over multiple time periods—say, the past one, three, five and 10 years, after all fees. If enough clients start asking, advisers will have to apply the same scrutiny to their own performance that they claim to apply to funds and other investments.
MP: Interestingly, the Mississippi-based, fee-only investment firm mentioned above – Medley and Brown – that publishes its performance results here, has under-performed its benchmark growth index YTD, and over the last 1-year, 3-year, 5-year and 10-year periods (see table below). Over a longer period of almost 25 years going back to the end of 1989, the firm has outperformed its benchmark index by about 1/3 of 1% per year.
Update 1: Note that the Vanguard Growth Index over the last ten years has generated an average annual return of 8.43%, more than 1% per year higher than the Medley and Brown Growth Composite return of 7.25%.
Update 2: Here’s another difference between active management of your investment/retirement funds through a full-service investment advisory firm like Medley and Brown vs. a more passive approach using index funds like the Vanguard S&P500 Index fund or the Vanguard Total Stock Market fund — the full-service investment firms charge pretty hefty advisory fees, payable upfront, compared to low-cost Vanguard index funds, which charge no upfront fees. For example, according to Medley and Brown’s “Advisory Fee Schedule” (which I assume is pretty standard for the industry), here are the annual fees that you’ll be billed for displayed in the table below, payable in advance on a quarterly basis, for various initial investment amounts, compared to the total annual expenses for the Vanguard Total Stock Market Index Fund (based on a total expense ratio of 0.05%, which isn’t billed to the investor directly, but is reflected in a slightly lower return on investment of 5 basis points).
||Annual Fees, Payable Upfront, Full Service
||Annual Expenses (Hidden), Vanguard Total Stock Market
Bottom Line 1: When comparing investing your funds using a full-service brokerage firm to investing in low-cost index funds at a firm like Vanguard, it would seem to be a very important consideration that full service advisers like Medley and Brown (and other full service firms) charge their management fees upfront, on a quarterly basis; and the typical management fees for Vanguard funds of only 0.05% are reflected in a slightly lower return, e.g. 10.00% instead of 10.05%. Over a ten-year period, an investor with $1 million in assets (often the minimum for some full-service advisers) would have paid $100,000 in fees, out-of-pocket and upfront; and an investor with $10 million in assets would have paid $675,000 in fees, out-of-pocket and upfront. (Actually most full-service brokers require investors to hold some of their assets in a cash/money market account, and the fees are taken directly from the investor’s cash account at the beginning of each quarter.) In comparison, those same investments in Vanguard would not have required any out-of-pocket, upfront fees! And since Vanguard doesn’t require direct payments of fees, investors are required to hold a portion of their assets in money market accounts, they can remain 100% invested in stock mutual funds.
Some investors might be concerned that the incredibly low-cost Vanguard funds (almost free at 0.05%, and not payable in advance or out-of-pocket) can only achieve those incredibly low fees with incredibly low or poor service. That’s not true. Investing in low-cost Vanguard index funds gives you the same access as full-service investment firms to a team of highly-qualified financial professionals. For example, an initial investment of only $50,000 qualifies investors for the Vanguard Voyager Services, $500,000 in Vanguard assets qualifies you for a higher level of Voyager Select Services, investors with $1 million get access to the Flagship Services and investors with $10 million in Vanguard assets qualify for the Flagship Select Services. See the full range of Vanguard (almost all free) services here. Note that for any level of investment there are no account service fees, and you get access to personal assistance from a financial Vanguard representative for free. For investments of $500,000 and higher you get free financial planning services and free access to a Certified Financial Planner (CFP) at any time. At investments of $10 million and higher, you qualify for a dedicated Vanguard relationship manager and administrator. All of these services are included in the 5 basis point fee ($5 per $10,000 invested) that is not paid directly, out-of-pocket, or upfront.
Bottom Line 2: At the risk of offending all of my friends and CD regulars who are full-service, wealth management, investment professionals, I’m starting to think that the full-service, active management investment industry is possibly doing a great disservice to many American investors, for the incredibly high fees they are charging, so often for returns below index funds? Maybe that’s too strong of a case — and uninformed investors certainly deserve some of the blame — but I would at least encourage every investor who has funds invested in a full-service broker to seriously consider the significant benefits of switching to a low-cost index mutual fund specialist like Vanguard. Or at least investors (and their advisers and brokers) should read the book that radically shaped my thinking about this issue – “Random Walk Down Wall Street The Time-Tested Strategy for Successful Investing.” As the Amazon.com review says, “It’s unlikely that you’ll spot many dog-eared copies of ‘A Random Walk’ floating amongst the Wall Street set.” So it’s probably the one book that active money managers and full-service brokers don’t want you to read – which means it’s the single most important investment book that you should read!
Hey, maybe I’m wrong, and I’d love to hear from any full-service brokers/advisers who will go on record in the comments section (and not by private email) and explain why their fees, services, and returns are equal to, or superior to the fees, services and returns that Vanguard and its index funds can offer to most investors.