When investors hire an advisor to help them make money fast, it often turns out that the only person making money is the advisor.
Advisors not held to a fiduciary standard are likely to churn clients’ portfolios, meaning they’ll buy and sell, either chasing performance or generating fees and commissions for themselves by reinvesting the clients’ money too often.
With a new regulation taking effect from the Department of Labor, advisors traditionally held to the low “suitability standard” will be required to adhere to the more stringent “fiduciary standard” in some client retirement portfolios. A fiduciary responsibility requires advisors to make investment decisions in the best interests of the client.
At Richard C. Young & Co., Ltd. we have always been held to the highest fiduciary standard. But putting clients’ interests ahead of our own hasn’t just been the law, it has been our philosophy all along. Jason Zweig reports:
With the Department of Labor’s fiduciary rule going into effect on June 9, investors should recognize what financial advisers can, and can’t, do.
The new regulation requires anyone getting paid to provide investment guidance on a retirement account to act solely in the investor’s best interest.
But what that means and how to measure it are as murky as ever. Do financial advisers improve their clients’ investment returns? If you think so, you may be paying your adviser for the wrong thing.
The performance of a mutual fund, exchange-traded fund or other financial asset is typically calculated as if you put all your money in at the beginning and kept it there, without adding or withdrawing anything, until the end of the measurement period.
But investors add and subtract money at will along the way — often at the worst possible times, when they are in the grip of greed or fear. Such buying high and selling low leads to what is often called the “behavior gap” between the performance of an investment and its investors.
That gap can only be estimated. However, by adjusting a fund’s returns for the amount of money investors put in and took out along the way, researchers can at least approximate a number.
Investors in mutual funds, for example, earn average annual returns roughly 1 to 1.5 percentage points lower than those of their funds. Investors in hedge funds may lag those vehicles by up to 7 percentage points annually.
In theory, that’s what a stockbroker or financial planner should prevent. “Advisers provide a human element that gives clients confidence and comfort in not deviating from a plan,” says Dave Butler, co-chief executive of Dimensional Fund Advisors, a firm in Austin, Texas, whose funds aren’t available to individual investors without an adviser. “The reaction to markets can be completely different when the adviser is in the loop.”
Unfortunately, some advisers might not behave that way in practice.
Read more here.
E.J. Smith