Advisor/ Broker Reputations

I grimace when a guy tells me he's an attorney...

Seriously, I agree that we deserve some respect and I feel like I get my fair share.  It might be in the approach...if you are overly friendly and volunteer what you do without being asked, people may well see the sales pitch coming, particularly if they are often the target of such pitches.  A low-key approach...don't act overly interested in them, don't get more interested when they tell you they have a high-income occupation, don't volunteer what you do for a living, do use a less shop-worn title than financial advisor or wealth manager (I once caught my dog calling himself a financial advisor), such as investment advisor, certified financial planner, etc., do let clients introduce you.  My favorite is when one of my high profile clients introduced me by telling his friend, "this guy has made me a hell of a lot of money".  You can't buy advertising like that.  It wasn't long before I had a substantial piece of the friend's money on my books.

Life gets a lot easier and you get a lot more respect when you can put away the pitch and work from referrals.  Until then, my experience is that you'll get more respect with a low-key approach.

How come we dont catch a break in terms of reputation versus these other professions?...these days to be an advisor the path is quite difficult with lots of exams and continuing education...like private practice lawyers and doctors we also have to do alot to grow our own practices...

It is a great question, with a lot of implications, just don't look for a lot of deep thinking from the group here. You asked the big question and it is a good one. But the implications are too much for most to handle. I'll bet you have a pretty good handle on some starter answers to why our collective reputation sucks in relation to some other professionals, especially since we really do accomplish so much for our clients.

The good ones do get lots of respect.  The problem from a perception point of view is that any bozo can be a financial advisor.

It’s the fault of the bank brokers that hover around the teller window and salivate whenever someone deposits a 4 digit check.

[quote=DCedjones]

We deserve some respect[/quote]



See how people react when you tell them you are a Realtor™



The core problem comes from the fact that Brokers are Registered
Representatives of the Firm, who are acting in the firms best interest.
Thus there is a missmatch in perception between the broker (salesman of
financial products) and client (trusted advisor).



I.e when a broker telsl a client to buy a closed end fund at IPO, Do
he  tell them that they are buying at 6% premium to NAV and that
90%+ of closed end funds trade below NAV within 12 months of IPO?



After getting worked over by the markup/down on bonds, closed end offerings, sales loads, annuities, etc most people have a vague unease about stockbrokers.



Vanguard/Fidelity know they have struck a nerve and will keep working the anti-broker message.



It’s up to you to offer more value than a fidelity target date fund.

[quote=AllREIT]

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?
[/quote]

Is this one of those "94% of all statistics are made up on the spot" facts?

[quote=mikebutler222]

[quote=AllREIT]

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?
[/quote]

Is this one of those "94% of all statistics are made up on the spot" facts?

[quote=AllREIT] [quote=DCedjones]
We deserve some respect[/quote]

See how people react when you tell them you are a Realtor(tm)

The core problem comes from the fact that Brokers are Registered Representatives of the Firm, who are acting in the firms best interest. Thus there is a missmatch in perception between the broker (salesman of financial products) and client (trusted advisor).

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?

After getting worked over by the markup/down on bonds, closed end offerings, sales loads, annuities, etc most people have a vague unease about stockbrokers.

Vanguard/Fidelity know they have struck a nerve and will keep working the anti-broker message.

It's up to you to offer more value than a fidelity target date fund.
[/quote]

The better solution is to offer a guarantee of below market returns net of your fee?

[quote=joedabrkr] [quote=mikebutler222]

[quote=AllREIT]

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?
[/quote]

The 6% premium to NAV isn't shocking considering the markup on them. I'd like to see the 90% trading below NAV in 12 months supported. 

Is this one of those "94% of all statistics are made up on the spot" facts?

[quote=Bobby Hull]It's the fault of the bank brokers that hover around the teller window and salivate whenever someone deposits a 4 digit check. [/quote]

LOL...the bank brokers?  Considering how the proliforation of "bank brokers" has only been a decade or so...I think you might have to work on that a little.

[See how people react when you tell them you are a Realtor(tm)

Agreed

Vanguard/Fidelity know they have struck a nerve and will keep working the anti-broker message.

I would agree but people have to understand they are brokers to.

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[quote=Greenbacks]

[See how people react when you tell them you are a Realtor™

Agreed

Vanguard/Fidelity know they have struck a nerve and will keep working the anti-broker message.

I would agree but people have to understand they are brokers to.

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[quote=BankFC]

[quote=AllREIT] [quote=DCedjones]
We deserve some respect[/quote]

See how people react when you tell them you are a Realtor(tm)

The core problem comes from the fact that Brokers are Registered Representatives of the Firm, who are acting in the firms best interest. Thus there is a missmatch in perception between the broker (salesman of financial products) and client (trusted advisor).

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?

After getting worked over by the markup/down on bonds, closed end offerings, sales loads, annuities, etc most people have a vague unease about stockbrokers.

Vanguard/Fidelity know they have struck a nerve and will keep working the anti-broker message.

It's up to you to offer more value than a fidelity target date fund.
[/quote]

The better solution is to offer a guarantee of below market returns net of your fee?

[/quote]

[quote=joedabrkr] [quote=mikebutler222]

[quote=AllREIT]

I.e when a broker telsl a client to buy a closed end fund at IPO, Do he  tell them that they are buying at 6% premium to NAV and that 90%+ of closed end funds trade below NAV within 12 months of IPO?
[/quote]

Is this one of those "94% of all statistics are made up on the spot" facts?

[/quote]

Actually Mike I think that's accurate.  I've read it elsewhere before.
[/quote]

I think the 6% premium to NAV is a slight exaggeration (at least in my experience I believe it is) and I'd like to see the "90% trading below NAV in 12 months from IPO" supported.

Notice, btw, it doesn't say "90% trading below the NAV AT IPO 12 months after the IPO.

[quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]

His line gets apppointments with wirehouse clients. Another one that gets them is "the first thing I'm gonna do is turn off those perpetual fees." Or "I work with people who have outgrown what they're getting at the large firms."

[quote=Bobby Hull][quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]

His line gets apppointments with wirehouse clients. Another one that gets them is "the first thing I'm gonna do is turn off those perpetual fees." Or "I work with people who have outgrown what they're getting at the large firms."

[/quote]

So, dishonesty sells. Congrats....

[quote=mikebutler222][quote=Bobby Hull][quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]

His line gets apppointments with wirehouse clients. Another one that gets them is "the first thing I'm gonna do is turn off those perpetual fees." Or "I work with people who have outgrown what they're getting at the large firms."

[/quote]

So, dishonesty sells. Congrats....

[/quote]

Actually, I really DO turn off those perpetual fees. Wirehouse clients are the easiest to steal. "I'm a little confused, Mr. MS client, most of the MS clients that I meet are doing almost as well as I'm doing with my clients. In fact, I tell a lot of them to stay where they are. Why is your case different?" Gets 'em every time.

BTW, anyone else notice how the thread about RR reputations very quickly, and in a covert fashion, answered the basic question?<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

It isn’t just outside threats to us, it’s how quickly some of us will impugn the integrity of others in the business in order to try to gain an advantage in the perpetual competition.

People selling annuities will quickly (and dishonestly) assert their products have fewer fees (thus the “broker meter” comment). Some <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Indies are happy to suggest that they hold their client’s interests first while other channels don’t. People who are enamored with passive investing will quickly question the integrity of the active management contingent.

Pogo was right….

[quote=Bobby Hull]

Actually, I really DO turn off those perpetual fees. [/quote]

No, you don't. You replace visable fees with higher, often hidden fees.

[quote=mikebutler222][quote=Bobby Hull]

Actually, I really DO turn off those perpetual fees. [/quote]

No, you don't. You replace visable fees with higher, often hidden fees.

[/quote]

You've never seen our suitability form.

[quote=anonymous]The good ones do get lots of respect.  The problem from a perception point of view is that any bozo can be a financial advisor.[/quote]

This is true, anyone can call themselves advisor without having the creditials and the client's interest at heart. I know a guy who works at Primerica for 2 weeks, with just a life license called himself a "PERSONAL FINANCIAL ADVISOR"

On the flip side if a doctor practices without a proper license or even called himself a doctor you will hear about it on the news the next day...

[quote=Bobby Hull][quote=mikebutler222][quote=Bobby Hull][quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]

His line gets apppointments with wirehouse clients. Another one that gets them is "the first thing I'm gonna do is turn off those perpetual fees." Or "I work with people who have outgrown what they're getting at the large firms."

[/quote]

So, dishonesty sells. Congrats....

[/quote]

Actually, I really DO turn off those perpetual fees. Wirehouse clients are the easiest to steal. "I'm a little confused, Mr. MS client, most of the MS clients that I meet are doing almost as well as I'm doing with my clients. In fact, I tell a lot of them to stay where they are. Why is your case different?" Gets 'em every time.

[/quote]

Hahaha.  That's some funny stuff.

[quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[quote=Bobby Hull][quote=mikebutler222][quote=Bobby Hull]

Actually, I really DO turn off those perpetual fees. [/quote]

No, you don't. You replace visable fees with higher, often hidden fees.

[/quote]

You've never seen our suitability form.

[/quote]

Sounds like you're saying it's ok if you lie to them, because afterwards you have them sign a form that tells the truth.  Goody...

[quote=joedabrkr] [quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]


Mike I hear what you're saying, and I understand why that "line" would get under your skin.

In my experience, though, between sales pressure and poor training, I have found that folks like yourself are the exception that proves the rule.
[/quote]

It's a good thing, joe, that there aren't any indies feeling "pressure" to produce (no mortgage payments among them) and they're all so superbly qualified. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Look, I don’t mind the ribbing between channels, my point was Greenbacks made distorting the facts about other channels and impugning their integrity a matter of standard business practice and prospecting.

[quote=mikebutler222]

It's a good thing, joe, that there aren't any indies feeling "pressure" to produce (no mortgage payments among them) and they're all so superbly qualified.

[quote=mikebutler222][quote=joedabrkr] [quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]


Mike I hear what you're saying, and I understand why that "line" would get under your skin.

In my experience, though, between sales pressure and poor training, I have found that folks like yourself are the exception that proves the rule.
[/quote]

It's a good thing, joe, that there aren't any indies feeling "pressure" to produce (no mortgage payments among them) and they're all so superbly qualified. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Look, I don’t mind the ribbing between channels, my point was Greenbacks made distorting the facts about other channels and impugning their integrity a matter of standard business practice and prospecting.

[/quote]

It's a tough business, Mike. You, of all people, should know that.

[quote=Bobby Hull][quote=mikebutler222][quote=joedabrkr] [quote=mikebutler222][quote=Greenbacks]

I let clients know I work for them and that LPL works for me. And also if I  was at a wirehouse or Fidelity or Schwab I would work for that BD and not for them.      

[/quote]

Now there's an assertion that would interest tens of thousands of wirehouse brokers who, as a matter of ethical business practice place the client's interest first.

[/quote]


Mike I hear what you're saying, and I understand why that "line" would get under your skin.

In my experience, though, between sales pressure and poor training, I have found that folks like yourself are the exception that proves the rule.
[/quote]

It's a good thing, joe, that there aren't any indies feeling "pressure" to produce (no mortgage payments among them) and they're all so superbly qualified. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Look, I don’t mind the ribbing between channels, my point was Greenbacks made distorting the facts about other channels and impugning their integrity a matter of standard business practice and prospecting.

[/quote]

It's a tough business, Mike. You, of all people, should know that.

[/quote]

I don't know what you think you're implying with the "You, of all people.." line, Bobby. The business has been very good to me, despite a move or two I wish with 20/20 hindsight I hadn’t made early on. If you think “tough business” provides some cover for dishonest business practices or impugning the integrity of others, you’re mistaken.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I think even more so than the fact that we bad mouth each other, is the manner in which we prospect.

Other professions typically have firms where growth is based on having need (either having more business than they can handle or a specific need going unfilled).  Veterans try to hire good people to fill these needs and help them be successful.  The firm generates enough business to help get the newbie established in their practice.

In contrast most new advisors are hired by national firms that are growing for growths sake, regardless of market needs or competition.  The national firms hire anyone that can pass the 7, throw them against the wall and see who sticks.  You're in competition with everyone, and previously invested money is just as good as new money.  For the newbie starting out with no other support, it won't be good enough to simply put a sign out front, put an ad in the paper, and join the Chamber.  Instead, those that are successful have to be proactive.  Cold calling, mailing, doorknocking.  

People roll their eyes because they are sick of being solicited.  Its coming from the brokers, banks, and insurance companies.  Everyone wants to sell you investments. 

Great answer Vagabond…i think you hit the nail on the head…perhaps additionally its the fact that our service is more like a luxury good that folks dont “have to have today,” (at least from their point of view), but many of those who do convert become very happy…and then the referrals come…if you can survive till then

[quote=BankFC]

The better solution is to offer a guarantee of below market returns net of your fee?

 More seriously, the best anyone can consistantly offer is market returns less a management fee.

I can offer better.  First of all, I never talk about rates of return or beating a specific benchmark.  Clients are not looking for a 12% return or looking to beat a specific benchmark.  On the surface, they may be asking for these things, but not really. 

Dig a little deeper and you'll find that the client wants to send their child to college, retire at age 60, protect their income if they can't work, pass down wealth, etc.

What I offer my clients is a better opportunity to acheive these goals.  This is far better offer than "market returns less management fees".

[quote=mikebutler222]It
isn�t just outside threats to us, it�s how quickly some of us will
impugn the integrity of others in the business in order to try to gain
an advantage in the perpetual competition.
[/quote]



If other players  worked to a high standard,  this would be
very hard to do.  I.e  CPA’s have a damn hard time taking
clients from each other based on quality of work. <o:p></o:p>

[quote]People who are enamored with passive investing will quickly question the integrity of the active management contingent.[/quote]

I'm sure active managers have the best of intentions, I don't question their integrity.

It's just that performance is non-persistant at best, and often much worse than passive benchmarks. S&P SPIVA  survey's show that in general 80% of active managers with the SPX as thier bench mark under perform it.

Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest.

[quote]Pogo was right�. 

[quote=AllREIT]
More seriously, the best anyone can consistantly offer is market returns less a management fee. [/quote]

I know the fans of passive management like to say that, and they like to base their claim on statistical studies that always involve the term "on average" (yet they love to ignore the above average outliers that are far more common than they like to concede), but it simply isn't so.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

[quote=anonymous]

 More seriously, the best anyone can consistantly offer is market returns less a management fee.

I can offer better.  First of all, I never talk about rates of return or beating a specific benchmark.  Clients are not looking for a 12% return or looking to beat a specific benchmark.  On the surface, they may be asking for these things, but not really. 

Dig a little deeper and you'll find that the client wants to send their child to college, retire at age 60, protect their income if they can't work, pass down wealth, etc.

What I offer my clients is a better opportunity to acheive these goals.  This is far better offer than "market returns less management fees".

[quote=mikebutler222]I
know the fans of passive management like to say that, and they like to
base their claim on statistical studies that always involve the term
"on average" (yet they love to ignore the above average outliers that
are far more common than they like to concede), but it simply isn’t so.[/quote]



The outliers are exactly that, outliers.



That means they are rare cases that don’t reflect the typical results.



If you could pick outliers a priori then you would make alot of money . But you can’t do that. Finding them post hoc is very easy. The typical results of active mangement is underperformance.



<span =“a”>www.spiva.standardandpoors.com/

<span =“a”>

[quote]Over longer time periods, indices continue to exceed a majority
ofactive funds. Over the past three years (and five years), the S&P
500 has beaten 65.7% (72.2%) of large-cap funds, the S&P MidCap 400
hasoutperformed 68.6% (77.4%) of mid-cap funds, and the S&P
SmallCap600 has outpaced 80.2% (77.7%) of small-cap funds. (Reports 1
to 5)[/quote]



The numbers get much worse over longer time spans. And perfomance skew makes this all much worse, since the beats tend to be small, and losses often impressive.

[quote=AllREIT] [quote=mikebutler222]It isn’t just outside threats to us, it’s how quickly some of us will impugn the integrity of others in the business in order to try to gain an advantage in the perpetual competition. [/quote]

If other players  worked to a high standard,  this would be very hard to do.  I.e  CPA's have a damn hard time taking clients from each other based on quality of work. [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

I submit most people trying to win business on “quality of work” arguement couldn’t if they told the truth, the whole truth and nothing but the truth. It’s only by shading the truth and cutting corners on all the qualifiers of the evidence they use to base their assertion that they attempt to make their case.

[quote=AllREIT] [quote=mikebutler222]People who are enamored with passive investing will quickly question the integrity of the active management contingent.[/quote]

I'm sure active managers have the best of intentions, I don't question their integrity.

It's just that performance is non-persistant at best, and often much worse than passive benchmarks. S&P SPIVA  survey's show that in general 80% of active managers with the SPX as thier bench mark under perform it. [/quote]

You and I both know that even if you ignore the 20% (and that survey’s based on MUTUAL FUND active managers, not “active managers”) that DO outperform the average (and why not, instead of accepting the average, use that 20%?), the survey includes managers that aren’t even attempting to outperform the average because their aim is a lower beta, or income. It’s a wildly misleading claim. “In general” is a loop-hole you could drive a semi through.

That claim has even less validity when you’re, for example, looking at managers that accurately should be benchmarked against other indexes, like those competing with the EAFE or the Russell 2000. Absolutists in the passive camp also never bother to attempt to tackle the fact that serious money in this country (endowments, trusts, pension plans) uniformly use active management and passive in a complimentary manner. Perhaps it’s because the they’re-crooks or they’re-foolish lines don’t ring as true when the targets are sophisticated trustees of large pools of money.

[quote=AllREIT] Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest. [/quote]

As I said, you are impugning the integrity of your competition, and on very, very shaky empirical evidence. It’s amazing how often passive investment types try this “dishonest” route without bothering to detail to the client/prospect how many caveats there are in their “active managers under perform” claims. I’ve yet to see someone who uses solely active management or someone who employs both try to make the “dishonest” assertion about indexers.

[quote=AllREIT] [quote=mikebutler222] Pogo was right. 

[/quote]

Firstly, ignore Bobby Hull. He is a troll. Last month he was the ultimate annuity shark, this month he is Operation Rescue.  [/quote]

You’re right about <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Hull, but I was thinking of the cartoon character Pogo and his assessment about who the real enemy is.

I think the big problems with public perception of our jobs/industry are several.

1. People really don't understand what it is that we do.   When I tell someone that I am a financial advisor they immediately think.... stockbroker, shark with a dorsal fin.  They don't think estate planning, tax planning, portfolio construction, asset allocation, life insurance, business planning or any of the other things we do.  They only think product pushing of the stock d'jour.

2. No value is placed on the activities that we do that are not directly associated with trading and activities that people don't understand.  People are inherently cheap and don't want to pay for things in which they don't see value.  The constant harping by the ETrade type of commercials on low fees only reinforce the idea that we are overcharging for not doing much of anything.

3. There is no understanding of the level of education and on going training that is required to be able to be a "good" financial advisor.  We are charging not just for the current activity of buying an investment but also for the years of time spend in obtaining the knowledge that we need to be able to advise.  Just like a doctor or lawyer who is recoveing the cost of their years of education.  Clients are surprised when I discuss the ongoing training that is required by the various licenses that I hold.  The time commitment and costs are never made apparent to the public.

4. It is much more interesting to make a movie about our industry like Wall Street than it would be to follow us around for a week with a camera to show what our lives and jobs are really like.   Pretty boring and mundane.  Because of this bad publicity, the public thinks we are all like the "guys" in the movies.  The same way they think that all Italians living in New Jersey are part of the Soprano's mob.

There's more.  But, personal experiences and stories about "bad" advisors, who do nothing but product pushing and no real follow up advising  are probably the most damaging to our profession. 

What you are talking about is asset allocation, risk profiling and time horizons. After the smoke clears: it is about investment performance that can attain those goals.

Have to disagree with this.  It's never about investment performance.  Sometimes, it is about investor performance, but this is very different than investment performance. 

The client with better investment performance, or investor performance, isn't necessarily the one with more money to spend in the future.  

Ex. Everything about Bob and Jack are identical except that Bob has a networth of 4.5 million.  Jack has 4.8 million.  Jack was able to accumulate more because Bob diverted money from investments into whole life insurance.  

Bob takes a single life pension of $8,000 a life from his company.  Jack has to take a joint life pension of $4,000 because he wants his wife to have the income if he dies.  (Bob wants the same thing, but it will come from the life insurance.)

Bob's total portfolio has done worse, but he gets to spend more money in retirement and leave more money behind at death.

It's not about returns.  It's about spendable dollars and accomplishing goals.

Vagabond and Looney, excellent points.

We need to act like sharks, though.

The win - win action item is more money for our clients, us and then the shareholders, in that order.

If we really want to get paid for what we do as advisors, we need to be more active in defining the game, top down.

Everything else is just fighting for scraps.

[quote=AllREIT] [quote=mikebutler222]I know the fans of passive management like to say that, and they like to base their claim on statistical studies that always involve the term "on average" (yet they love to ignore the above average outliers that are far more common than they like to concede), but it simply isn't so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don't reflect the typical results. [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.

[quote=AllREIT]

If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.

 [quote=AllREIT]

 The typical results of active mangement is underperformance. [/quote]

My suggestion, if you believe that, is avoid the “typical” advisor. On average, most of us can’t hit a 300 yard drive. OTOH, the PGA is filled with people who come very, very close to doing so on a regular basis. That’s the problem with using statistical evidence based on “averages”, especially when the advantage of indexes is as slight as you show below. Remember, even if you ignore the tracking errors involved in using funds, much less funds not attempting to “beat” an index, a “65%” outperform amounts to 15% above being “average”. Not much of an advantage and certainly not enough to make definitive pronouncements about the value of active management.

 [quote=AllREIT]

www.spiva.standardandpoors.com/

[quote]Over longer time periods, indices continue to exceed a majority ofactive funds. Over the past three years (and five years), the S&P 500 has beaten 65.7% (72.2%) of large-cap funds, the S&P MidCap 400 hasoutperformed 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap600 has outpaced 80.2% (77.7%) of small-cap funds. (Reports 1 to 5)[/quote]

The numbers get much worse over longer time spans. And perfomance skew makes this all much worse, since the beats tend to be small, and losses often impressive.



[/quote]

Sorry, but you’re once again using funds (with all the performance hurdles they face in the form of cash flows, illogical pool investor behavior, etc.. that SMA managers don’t) to base your claims. So, your  talk of “active managers” is even less accurate when all you’re describing are mutual fund active managers.

You must realize that you’re not presenting anything the vast majority of us aren’t familiar with in terms of  academic studies, right? It’s simply that most of us (as with the vast majority of trustees of genuine pools of money) don’t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.

You really have the zealotry of the converted on this subject. That’s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your “evidence” is riddled with truck-sized loop holes. IOW, your absolutist commentary isn’t supported well by your caveat-filled evidence.

I think one of the problems with our perception is the way we measure "successful" advisors. It's always the one's who made the most money, not for their clients but for themselves. MDRT, Top Producer, Gold Circle, etc. is all about the stockbroker/insurance agent, not his or her clients.

Can you imagine walking into your doctor's office and seeing a plaque on the wall that says "Dr. Smith made $350,000 last year". You'd probably rather see where doctor Smith traveled to Africa to work in a clinic for free (and paid his own way!).

Same with lawyers and pro bono work.

[quote=EDJ to RIA]

I think one of the problems with our perception is the way we measure "successful" advisors. It's always the one's who made the most money, not for their clients but for themselves. MDRT, Top Producer, Gold Circle, etc. is all about the stockbroker/insurance agent, not his or her clients.

Can you imagine walking into your doctor's office and seeing a plaque on the wall that says "Dr. Smith made $350,000 last year". You'd probably rather see where doctor Smith traveled to Africa to work in a clinic for free (and paid his own way!).

Same with lawyers and pro bono work.

[/quote]

Excellent points.

I don't see any registered investment advisors, or independent broker dealer affiliates, needing to give up some of their payout, so they can be patted on the back by some home office sales contest. There are plenty of red herrings, but quiet success speaks louder than winning some sales contest.

Do you think there is a correlation between winning sales contests and needing to make cold calls?

If a person wants to be a doctor, they learn from other doctors, they don't go to some bull pen and hack on practice bodies.

[quote=mikebutler222]

I submit most people trying to win business on �quality of work� arguement couldn�t if they told the truth, the whole truth and nothing but the truth. It�s only by shading the truth and cutting corners on all the qualifiers of the evidence they use to base their assertion that they attempt to make their case. [/quote]

All you need to make a "quality of work" argument is a client who is unhappy about the quality of work. If you do a good job, that won't be a problem. As an industry most clients of financial services are less than happy.

[quote=AllREIT]You and I both know that even if you ignore the 20% (and that survey�s based on MUTUAL FUND active managers, not �active managers�) that DO outperform the average (and why not, instead of accepting the average, use that 20%?)[/quote]

And can you pick that 20% ahead of time. All the time? Consistantly?

The future is random, and evidence for the persistance of outperformance is weak. Interestingly the evidence for persistance of underperformance is much stronger.

[QUOTE]the survey includes managers that aren�t even attempting to outperform the average because their aim is a lower beta, or income. It�s a wildly misleading claim. �In general� is a loop-hole you could drive a semi through.[/quote]

I just posted the SPIVA site, you can go look through over there. SPIVA is corrected for that by the use of appropriate benchmarks, correcting for survivorship bias (funds that suck get merged/liquidated) etc

[quote]
The Standard & Poor's Index Versus Active (SPIVA) methodology is designed to provide an accurate and objective apples-to-apples comparison of funds’ performance versus their appropriate style indices, correcting for factors that have skewed results in previous index-versus-active analyses in the industry. SPIVA scorecards show both asset-weighted and equal-weighted averages, include survivorship bias correction to account for funds that may have merged or been liquidated during the period under study, and show style consistency for each style group across different time horizons.[/quote]

[quote]That claim has even less validity when you�re, for example, looking at managers that accurately should be benchmarked against other indexes, like those competing with the EAFE or the Russell 2000.[/quote]

You haven't read this quarters SPIVA report, have you?

Because again, your forgetting the part about appropriate benchmarks. Domestic funds vs domestic benchmarks and international vs international benchmarks.

[quote]Absolutists in the passive camp also never bother to attempt to tackle the fact that serious money in this country (endowments, trusts, pension plans) uniformly use active management and passive in a complimentary manner. Perhaps it�s because the they�re-crooks or they�re-foolish lines don�t ring as true when the targets are sophisticated trustees of large pools of money.[/quote]

There's a couple of flaws in your thinking.

1) Alot of the active management at "serious money" is really allocations to alternative investments. Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work.

Much of that active management comes in the form of "Global Macro" top down management and/or quant models. Both us

How do we know that "serious money uniformly use active management and passive in a complimentary manner"?

And what is serious money anyways? Just cause you have a slug of money (from whatever source) doesn't mean you know how to manage it or even know how to hire people to manage it.

[quote=AllREIT] Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest. [/quote]

As I said, you are impugning the integrity of your competition, and on very, very shaky empirical evidence. It�s amazing how often passive investment types try this �dishonest� route without bothering to detail to the client/prospect how many caveats there are in their �active managers under perform� claims. I�ve yet to see someone who uses solely active management or someone who employs both try to make the �dishonest� assertion about indexers.[QUOTE]

I just tell people:

1) Markets are effecient to the point where it is not profitable to try and beat them. You want the cheapest-to-deliver exposure to risk asset classes.

2) Historical results of active vs passive management show that long term, active management doesn't work.

2.5) The main area's of active management areas that work are.

a) Deep value
b) Private Equity
c) Venture Capital.
d) Some hedgefund strategies
e) Distressed investing ( which is 2nd cousin to deep value)

3) Asset allocation and risk budgeting are what you should worry about. 

4) Never ever buy an annuity.   

[quote=AllREIT]

You�re right about Hull, but I was thinking of the cartoon character Pogo and his assessment about who the real enemy is.[/quote]

I like Pogo,

[quote=mikebutler222]

[quote=AllREIT]

[quote=mikebutler222]I know the fans of passive management like to say
that, and they like to base their claim on statistical studies that
always involve the term “on average” (yet they love to ignore the above
average outliers that are far more common than they like to concede),
but it simply isn’t so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don’t reflect the typical results. [/quote]<o:p></o:p>

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.[/quote]

If lets's take that 1 year 20% in mind. In any given year the odds against you picking the lucky fund are 4:1 against.

I'd flip coins all day if you paid me 4:1.

But as you increase time horizon's the %age of outperformers and the cummulative extent of outperformance get less and less. Historical data shows that investment performance tends to be mean reverting.

And ofcourse, when Bill Miller started out you couldn't have know he was any good. As morningstar's investor weighted performance figures show, the typical investor never caputres historical performance, b/c they weren't there while the fancy record was being established.

You really need to read a copy of "Fooled by Randomness", and if you really want to spar with passive indexers, a copy of "Margin of Safety".

[quote=AllREIT]

If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.[/quote]

Which is 1 manager out of how many currently working, and out of how many who were working when he got started?

Bill Miller is an outlier, and not a very typical outlier at that.

You really

[quote]
 The typical results of active mangement is underperformance. [/quote]

 
My suggestion, if you believe that, is avoid the �typical� advisor. On average, most of us can�t hit a 300 yard drive. OTOH, the PGA is filled with people who come very, very close to doing so on a regular basis.[/quote]

There is little evidence that investment management requires (or even has) as much of a skill element as golf.

Investment management is probably closer to tournament poker, there is some skill element, but that element is greatly swamped by random luck.

[quote]Not much of an advantage and certainly not enough to make definitive pronouncements about the value of active management.
Sorry, but you�re once again using funds (with all the performance hurdles they face in the form of cash flows, illogical pool investor behavior, etc.. that SMA managers don�t) to base your claims. So, your  talk of �active managers� is even less accurate when all you�re describing are mutual fund active managers.[/quote]

I never said I was talking about SMA's, just actively managed mutual funds.

Don't over generalise here. Since SMA's tend not to report public figures (and may often have skews due to timing which make standardised reporting impossible) they arent comperable to public funds and so have been subject to less research.

But there is nothing that implies that SMA as a class should have better performance than mutual funds as a class.

[quote]You must realize that you�re not presenting anything the vast majority of us aren�t familiar with in terms of  academic studies, right? [/quote]

A brief refresher can be very useful.

[quote]It�s simply that most of us (as with the vast majority of trustees of genuine pools of money) don�t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.[/quote]

Who said I precluded the use of active management in all cases? I think the use of actively managed mutual funds is dumb. Don't put idea's in my mouth.

[QUOTE]That�s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your �evidence� is riddled with truck-sized loop holes. IOW, your absolutist commentary isn�t supported well by your caveat-filled evidence.[/quote]

Now you are just making things up. First you claim that I am repeating the the results of academic studies. Then you claim that I am challenging people's ethical standards, and then you claim that the studies about the performance of actively management have loopholes and so forth.

I'll say this much. The result of any study of a group, cannot be over generalised to the individuals in that group.

You will always have outliers (extreme cases) and subjects who are above average. But if, going in blind,  you have to ask about the typical group member, then group results will be most typical.

The typical result of active management of mutual funds is that they underperform. Of those that do outperform, it is not consistant over longer time periods.

On a theoretical basis, the observed dispersion of mutual fund results is consistant (i.e not inconsistant) with an effecient market that impossible to beat.

And that's all I'm going to say about the subject.

[quote=AllREIT] [quote=mikebutler222] You and I both know that even if you ignore the 20% (and that survey�s based on MUTUAL FUND active managers, not �active managers�) that DO outperform the average (and why not, instead of accepting the average, use that 20%?)[/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

And can you pick that 20% ahead of time. All the time? Consistantly?  [/quote]

Again, you and I know that number is larger than 20% and it is ONLY talking about mutual funds and not "active managers" as a whole. Again, you’re misusing the terms of the study. Sloppy work equals sloppy results.

[quote=AllREIT] [quote=mikebutler222] Qthe survey includes managers that aren�t even attempting to outperform the average because their aim is a lower beta, or income. It�s a wildly misleading claim. �In general� is a loop-hole you could drive a semi through.[/quote]

I just posted the SPIVA site, you can go look through over there. SPIVA is corrected for that by the use of appropriate benchmarks, correcting for survivorship bias (funds that suck get merged/liquidated) etc [/quote]

Correcting for survivorship doesn’t eliminate every , for example, large cap fund from the comparison universe that isn’t attempting to beat the S&P index because it has another goal, like lower risk or higher income. BTW, just what would I trust the S&P people when they construct a study to prove their effectiveness?

[quote=AllREIT] You haven't read this quarters SPIVA report, have you?

Because again, your forgetting the part about appropriate benchmarks. Domestic funds vs domestic benchmarks and international vs international benchmarks. [/quote]

I have read it, and I’ve read the other supporting research. That’s why I’m able to correct you. What you’re saying isn’t a recent assertion, and applying a domestic benchmark, say, the S&P 500 to a large cap fund does NOT eliminate those funds that EXPRESSLY have other goals than the index itself. AGAIN, lower beta or higher current income. Including those sorts of funds that happen to own large cap stocks but with another agenda serves to skew results in the favor of the index, thus padding their marginal leads.

[quote=AllREIT] [quote=mikebutler222] Absolutists in the passive camp also never bother to attempt to tackle the fact that serious money in this country (endowments, trusts, pension plans) uniformly use active management and passive in a complimentary manner. Perhaps it�s because the they�re-crooks or they�re-foolish lines don�t ring as true when the targets are sophisticated trustees of large pools of money.[/quote]

There's a couple of flaws in your thinking.

1)     Alot of the active management at "serious money" is really allocations to alternative investments. Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work. [/quote]

That’s simply fiction, and someone who goes out of his way to cast aspersions about the ethical nature of people who disagree with them on the proper implications of statistical studies should know better. If you like I can provide you with reams of names of active managers that run conventional equity portfolios for massive pools of money like CALPERS and the endowments of ever major university in the nation, all of which have very informed trustees. Now, if you’d like to support your assertion that these trustee are rubes, by all means…...

[quote=AllREIT]

And what is serious money anyways? Just cause you have a slug of money (from whatever source) doesn't mean you know how to manage it or even know how to hire people to manage it. [/quote]

I can hear the trustees of massive defined benefit plans and charitable foundations having a pretty good chuckle at your comments on that one.

 [quote=mikebutler222][quote=AllREIT]Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest. [/quote]

As I said, you are impugning the integrity of your competition, and on very, very shaky empirical evidence. It�s amazing how often passive investment types try this �dishonest� route without bothering to detail to the client/prospect how many caveats there are in their �active managers under perform� claims. I�ve yet to see someone who uses solely active management or someone who employs both try to make the �dishonest� assertion about indexers.[QUOTE]

[quote=AllREIT] I just tell people:

1) Markets are effecient to the point where it is not profitable to try and beat them. You want the cheapest-to-deliver exposure to risk asset classes.

2) Historical results of active vs passive management show that long term, active management doesn't work.

2.5) The main area's of active management areas that work are.

a) Deep value
b) Private Equity
c) Venture Capital.
d) Some hedgefund strategies
e) Distressed investing ( which is 2nd cousin to deep value)

3) Asset allocation and risk budgeting are what you should worry about. 

4) Never ever buy an annuity.   [/quote]

[/quote]

You can tell people whatever you like, including some bits of misinformation like you’ve listed (Warren Buffet, no rube he, has some different thoughts about the efficiency  of the markets in the short-term. While it might be fair to make the counter-arguement, is it fair to call him dishonest?). However, if you jump from expressing your opinion about the above to asserting that those who disagree with you are unethical, you’ve crossed a line that says more about your standards of honesty than theirs.

Mike, I'd just as soon indexing disciples keep believing the efficient market/indexing story....it makes my job easier...

As a quick example of how easy it is to beat the index, I laid Vanguard's 500 index fund next to every domestic stock fund ran by American Funds and compared on an all-expenses basis for the last ten years.  Here are the unvarnished results:

Vanguard 500 index: 8.12%

Growth Fund of America: 12.37%

Fundamental Investors: 10.48%

Washington Mutual: 9.00%

Investment Company of America: 9.64%

AMCAP Fund: 10.73%

American Mutual Fund: 8.79%

These numbers are trailing ten years as of March 31, 2007, and all American funds have the MAXIMUM load applied as opposed to Vanguard's 0.18% expense ratio.  Add on the advisor fee and indexing looks even crappier.

I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.

The sad thing is, there are lots of better funds and managers than the ones I cited here...I just used a very common strategy to illustrate my point.  I hope Suze and others keep telling everyone to index...

You get what you pay for.  A lazy advisor is almost worse than no advisor at all.

[quote=AllREIT][quote=mikebutler222][quote=AllREIT] [quote=mikebutler222]I know the fans of passive management like to say that, and they like to base their claim on statistical studies that always involve the term "on average" (yet they love to ignore the above average outliers that are far more common than they like to concede), but it simply isn't so.[/quote]

The outliers are exactly that, outliers.

That means they are rare cases that don't reflect the typical results. [/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

20%- 30% isn't often considered "rare" by most people without an agenda. The outliers are even less rare when managers not even attempting to beat the index (again, those looking to produce income or those looking for a lower beta as two examples) are removed from the initial pool of observations.[/quote]

If lets's take that 1 year 20% in mind. In any given year the odds against you picking the lucky fund are 4:1 against.

I'd flip coins all day if you paid me 4:1.  [/quote]

If the selection methodology of picking managers was flipping a coin, you’d have a point, or if the 20% really did represent a single year.

[quote=AllREIT]

But as you increase time horizon's the %age of outperformers and the cummulative extent of outperformance get less and less. Historical data shows that investment performance tends to be mean reverting. [/quote]

“Tend to be”, “on average”. Again, you’re making definitive assertions and using language from studies that’s anything but definitive. It would matter if the selection process were purely random, but it isn’t.

[quote=AllREIT]

And ofcourse, when Bill Miller started out you couldn't have know he was any good. [/quote]

That’s a irrelevant point, as we now have some 19 (?) years of observations on which to make a selection in his favor. You could have made an informed decision 15 years ago to employ him and not the index he beats with remarkable regularity. IOW, what settle for an approach that is very likely to underperfom identifiable managers?

[quote=AllREIT]

As morningstar's investor weighted performance figures show, the typical investor never caputres historical performance, b/c they weren't there while the fancy record was being established. [/quote]

Another irrelevant point as we’re talking about advisors, and not “typical investors”.

[quote=AllREIT]

You really need to read a copy of "Fooled by Randomness", and if you really want to spar with passive indexers, a copy of "Margin of Safety". [/quote]

There’s no point. I (and most everyone in the business more than 10 years) long ago read the underlying academic studies that the popular press attempts to misuse to dismiss the power of active investing.

[quote=AllREIT] [quote=mikebutler222]
[quote=AllREIT]
If you could pick outliers a priori then you would make alot of money . But you can't do that. [/quote]

That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.[/quote]

Which is 1 manager out of how many currently working, and out of how many who were working when he got started? [/quote]

Again, irrelevant. It doesn’t mater of how many, it matters that he’s done, consistently, what you claim (by misusing your sources) can’t be done.

[quote=AllREIT]

I never said I was talking about SMA's, just actively managed mutual funds. [/quote]

Actually, you’ve consistently said “active managers”. I’ve had to point out you’ve misapplied the studies, which ONLY refers to mutual fund managers.

[quote=AllREIT]

Don't over generalise here.[/quote]

That’s interesting coming from you, since that would be my number one criticism of your presentation thus far. You’ve made broad definitive statements about the value of active management by trying to use in a very specific manner things the studies say in much more generalized, caveated terms.

[quote=AllREIT]  Since SMA's tend not to report public figures …[/quote]

Untrue.

[quote=AllREIT]

But there is nothing that implies that SMA as a class should have better performance than mutual funds as a class. [/quote]

Of course there is. Two quick examples; 1) mutual fund returns are skewed substantially by inflows and outflows of cash, which are often functions of the irrational decisions of individual investors motivated by market swings. 2) Even rational decisions on the part of investors to add or subtract funds cause managers to make purchase or liquidation decisions they wouldn’t otherwise make, unless forced.

[quote=AllREIT] [quote=mikebutler222]

It’s simply that most of us (as with the vast majority of trustees of genuine pools of money) don’t find the advantage the indexes show when measured against a indiscriminately drawn comparison pool so compelling as to preclude the use of active management.[/quote]

Who said I precluded the use of active management in all cases? I think the use of actively managed mutual funds is dumb. Don't put idea's in my mouth. [/quote]

You’ve consistently dismissed active equity management, haven’t you?

[quote=mikebutler222] That’s hardly ever a wise thing, nor is it wise to make disparaging remarks about ethical standards of those who disagree with you, when your evidence is riddled with truck-sized loop holes. IOW, your absolutist commentary isn’t supported well by your caveat-filled evidence.[/quote]

[quote=AllREIT]

Now you are just making things up. First you claim that I am repeating the the results of academic studies. [/quote]

I thought you realized what basis there is for the argument you’re making. It’s the absolutist view of MPT.  Anyone in the business over a few years is familiar with both sides of the debate.

[quote=AllREIT]

Then you claim that I am challenging people's ethical standards,…[/quote]

You aren’t? What did you mean by “Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest.”? Or “ Inside of conventional equities, pretty much everyone (except for active managers and thier sales representatives) agree's that it doesn't work.”?

[quote=AllREIT] …. and then you claim that the studies about the performance of actively management have loopholes and so forth. [/quote]

Again, I assumed you knew that what you were repeated was the absolutist view of MPT. If you knew that, you’d know the “generally” and “often” and “typically” loopholes involved.

[quote=AllREIT] You will always have outliers (extreme cases) and subjects who are above average. But if, going in blind,  you have to ask about the typical group member, then group results will be most typical.

The typical result of active management of mutual funds is that they underperform. Of those that do outperform, it is not consistant over longer time periods. [/quote]

One last time, 25-45% isn’t “extreme” and “typical” is too ill-defined a term to make definitive statements dismissing the value of active management in equity portfolios.

[quote=AllREIT]

On a theoretical basis, the observed dispersion of mutual fund results is consistant (i.e not inconsistant) with an effecient market that impossible to beat. [/quote]

The problem with that assumption is the belief that even in the short term the market’s so efficient that skilled investors cannot profit from imbalances that make a significant difference when accumulated over the longer term.

[quote=Indyone]

Mike, I'd just as soon indexing disciples keep believing the efficient market/indexing story....it makes my job easier...

As a quick example of how easy it is to beat the index, I laid Vanguard's 500 index fund next to every domestic stock fund ran by American Funds and compared on an all-expenses basis for the last ten years.  Here are the unvarnished results:

Vanguard 500 index: 8.12%

Growth Fund of America: 12.37%

Fundamental Investors: 10.48%

Washington Mutual: 9.00%

Investment Company of America: 9.64%

AMCAP Fund: 10.73%

American Mutual Fund: 8.79%

These numbers are trailing ten years as of March 31, 2007, and all American funds have the MAXIMUM load applied as opposed to Vanguard's 0.18% expense ratio.  Add on the advisor fee and indexing looks even crappier.

I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.

The sad thing is, there are lots of better funds and managers than the ones I cited here...I just used a very common strategy to illustrate my point.  I hope Suze and others keep telling everyone to index...

You get what you pay for.  A lazy advisor is almost worse than no advisor at all.

[/quote]

[quote]I've never used the vast majority of these funds, but when you're feeling all smug and superior with your passive indexing strategy next to the local EDJ guy hawking funds down the street, you might want to take a harder look at the numbers before you dismiss active management.[quote]

I'll be reminding myself of the dangers of post hoc data mining. I.e you only look at the winners.

And survival bias is a  big problem in doing this, since the only funds that are still around for 10 years have beaten the indexes. That really says very little about if they can keep it up for the next ten years. (Classic examples, Performance of GFA or Bill Miller in 2006)

On the whole, if you put your money into 10 random funds, and then then come back in 3 years, 7+ of them will have underperformed thier benchmark. There isn't good odds.

Some of those funds will underperform by a large amount. This is expensive.

I.e no one talks about the Van Wagoner funds.

IMHO ya'll should read a copy of Nassim Taleb's Fooled by Randomness.

[quote=AllREIT]

 That really says very little about if they can keep it up for the next ten years. (Classic examples, Performance of GFA or Bill Miller in 2006) [/quote]

You say "next ten years" and then try to make an issue of 2006?

[quote=AllREIT]On the whole, if you put your money into 10 random funds, and then then come back in 3 years, 7+ of them will have underperformed thier benchmark. There isn't good odds.[/quote]

Then I suggest you not randomly select managers.

[quote=AllREIT]IMHO ya'll should read a copy of Nassim Taleb's Fooled by Randomness.

[/quote]

Life isn't so long that I can read every book ever printed, so, in order to make sure I'm not wasting my time, tell me what his 3,5 and 10 year annualized numbers are.

I'll be reminding myself of the dangers of post hoc data mining. I.e you only look at the winners.

Not really.  Indyone was quoting the majority of the American Funds equity funds that are comprised of US Stock.  He didn't use the composite and international funds they have which also have good performance

Capital World Growth and Income  13.10%

Capital Income Builder 10.73

American Balanced Fund  8.86

If the majority of their equity funds and blended funds outperform the Vanguard Indexed fund even with full load included, that tells us something about American Funds, Vanguard and the whole premise of passive index investing.

If you're focusing strictly on 2006, GFA and AMCAP underperformed.  The other four in my example beat the index yet again.  As far as looking only at the winners, I looked at every domestic stock fund American carries...not just the "winners".  As far as I know, they've not merged or liquidated any funds, but I'll leave it to someone who knows them better than I do to verify this.

As far as picking random funds...why on earth would I?  If you look at managers with long-term track records that persistently outperform the indexes, why wouldn't you use them?  As I said earlier, the funds cited in my example aren't the best ideas I have...just a very commonly used idea that most folks on this board would be familiar with.  Most of the managers I use beat their index last year...some by wide margins.  All of the managers I use beat their respective indexes over the last ten years.  Although I don't use his fund, I'd take my chances with Bill Miller rather than index...one underperforming year doesn't disqualify a manager as long as they outperform over the long term.  I have no interest in using Van Wagoner funds.

If indexing works for you, go with it.  I've looked at indexing a long time and have never been sold on the theory.

Well the way I see it there’s many ways to skin a cat.  I don’t have a problem personally with the indexing camp-I just happen to thing they’re wrong and it doesn’t work for me.  That doesn’t make them bad people, and I’m sure plenty of their clients make money.

Having said that, don’t kid yourselves…buying an index might mean that you are buying a low turnover inexpensive product, but it is NOT an “unmanaged” passive product.  The folks at S&P and EAFE/MSCI and Dow Jones PICK the companies that go into the indices, and with most indices they have substantial discretion.  The S&P 500, for example, is NOT as many people believe the 500 “biggest” or “most profitable” or “fastest growing” companies in America.  They are 500 companies that S&P believes to be “representative” or “significant”.  (Note-these are my words, and my understanding.  If one of you index-philes wants to pull the official definition off the S&P website to show me up, have at it.)  I also am personally uncomfortable with how market cap weighting works in most indices to have you far less diversified than most people think.

Too, in my unscientific but somewhat experienced opinion, I think that index funds and ETF’s that follow them are “bull market” vehicles unless you use a stop loss or a hedging strategy.  Go back and pull up an actual chart of the S&P 500, R2K, or Nasdaq 100 indices from say October 99-March 2005 if you have any questions about that.

As far as I’m concerned it’s really NOT about beating indexes. It’s about performance, but only to the extent that 1.)  It delivers the capital over time that clients need to meet their financial goals, and 2.)  those returns come in a fashion(without too much variability) that the client stays “in the game” and doesn’t pull the eject lever when things are bad, or pile into the hot sector when things are good.

[quote=joedabrkr]Well the way I see it there's many ways to skin a cat.  I don't have a problem personally with the indexing camp-I just happen to thing they're wrong and it doesn't work for me.  That doesn't make them bad people, and I'm sure plenty of their clients make money.[/quote]

I have no problem with them either, until they insinuate that those who disagree with them simply aren't honest.

[quote=mikebutler222]

[quote=joedabrkr]Well the way I see it there’s many ways to skin a cat.  I don’t have a problem personally with the indexing camp-I just happen to thing they’re wrong and it doesn’t work for me.  That doesn’t make them bad people, and I’m sure plenty of their clients make money.[/quote]

I have no problem with them either, until they insinuate that those who disagree with them simply aren't honest.

Just a reminder this is a Reputation forum not a index vs active forum!

[quote=babbling looney]

3. There is no understanding of the level of education and on going training that is required to be able to be a "good" financial advisor.  We are charging not just for the current activity of buying an investment but also for the years of time spend in obtaining the knowledge that we need to be able to advise.  Just like a doctor or lawyer who is recoveing the cost of their years of education.  Clients are surprised when I discuss the ongoing training that is required by the various licenses that I hold.  The time commitment and costs are never made apparent to the public.

[/quote]

I agree with everything you said except for this statement.  Unlike doctors and lawyers there is no long and expensive educational hurdle.  In fact, there is no college requirement at all, merely the ability to self study and pass a few exams.  The "years of time spend in obtaining the knowledge that we need to be able to advise" are part of the problem.  We don't get this knowlege through education or apprenticeship.  We get it by pretending to be FAs when we really have no idea what we are doing (and have minimal supervision).  There's still no guarantee that someone who has survived the first few years has learned anything, other than how to sell.  It's hard for a profession to have respect when you could go from selling books door to door one day (or substitute any other job) and three months later be called a "Financial Advisor".   With the proliferation of FAs, most everyone has a friend or relative that has gotten into the profession with no financial background. 

Our profession is much more like realtors than doctors & lawyers.  The low entrance requirements and high earnings of the very successful in real estate cause a lot of people to "try it out" and then go on to something else.  I have several relatives in real estate and the similarities are many.   

[quote=Indyone]If you’re focusing strictly on 2006, GFA and AMCAP
underperformed.  The other four in my example beat the index
yet again.  As far as looking only at the winners, I looked at
every domestic stock fund American carries…not just the
"winners".  As far as I know, they’ve not merged or liquidated any
funds, but I’ll leave it to someone who knows them better than I do to
verify this. [/quote]

I'd have to look more closely but I don't think all American Funds are benched marked to the SPX, as many of them are small/mid/value type funds.

And of course there is a big issue of luck built in to all of this. We are only talking about American funds because they have survived to be talked about it.

[quote]As far as picking random funds...why on earth would I?  If you look at managers with long-term track records that persistently outperform the indexes, why wouldn't you use them?  As I said earlier, the funds cited in my example aren't the best ideas I have...just a very commonly used idea that most folks on this board would be familiar with.[/quote]

This is where you get to the question of if manager track records have information content. I.e can past performance predict future results?

The general result has been that manager performance is not persistant, and that manager track records have little information content.

Now of course there are exceptions to everything, but in general this is how it is. And in my opinion this is the way to bet. Assume no one knows anything, since we lack conclusive evidence otherwise.

It's also a bit of risk management as well, since really big cock ups usually require human intervention.

[quote]If indexing works for you, go with it.  I've looked at indexing a long time and have never been sold on the theory.[/quote]

I totally agree with your post. In my opinion, anytime sales becomes part of the equation people turn their noses up.

[quote=AllREIT][quote=Indyone]If you’re focusing strictly on 2006, GFA and AMCAP underperformed.  The other four in my example beat the index yet again.  As far as looking only at the winners, I looked at every domestic stock fund American carries…not just the “winners”.  As far as I know, they’ve not merged or liquidated any funds, but I’ll leave it to someone who knows them better than I do to verify this. [/quote]

I'd have to look more closely but I don't think all American Funds are benched marked to the SPX, as many of them are small/mid/value type funds.  I just referenced large cap growth and value funds.  These surely qualify for benchmarking to the S&P 500.  As BL stated earlier, I even left out balanced funds with a significant bond exposure, yet which had outperformed the S&P for the same time frame when there would be no reason to assume they would.

And of course there is a big issue of luck built in to all of this. We are only talking about American funds because they have survived to be talked about it.  If you look closely at American, luck doesn't play much of a role in what they do. Portfolios are managed by multiple advisors which change over time, yet the performance is remarkably consistent.  American is the only one I brought up because it's a well-known and common story...not because I thought they were the absolute best.  I'm not giving up my research that easily.

[quote]As far as picking random funds...why on earth would I?  If you look at managers with long-term track records that persistently outperform the indexes, why wouldn't you use them?  As I said earlier, the funds cited in my example aren't the best ideas I have...just a very commonly used idea that most folks on this board would be familiar with.[/quote]

This is where you get to the question of if manager track records have information content. I.e can past performance predict future results?  I believe to a large extent that they can.  We know they don't guarantee future results, but over extended time frames, good managers consistently overperform and bad managers continue to lag behind until they are fired.  There's some luck involved both good and bad), but over longer time frames, luck is largely eliminated.

The general result has been that manager performance is not persistant, and that manager track records have little information content. I'll respectfully point out that this may be true for bad and mediocre managers, but I think there are plenty of good managers with persistent outperformance.  Sure, they may have a bad quarter or even a bad year, but I'm still comfortable with the premise that there are good managers with established track records that can reasonably be expected to outperform their benchmarks more often than not and on average over longer time frames.

Now of course there are exceptions to everything, but in general this is how it is. And in my opinion this is the way to bet. Assume no one knows anything, since we lack conclusive evidence otherwise.  I think this is a bad assumption.  Whether intentional or not, it is possible for company management to give two different analysts a completely different picture of what's going on in the organization.  Even the time of visit/discussion can have a marked influence over what the analyst sees and hears.

It's also a bit of risk management as well, since really big cock ups usually require human intervention. uhhhhhh...WHAT?!!

[quote]If indexing works for you, go with it.  I've looked at indexing a long time and have never been sold on the theory.[/quote]

It's not so much theory, as it is a radical admission of humility.  I call it defeatist and I'm not willing to give in.  I see too many examples of active management that adds plenty of alpha to justify the fee.  It's not a question of humility...it's the search for what is truly best for our clients.  I think I've found something that you think is impossible.  Time will tell.[/quote]

You've obviously spent some time in academia studying your position and I'll never accuse you of lack of due diligence into the process.  I simply don't agree with it and I think the position taken by indexers is far from irrefutable.

It's one thing to tell the masses that you believe indexing is an effective, low-cost investment strategy.  It's far different to represent it as the best investment strategy...that's opinion, not fact, and there are plenty of well-respected money managers who would strongly disagree with it and have the track record to back their positions.

Sorry, all,  for getting off-topic...

I like you, I like sex, it’s nice!

[quote=anabuhabkuss]I like you, I like sex, it’s nice![/quote]

I like sex too, but I don’t see what it has to do with this thread.

Are you propositioning him?

Or just posting after a couple of cocktails?

[quote=anabuhabkuss]I like you, I like sex, it’s nice![/quote]



PetroKazakhstan!

[quote=AllREIT]

[quote=anabuhabkuss]I like you, I like sex, it’s nice![/quote]



PetroKazakhstan!

[/quote]

Dude are you in the bag tonight too?  I feel jealous I’m just on a study break.

Joe,

You obviously haven’t seen the movie Borat.

[quote=BankFC]Joe,

You obviously haven’t seen the movie Borat.

[/quote]

No I haven’t.  I am movie illiterate.

[quote=joedabrkr]

[quote=BankFC]Joe,

You obviously haven’t seen the movie Borat.

[/quote]

No I haven’t.  I am movie illiterate.
[/quote]



Obviously you are from Uzbekistan.

[quote=DCedjones]

How come we dont catch a break in terms of reputation versus these other professions?[/quote]

When a bad doctor screws a client he generally kills them and leaves no evidence (if he is moderately competent).  Thus, there is no "bad reputation" to follow him or his profession.

When an attorney screws a client the client is usually none the wiser and cannot find, nor afford, a decent attorney that is willing to screw the other attorney. (professional courtesy)

When a financial advisor screws a client then there is evidence (a diminished account) and he can generally find a good lawyer to take the case on a pro bono basis.  As such, a bad reputation of the financial advisor and his profession will surely follow.

Trading is my hobby and interest. As a doctor I have very tough life and hardly get time to manage my investments but they are important too, but thanks to Banc De Binary. They keep me updated and educated whatever is going on with my investments. I am really satisfied from their services and anyone who wanted to feel to be cared must join them.