The U.S Government in its regulation of 401k plans and 403b plans is advocating lower fees for investors. The lowest fees are found in index funds. Individual stock investing is discouraged because of liability issues for the fiduciaries. Index funds, ETF’s and robo-advisors are getting a lot of press.
ADVISORS SHOULD BE CONCERNED.
Advisors should be concerned because over time their fees are likely to be reduced and their clients are likely to move assets to low cost providers, as they have to discount brokers. Advisor’s and brokers are still doing well because of client relationships, but as their clients age and monies are transferred to a new generation, assets may move to these low cost providers. In many cases advisors and brokers are not adding positive alpha and are providing middle of the road services such as growth and income accounts where accounts perform a lot like the indexes but the fees are significantly higher. Positive alpha is adding value by earning more than an index over a complete market cycle.
THE NEW BOOK, “ MONEY MASTER THE GAME “, EXPLAINS IT WELL.
Tony Robbins suggests that mutual funds and advisors often charge as much as 2% in management fees and about 1.25% in other expenses. Since most do not beat the S&P500 index over a long period of time this cost is substantial. Example: If the S&P500 index averages 6.5% over 50 years in an index fund with expenses of only .05%, $1.00 grows to $30 in 50 years. If because of fees results are only 5% net of fees, $1.00 grows to only $10 in 50 years. Considering that half of the S&P500’s gains are from dividends, higher fees more than offset the dividends. Tony suggests that for many people an indexed annuity or IUL with lifetime income guarantees may be better than mutual funds.
DO YOU BELIEVE THIS CONCLUSION?
No one denies there are successful investors who limit losses and achieve large gains over time. The bigger question is can the average investor achieve results above and beyond the S&P 500’s long term gains? Most people have proven they cannot. Dalbar surveys over the last 20 years prove retirement investors cannot even come close to the performance of the underlying funds they invest in. Why? Because they buy high when the funds have had great gains and then sell in disappointment when the funds decline substantially. They also have reported that those investors who had advisors did substantially better. Why? Because they took more equity risk and the advisors helped to keep them invested long term.
THIS ARGUMENT BEGAN IN 1973.
Burton Makriel wrote the now classic book entitled, “ A RANDOM WALK DOWN WALL STREET “. Makriel concluded that stocks move in a random fashion and that one could be as successful throwing darts at stock symbols as by following stockbrokers and research analysts.
NON RANDOM PROFITS REFUTES “ A RANDOM WALK DOWN WALL STREET” IN 1978.
Raymond Hanson Jr. and I wrote a counter thesis entitled, “NON RANDOM PROFITS”. Our study made a different claim. It states: “ The concept of cyclicality implies predictability and predictability when applied to stock prices implies profits—Consistent, non random profits.” Today after 37 years have passed the conclusions reached by Hanson and Mann can be affirmed and the argument closed. After 79 years of data you may investigate the conclusions and test the hypothesis for yourself.
I am not against investing in indexes, ETF’s or robo advisory services. Investors have done well in indexes, especially as compared to non investors. I do believe advisors can help investors do much better by seeking after excellence and not being satisfied with average results. There are many ways of achieving positive alpha. The search should be for truth using scientific principles. In addition, we must consider the experience, the suitability and the mindset of our investors.
Once the scientific evidence is in, it is necessary to educate our clients.
WHAT ABOUT SEEKING EXCELLENCE?
From Jan 1, 2003 through December 31, 2013 the S&P 500 index just about doubled in price. The buying power of money dropped by 50% over this period. Take out the tax liability and you are way ahead of the non investor, but not in a great place. Over this same period, a study of 280 Non Random type stocks rose by a factor of 10 times the increase of the S&P 500 stocks. We invite advisors and investors to do their own homework and help us be a voice for the argument that you can help an investor achieve positive alpha. Our book marketer’s site is http://www.nonrandomprofits.info. Click on the links above and below the page for additional information.