Advisor/ Broker Reputations

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DCedjones's picture
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My best friend is a lawyer at a prestigious law firm in town. So are several of my clients. I have other friends that are doctors. A few PhDs. We all went to the same top 50 US university.
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...
I'm just interested to see what folks opinion is on why the words "i'm a financial advisor" puts a grimace on the face of 60% + of the people who you tell that to (as in "oh my god, what is he/she going to say next...he/she obviously wants my money")...
My take is that this lack of reputation is largely due to:
-Brokers exploits in the 80's and early to mid 90's
- The continued use of the word "commission" as opposed to fees...hedge funds and mutual funds don't refer to their take as "comissions" even though their "annual expenses" really are the same thing since its a consistent % of assets rather than a flat $$ amount or directly tied to any "paper expenses"...our pay, whether upfront or over time is still to cover our own personal "operating expenses"
- Some firms/ policies that do not allow advisors to freely choose the best products for their clients (i.e. "captive brokers")
- And related to that last point, cut-throat competition within the industry where we each label our neighbor as a scam artisit and mass publicize it in effort to win business away from each other (the biggest examples being vanguard/ fidelity "anti-broker" commercials, and motleyfool "anti-broker/ DIY" spams...you would rarely if ever hear one heart surgeon calling another heart surgeon a crook in the public space even if it was a valid point)...
And my last word...we advisors MUST band together and stop publicly deriding each other as this plays right into the hands of the divide and conquer technique of the Vanguard/ Fidelity/ DIY shops...if we would channel that same energy into publicly rebutting the massive amount of negative media on us (just do a google search for "how to choose a financial advisor" and see how overwhelming the message of DIY shops is in play) rather than bickering at each other on these message boards we might be able to ensure our survival into the next few decades (just ask any 20 to 30 year old today and they will likely tell you that they think the "professional financial advisor" is a dying breed relative to the free info online and the cookie-cutter recipes provided by DIY shops...heck...if i weren't in this industry i'd probably be using fidelity based on the popularity of the myths and half-truths they propogate...just imagine then where your last prospect is verifying info on "advisors" and on your last recommendation, and what that info is saying)...
Financial Advisors of the world unite!
- We passed tough exams and still have continued study...
- We are responsible for profit and loss of our practices
- We are arguably the most heavily regulated industry in existence
We deserve some respect
I'll take responses off the air...

Indyone's picture
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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.

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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.

anonymous's picture
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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.

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

AllREIT's picture
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DCedjones wrote:

We deserve some respect

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.

troll's picture
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AllREIT wrote: 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?
 
Is this one of those "94% of all statistics are made up on the spot" facts?

troll's picture
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mikebutler222 wrote:AllREIT wrote: 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?
 
Is this one of those "94% of all statistics are made up on the spot" facts?Actually Mike I think that's accurate.  I've read it elsewhere before.

BankFC's picture
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AllREIT wrote: DCedjones wrote:We deserve some respectSee 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.
The better solution is to offer a guarantee of below market returns net of your fee?

troll's picture
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joedabrkr wrote: mikebutler222 wrote:
AllREIT wrote: 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?
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?Actually Mike I think that's accurate.  I've read it elsewhere before.

BankFC's picture
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Bobby Hull wrote:It's the fault of the bank brokers that hover around the teller window and salivate whenever someone deposits a 4 digit check.
 
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.

Greenbacks's picture
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[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.      

troll's picture
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Greenbacks wrote:[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.      Precisely my experience.  People react in a distinctly different fashion when I tell them I own my own firm...it's funny really, because when I was in the wire world I was so attached to the idea of having a brand name.

troll's picture
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BankFC wrote:
AllREIT wrote: DCedjones wrote:We deserve some respectSee 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.
The better solution is to offer a guarantee of below market returns net of your fee?

 

troll's picture
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joedabrkr wrote: mikebutler222 wrote:
AllREIT wrote: 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?
 
Is this one of those "94% of all statistics are made up on the spot" facts?
Actually Mike I think that's accurate.  I've read it elsewhere before.
 
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.

troll's picture
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Greenbacks wrote:
 
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.      

 
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.

troll's picture
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mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.

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."

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Bobby Hull wrote:mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.

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."

 
So, dishonesty sells. Congrats....

troll's picture
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mikebutler222 wrote:Bobby Hull wrote:mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.

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."

 
So, dishonesty sells. Congrats....

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.

troll's picture
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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….
 

troll's picture
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Bobby Hull wrote:
Actually, I really DO turn off those perpetual fees.
No, you don't. You replace visable fees with higher, often hidden fees.

troll's picture
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mikebutler222 wrote:Bobby Hull wrote:
Actually, I really DO turn off those perpetual fees.
No, you don't. You replace visable fees with higher, often hidden fees.

You've never seen our suitability form.

CueYouWhy's picture
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anonymous wrote: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.
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...

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Bobby Hull wrote:mikebutler222 wrote:Bobby Hull wrote:mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.

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."

 
So, dishonesty sells. Congrats....

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.

Hahaha.  That's some funny stuff.
 

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mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.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.

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Bobby Hull wrote:mikebutler222 wrote:Bobby Hull wrote:
Actually, I really DO turn off those perpetual fees.
No, you don't. You replace visable fees with higher, often hidden fees.

You've never seen our suitability form.

 
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...

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joedabrkr wrote: mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.
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.
 
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.
 

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mikebutler222 wrote: 
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. Far be it from me to make that claim either, Mike.   I've seen some ugly stuff out there.

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mikebutler222 wrote:joedabrkr wrote: mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.
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.
 
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.
 

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

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Bobby Hull wrote:mikebutler222 wrote:joedabrkr wrote: mikebutler222 wrote:Greenbacks wrote:
 
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.      

 
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.
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.
 
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.
 

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

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" />

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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. 

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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

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

Isn't that what annuities are for?

More seriously, the best anyone can consistantly offer is market returns less a management fee. To have below market returns takes extra effort, and usually costs more in management fee's.

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 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".

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mikebutler222 wrote: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.

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:People who are enamored with passive investing will quickly question the integrity of the active management contingent.

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�. 

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

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AllREIT wrote: More seriously, the best anyone can consistantly offer is market returns less a management fee.
 
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" />

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anonymous wrote: 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".

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.

The upper bound on sustainable investment performance is market returns less management fee's.  The lower bound is strong technical support at zero.

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mikebutler222 wrote: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.

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.

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)

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.

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AllREIT wrote: mikebutler222 wrote: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. 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. <?: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.
AllREIT wrote: mikebutler222 wrote:People who are enamored with passive investing will quickly question the integrity of the active management contingent.
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.
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.
AllREIT wrote: Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest.
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.
 
AllREIT wrote: mikebutler222 wrote: Pogo was right. 
Firstly, ignore Bobby Hull. He is a troll. Last month he was the ultimate annuity shark, this month he is Operation Rescue.  
 
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.
 
 
 
 
 
 
 
 
 
 

babbling looney's picture
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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. 

anonymous's picture
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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.

joecamelguy's picture
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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.

troll's picture
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AllREIT wrote: mikebutler222 wrote: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.The outliers are exactly that, outliers.That means they are rare cases that don't reflect the typical results. <?: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.
 
AllREIT wrote: If you could pick outliers a priori then you would make alot of money . But you can't do that.
That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.
 AllREIT wrote:
 The typical results of active mangement is underperformance.
 
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.  AllREIT wrote:
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)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.
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.
 
 
 

EDJ to RIA's picture
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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.
 

joecamelguy's picture
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EDJ to RIA wrote:
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.
 

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.

AllREIT's picture
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mikebutler222 wrote:
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.

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.

AllREIT wrote: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%?)

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.

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: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.

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.

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.

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

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.   
AllREIT wrote:

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

I like Pogo,

AllREIT's picture
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Joined: 2006-12-16

mikebutler222 wrote:AllREIT wrote:
mikebutler222 wrote: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.The outliers are exactly that, outliers.That means they are rare cases that don't reflect the typical results.

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.

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".

AllREIT wrote: If you could pick outliers a priori then you would make alot of money . But you can't do that.

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

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.

 
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.

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.

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?

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.

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.

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.

troll's picture
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AllREIT wrote: mikebutler222 wrote: 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%?)<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
And can you pick that 20% ahead of time. All the time? Consistantly?  
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.
AllREIT wrote: mikebutler222 wrote: 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.
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
 
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?
AllREIT wrote: 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.
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.
 
AllREIT wrote: mikebutler222 wrote: 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.
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.
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…...
AllREIT wrote:
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.
I can hear the trustees of massive defined benefit plans and charitable foundations having a pretty good chuckle at your comments on that one.
 
 mikebutler222 wrote:AllREIT wrote:Thus recomending active management, when you get a kick-back (sales load/trailer), is dishonest.
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 wrote: 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 valueb) Private Equityc) Venture Capital.d) Some hedgefund strategiese) 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.   

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.
 
 
 
 
 
 
 
 
 
 
 
 

Indyone's picture
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Joined: 2005-05-31

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.

troll's picture
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Joined: 2004-11-29

AllREIT wrote:mikebutler222 wrote:AllREIT wrote: mikebutler222 wrote: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.The outliers are exactly that, outliers.That means they are rare cases that don't reflect the typical results. <?: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.
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.  
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.
AllREIT wrote:
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.
“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.
AllREIT wrote:
And ofcourse, when Bill Miller started out you couldn't have know he was any good.
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?
AllREIT wrote:
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.
Another irrelevant point as we’re talking about advisors, and not “typical investors”.
AllREIT wrote:
 
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".
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.

AllREIT wrote: mikebutler222 wrote:AllREIT wrote: If you could pick outliers a priori then you would make alot of money . But you can't do that.
That's simply untrue, as anyone one of us here could detail. Ask Bill Miller.
Which is 1 manager out of how many currently working, and out of how many who were working when he got started?
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.
AllREIT wrote:
I never said I was talking about SMA's, just actively managed mutual funds.
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.
AllREIT wrote:
Don't over generalise here.
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.
AllREIT wrote:  Since SMA's tend not to report public figures …
 
Untrue.
 
AllREIT wrote:
But there is nothing that implies that SMA as a class should have better performance than mutual funds as a class.
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.
 
 
AllREIT wrote: mikebutler222 wrote:
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.
 
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.
You’ve consistently dismissed active equity management, haven’t you?
 
mikebutler222 wrote: 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.
AllREIT wrote:
Now you are just making things up. First you claim that I am repeating the the results of academic studies.
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.
AllREIT wrote:
Then you claim that I am challenging people's ethical standards,…
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.”?
AllREIT wrote: …. and then you claim that the studies about the performance of actively management have loopholes and so forth.
 
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.
AllREIT wrote: 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.
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.
AllREIT wrote:
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.
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.
 
 
 
 
 
 

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Joined: 2004-11-29

Indyone wrote:
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.

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