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We Keep Dancing – Part II

Posted: Ashley Cornner-Patel

As a follow up to our WJNotes last week.

“Our responsibility now is to keep dancing, but closer to the exit and with a sharp eye on the tea leaves.”
– Ray Dalio, Head of the largest hedge fund in the world, Bridgewater Associates, LP

His quote reflects our sentiments and positioning.

A couple of articles caught our attention the past few months. The first was titled: “Some of the Best Available Mutual Funds Are Now Off Limits to Millions of Investors.” It was published on the site. The article highlights the doublespeak of the brokerage industry. There are two classes of financial advisors in the US. Brokers, who are salespeople providing investment advice ‘solely incidental to the sale’ and are not fiduciaries. And registered investment advisors (RIAs), who are fiduciaries, treating your money like it is their own. Brokers typically are compensated by commissions paid by the investor and broker, while RIAs are typically compensated through fees only paid by the client.

The author of the article describes how Morgan Stanley, the largest broker in America, with over 15,800 representatives and trillions in assets, will no longer permit their clients (3.8 million of them) to purchase funds from Vanguard. Vanguard, as you probably know, is one of the largest mutual fund companies in the world with over $4 trillion in assets. Vanguard is known for its very low cost investment options across a variety of asset classes.

Brokers claim that it is not necessary to require them to meet a fiduciary standard because it would harm investors. Usually the claims are pure doublespeak and obfuscation like the following quote from the article: “These changes are designed to reduce client costs, ensure we are offering top quality products to clients, and reduce the potential for conflicts of interest.” The author of the article deadpans: “The company did not explain how eliminating a line of low-cost funds would help reduce client costs.”

The truth is Vanguard has not agreed to pay Morgan Stanley’s price to be offered on their platform (the same is true of Merrill Lynch) so they simply banned clients from buying their funds. Is this putting client’s interests first? Or Morgan Stanley’s interests first? You can decide, but if you have friends or colleagues that invest with the Morgan Stanley’s and Merrill Lynch’s of the world, do them a favor and introduce them to a Fee-Only, fiduciary advisor like WJ Interests.

The second article was written by Jason Zweig of the Wall Street Journal. We have mentioned this before, but if you read one financial journalist weekly, it should be him. The article was called “Whatever You Do, Don’t Read This Column.” (Please know this link is paywalled or subscription-only) Zweig explains how most investors performance expectations are way out of line with reality. He describes a recent survey of a group of wealthy individuals that expect their portfolios to earn 8.5% annually after inflation. This would require stocks to gain 12.5% per year as bonds currently yield only 2.5%. Almost double what we’ve earned over the long term. Institutional investors are not much better he explains. They expect their venture capital investments to average 20% annually even though the funds on average barely keep up with stocks. The article goes on to describe why investors are so detached from reality. First he points out the “hope springs eternal” and that people think the other guy may earn measly returns, but not me because I’m special. Next he says many investors “can’t handle the truth” called “information avoidance” by psychologists or as he says intentional ignorance. He quotes a psychologist who studies the phenomenon: “People avoid information if it’s going to make them feel or behave or think in a way they don’t want to”. “Save more” or “eat less” or “exercise more” are not things we like to hear.

Zweig concludes and I quote: “So when you or financial adviser estimate future performance, ask: What are the sources of this expected return (income, inflation, capital appreciation and so on)? How much of the total will come from each? How do those expectations compare to the long-term past results and, if they differ, by how much and why?” . . . “What conditions or circumstances would it take to be proven wrong?”

We accept Mr. Zweig’s challenge, please call us if you would like the answers.

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