Tuesday 21 January 2014

Advisors, Mutual Funds and ETFs - Savings Discipline vs Expert Unbiased Advice

Blogger Robb Engen at Boomer and Echo received some darts from a mutual fund industry representative recently for recommending that investors switch to index mutual funds or ETFs. He defends himself quite well but there is one line argument he has not pursued.

The mutual funds industry says investors with mutual funds get savings discipline from their advisor and they end up with more savings than households who do not receive advice as a result. Ok, turn that around, how do people with high savings, the wealthy, invest? How do investors who use ETFs fit on the wealth ladder? It seems that no one has actually done large scale survey studies. But some evidence points to ETF investors being even better off. ETF Trends' High Net Worth Investors Adopting ETFs reported on a Spectrum study of US investors in July 2013 that found that the higher up the wealth scale, the more the investors own ETFs. An older 2010 study on Canadian high net worth investors ($500k+ investable assets) from ETF provider BlackRock (which admittedly raises the same concerns about bias as do mutual fund studies from that industry) found that the majority of HNW investors favour ETFs over mutual funds. The HNW investors, apparently unlike the hoi polloi LNW investors who look to their mutual fund advisors for "savings discipline" according to IFIC's justification for high mutual fund fees, look to their advisors "... to help manage risk and provide counsel on investment products they have not considered". The HNW felt it important that the advisors put client interest first. Unbiased advice is key.

A second key element is the actual investment expertise of the advisor. To a large degree the attitude of younger investors cited by BlackRock rings true to me:  "61 per cent of HNW investors under 35 years of age felt that advisors provide no better information or advice than can be found on the Internet for free". The reason is two-fold. First, basic investing success is not rocket science - simple model portfolios, one-minute portfolios with yearly rebalancing do an adequate job. Second, the more sophisticated investing, the rocket science of finding extra return and controlling better various risks, such as I believe is possible with smart beta ETFs, post simple-beta portfolio management (the kind Jacques Lussier writes about in Successful Investing is a Process) along with tax management is not expertise I would expect to find often amongst mutual fund sales people / advisors. They don't have the training and the knowledge, let alone the motivation.

1 comment:

Robb said...

Thanks for the mention and the comment on my blog. You make a great point about HNW investors using ETFs.

Ideally, the financial industry will start to separate product sales from advice due to the inherent conflict of interest.

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