According to
a ground-breaking study, the raw returns of equally weighted mutual funds (net
of all expenses) for 1996 to 2002 were 6.626% for investors working on their
own and 2.924% for funds chosen by advisors.
In other
words, the do-it-yourselfer did more than 100%
better than financial advisors when it came to selecting equity mutual funds.
After factoring in inflation and taxes, clients of financial advisors lost
money and lost purchasing power. This should be criminal.
The study,
"Assessing the Costs and Benefits of Brokers in the Mutual Fund
Industry" is written by Daniel Bergstresser of Harvard Business School,
John Chalmers of the University of Oregon, and Peter Tufano of Harvard Business
School. You are going to be hearing a lot more about this study in the months
and years to come. Some are calling it one of the seminal studies of the
decade, like those done on asset allocation in the past.
The BCT study
(after the initials of the author's last names) is an exhaustive analysis of
the cost and performance of more than 4,000 mutual funds sold by financial
advisors as compared to those selected by investors on their own over the years
1996 to 2002. This is the first study ever to scientifically quantify the
benefits of using financial advisors.
The study
attempts to find tangible evidence of a benefit from hiring an advisor by
answering these five questions. It appears they came up empty-handed!
1. Do
investors who hire advisors get access to funds that would otherwise be harder
to find or evaluate? The answer is yes, but as already noted, advisor-selected funds underperform funds that
investors select on their own.
2. Do
advisors help clients find funds that are lower cost (excluding distribution
costs)? After analyzing several trillion dollars worth of transactions, the
answer is no. In fact, another new study released in late November by
the Zero Alpha Group (ZAG) and Fund Democracy supports this finding. Their
study showed investors who buy index funds through brokers pay half a
percentage point more in management fees than do independent investors who go
through no-load channels - for essentially the same fund.
3. Do
advisors give clients access to funds with better performance? Once again, the
answer here is a resounding no. Contrary to everything we are led to believe,
the evidence shows that advisors not only underperform indexes--they
underperform what most people do on their own if they don't have an advisor. If
that is not a damning indictment, I don't know what is!
4. Do
advisors provide superior asset allocation? After years of research covering
trillions of dollars of asset allocations, the finding is that advisors do not
provide superior asset allocation. They are as likely to get caught up in the
hot sector as we are - possibly more likely.
5. Do
advisors help correct bad investor behavior such as chasing fads and chasing
performance? Unfortunately, no. In fact, the evidence shows that advisors even
contribute to such behavior.
Lest you
think the authors were biased against advisors, let me set you straight. They
went out of their way to give advisors the benefit of the doubt. Not only that,
they were aided in their research by some of the largest and most respected
industry groups and research organizations.
One last
thing that is worth noting - this study also found that the clients of advisors
are less educated and have lower net worth than do-it-yourselfers. You can
certainly make a chicken and the egg argument here. But still, let's call a
spade a spade. Using an advisor to choose your investments is just plain dumb
when you can do better on your own.
What does
this mean?
Get educated
about personal finance in general and investing more specifically. If you need
help, avoid commissioned sales-people like the plague. Seek out someone you can
pay a one-time fee, by the hour or a retainer if necessary.
No one is
going to take care of your money for you. The only person who has no conflict
of interest is you. The person best qualified to handle your money is you -or
at least you should be. If you are not, you need to get cracking, right now.
My thanks to
Snider Investment Method™ investor Wayne Jackson for bringing this study to my
attention. We are going to try to get one of the authors of the study on the
radio show. In the meantime, I am curious about what you think. Do these
findings surprise you? Do they prompt to you to change what you are doing?
Please leave your thoughts and comments below.
SOURCES:
1. Barbara Whelehan.
"Do-It-Yourself Investors Win the Race." BankRate.com 6 Dec 2006. http://biz.yahoo.com/brn/061206/20408.html
2. Donald
Moine. "The Study of the Decade." MorningStar
Advisor 22 June 2006. http://advisor.morningstar.com/articles/doc.asp?s=1&docId=4482&pgNo=0
3. Bergstresser,
Daniel B., Chalmers, John M.R. and Tufano, Peter, "Assessing the Costs and
Benefits of Brokers in the Mutual Fund Industry" (January 16, 2006). AFA
2006 Boston Meetings, Forthcoming Available at SSRN: http://ssrn.com/abstract=616981
4. Mercer
Bullard and Edward S. O'Neal. "The Costs of Using a Broker to Select
Mutual Funds." Zero Alpha Group
November 2006.
http://www.zeroalphagroup.com/news/113006_release.cfm
Kim Snider, Kim Snider Financial Communications, Chronim Investments
and/or Snider Advisors make no representation that the information and opinions
expressed are accurate, complete or current. The opinions expressed should not
be construed as financial, legal, tax, or other advice and are provided for
informational purposes only. Call 866-952-0100 to request the Snider
Investment Method™ Owner's Manual, which includes a description of the
Snider Investment Method, investment objectives, risks, suitability and other
information. Please read and consider carefully before investing. All
investments are subject to risk including possible loss of principal.
