Therefore we conclude that in most cases, finding an investment professional that you feel comfortable with is generally a wise move for the average investor.
“Why The Average Investor’s Investment Return Is So Low”
“Dalbar has been analyzing investor returns for over 20 years and indeed found greatly diminished returns – with the root causes being a much more complex set of factors. For the 30 years ended December 31, 2015, the S&P 500 index produced an annual return of 10.35%, while the average equity mutual fund investor earned only 3.66%” https://globenewswire.com/news-release/2016/04/26/832952/0/en/Better-Investment-Recommendations-equals-Greater-Returns-DALBAR-Annual-Report-of-Investor-Returns-Says-Not-So.html
- Chart Below Source = Dalbar
Compensation – Fee Based vs. Commission Based
Fee Based advisors are legally bound to an ongoing fiduciary standard to offer completely independent, un-biased investment advice. Oppositely, commission based advisors are not bound to same fiduciary standard. We believe investment professionals who are compensated with commissions find it difficult to place client’s best interest’s first. As such we believe retail investors are best-served in a fee-based arrangement.Cyr Financial References:
“The Labor Department’s fiduciary rule is aimed at stopping the $17 billion a year the government claims investors waste in exorbitant fees. The idea is that the regulation will stop advisers from putting their own interests in earning high commissions and fees over clients’ interests in obtaining the best investments at the lowest prices.” http://www.investmentnews.com/article/20160509/FEATURE/160509939/the-dol-fiduciary-rule-will-forever-change-financial-advice-and-the
True Independence – Registered Investment Advisor
All fee-based advisors charge their fees through a “Registered investment Advisor” (RIA). RIA’s are entities, not individuals. Most fee-based advisors do not have their own RIA and therefore must affiliate themselves with a large, national broker dealer RIA. In the past, we used to work for these large broker-dealer RIA firms and in our experience, the situation was less than ideal for the client. We found these large national RIA firms were an un-necessary middle man in the investment process, offering nothing except additional fees while stripping us of our independence. Today, Cyr Financial Inc. is proud to be a completely independent Registered Investment Advisor.
The following information (1) demonstrates this extra layer of costs and (2) gives you specific instructions on how to verify if an advisor is independent or working with a broker dealer.
Research performed by Daniel Bergstresser and Peter Tufano of the Harvard Business School and John Chalmers of the University of Oregon Business School finds the following in regards to mutual fund investing through brokers…
- “Brokers fail to have substantial benefit”
- “Funds sold by brokers underperform those sold through the direct channel, even though calculated on a pre-distribution-fee basis… underperformance varies from 0.23% to 2.55%.”
- “We find no evidence that, in aggregate, brokers provide superior asset allocation advice that helps their investors time the market.”
- “Brokers may also be compensated with indirect distribution fees… where mutual fund companies pay part of their management fee to brokers in the form of revenue sharing agreements”… i.e. a kick-back for selling their funds. This finding illustrates why broker dealers are now required by law to disclose such agreements… unfortunately they are usually buried somewhere deep on their website…
To investigate whether a specific advisor, review the SEC’s website and investigate if they are independently working for you or working for someone else. You may be surprised who local advisors in your neighborhood are actually working for…
- Step 1 – visit the SEC website – > https://www.adviserinfo.sec.gov/IAPD/default.aspx
- Step 2 – Enter an advisor’s last name and approximate zip code
- Step 3 – Choose “Get Details” box of the advisor
- Step 4 – Download the Detailed Report
- Step 5 – Scroll down 3 or 4 pages to see who employs the advisor. Virtually every time you will find that the advisor actually works for a major firm located hundreds of miles away… not for himself or for herself.
Active – Try to “beat” the market by selecting “better” investments
Based on our experience, we believe most investment professionals place their clients into mutual funds with an active approach in attempts to “out-do” the market. However most mutual funds under-perform their stated benchmarks. Therefore we believe most retail investment clients experience underperformance. On top of the fees charged by the mutual funds, client performance can be further degraded by fees charged by the advisor.
- “Actively managed funds have historically tended to underperform their benchmarks over short- and long-term periods” http://us.spindices.com/spiva/#/reports
- “Only one in five U.S. stock funds have beat their benchmarks in the last five years, according to data from Morningstar.” https://dailyreckoning.com/real-reason-mutual-fund-cant-beat-sp-500/
- “And the top-rated mutual funds generally under preform.” Resources – Informational Documents
- “The proof that active managers can’t beat the market” https://www.justetf.com/uk/news/passive-investing/the-proof-that-active-managers-cannot-beat-the-market.html
Passive – Buy and Hold to “meet” the market
Since most active managers do not meet their benchmark, we reason that passive investing trumps active investing. Passive investment vehicles are generally less expensive than active vehicles and can be obtained relatively easy in the market place without the use of an advisor. And while advisors investing client assets in passive portfolios may not be adding much “portfolio alpha”, they do provide value to clients in other ways such as piece of mind, comfort, face to face interaction, planning, etc.
The vast majority of advisors place client assets into a combination of active and passive mutual funds and rarely watch, move or otherwise participate often in portfolio management. This typical scenario is deemed acceptable by the industry, where investors are paying both the mutual fund company fees AND advisor fees. While this may be acceptable, we believe portfolios should do more.
Systematic – Quantitative, research-driven, disciplined, unemotional, evidence-based investing
In our opinion, systematic investing trumps active and passive strategies. Some of the best and most successful money managers follow time-tested, research based approaches to money management. To that end, the most powerful investment phenomena is systematic momentum and trend-following investing. These evidence-based, methodologies promise high-conviction strategies built to beat behavioral bias.
- Eugene Fama, the 2014 co-recipient of the Nobel Prize in Economics and father of the efficient market hypothesis, has summarized the academic research on momentum as follows: “The premier anomaly is momentum.” http://schwert.ssb.rochester.edu/f532/ff_JF08.pdff532/ff_JF08.pdf
- Time Series Momentum – Tobias J. Moskowitz https://www.aqr.com/library/journal-articles/time-series-momentum
- A Century of Evidence on Trend-Following Investing – Brian Hurst, Yao Hua Ooi https://www.trendfollowing.com/whitepaper/Century_Evidence_Trend_Following.pdf
Below is our hypothetical example of the three types of investors (Average investor, passive buy and hold investor, and the systematic, momentum based investor). Active investors are NOT depicted in the hypothetical chart below. However, based on the evidence provided herein we would assume the active investor experience would be the most volatile, showing the highest performance in some years and the lowest performance in others. Additionally, based on the evidence provided herein, we believe the performance of the active investor would be between the Average investor and the passive buy & hold investor.
THIS CHART IS BASED ON AN EXAMPLE TO HIGHLIGHT OUR INVESTMENT PHILOSOPHIES. THEY DO NOT REFLECT REAL PERFORMANCE. INVESTMENTS CAN LOSE VALUE. PAST RESEARCH AND PAST PERFORMANCE ARE NO GUARANTEE OF FUTURE RESULTS. INVESTMENT ADVISORY FEES CAN DETRACT FROM NET INVESTMENT PERFORMANCE.
Cyr Financial References:
5 Questions to Ask Your Investment Professional
Tax Alpha Strategy #1 – Tax Efficient Portfolio Allocation Strategies
Tax Alpha Strategy #2 – Tax Loss Harvesting
- Unless you feel very comfortable with investing, enlist the services of a financial advisor.
- Make sure to use the services of a fee-based advisor, not commission based. If you are not sure, use the questions found on “5 Questions to Ask Your Investment Professional” to assist you.
- Understand who your advisor actually works for. Use the SEC website to find out. True independence is hard to find.
- Understand which of the three styles makes the most sense to you and find an advisor who follows that style. Don’t just accept an advisor when they tell you they follow a certain style, ask them some of the questions found on “5 Questions to Ask Your Investment Professional” to help assure yourself.
- The top combined income tax rates in the U.S. are over 40%. Nothing beats down an 8% guaranteed interest payment than giving nearly half of it to the government. It is important that your advisor understands taxes. If an advisor is not a CPA, be sure to gain assurance that they understand the tax aspects of portfolio management and how they impact your taxes. Use the questions found on “5 Questions to Ask Your Investment Professional” to assist you with these questions.