Dumb Investing Ideas

Excerpts from Barry Ritholtz's Washington Post Article of July 5th.  I mainly post this to show an affirming opinion to my views and things I have seen in client accounts before they move over to me.
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Mutual funds held at the mutual fund company. This head-scratcher is hard to understand. For some unfathomable reason, people hold mutual funds at the underwriting company instead of at any ordinary brokerage account. Of course, these are the “A Shares,” with commissions typically approaching 5.75 percent (or higher).

This is an insane amount of money to pay for a mutual fund when you can shop around and probably find a very similar fund for 80 percent less. Or find the rough equivalent in an ETF index fund with a 0.15 percent expense ratio, and pay $8 to buy it.

It amazes me that it’s 2014 and we are still discussing A-shares.

Apparently ethics are still an optional aspect of parts of the finance industry.

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Tax-deferred products sold in IRAs and 401(k)s. An entire universe of investments has one purpose: to provide a return without generating a taxable event. Think municipal bonds (or municipal bond mutual funds), or insurance products such as annuities or whole life insurance.

All of these products are priced to generate an equivalent after-tax basis return. In other words, you get less in terms of yield, but on balance can come out ahead. Putting these products into tax-deferred accounts defeats their reason for existing, and instead creates an investment that is built to underperform.

I don’t know how this happens, but it does.

Investment Advisors: Show your numbers

Zweig: Advisors need to show their numbers

I have a pretty strong opinion on this article.  At face value and in spirit, I totally agree that advisors should show their portfolio performance.

The letter of the law really prevents us from doing that.  It is an incredibly diffcult challenge to take in account all the different factors - fund flows, taxes, dividends, fees, etc.  Regulators are very strict in this arena - as they should be and therefore, many choose to not showcase performance.

Here is how I do it for individual clients that are with me.  I show the client's return NET OF FEES and I include how the Russell 3000, Aggregate Bond Index, Global Market Index, and International Market Index.

Then, on a weighted average the client can determine how he did vs. the benchmark.

Example:  If a client trailed their benchmark by .10%, but they know their total fees were 0.30%, then they can see they outperformed the benchmark by 0.20%.  Conversely, if they trailed the benchmark by 0.50% net of fees, they know their investments trailed the benchmark before fees by 0.20%.  Of course, this is pre-tax.

0.20% over a quarter is simply ambient noise.  However, if an advisor shows their results GROSS OF FEES, he is inflating his numbers because that isn't what the client actually experienced.

The other thing you have to consider is (1) The intangibles that an advisor offers, (2) the tax impact.