My regular Saturday comment followed by this week’s blog and financial site links.
Ever wondered why people are bad with money? Turn to today’s Financial Times, which reports that most financial advisers have never recommended a low-cost ETF:
Just under two-thirds of independent financial advisers (IFAs) have never advised on ETFs, while 23 per cent have recommended the products to less than 10 per cent of their clients, according to research carried out by the Financial Times and Skandia, the investment group.
What a disgrace. These people are supposedly professionals, paid by their clients for advice on the best investing products, and almost two-thirds of them have shunned one that delivers cheaply and efficiently.
Let’s run through the facts again:
- Most active funds under perform the stock market over time
- Passive index-tracking ETFs deliver close to the market return
- Active funds usually charge 1-2%
- UK ETFs usually charge 0.25%-0.5%
- Active funds pay advisers trail commission
- An ETF does not give an adviser commission
Take a wild guess why advisers have not been recommending ETFs?
In the past year alone, only 43% of fund managers active in the UK market beat the FTSE 100. Come back in five years and that figure will be less than 30%.
It’s exactly the same in the U.S., where ETF providers like Vanguard have made more inroads into revealing the myth of active fund management.
These stats from Business Week make the case yet again:
During the five-year market cycle from 2004 to 2008, the S&P 500 outperformed 72% of actively managed large-cap funds, the S&P MidCap 400 outperformed 76% of mid-cap funds, and the S&P SmallCap 600 outperformed 86% of small-cap funds.
These results are similar to the five-year cycle from 1999 to 2003, according to Standard & Poor’s Index Services. […]
S&P’s benchmark indices also beat a majority of actively managed fixed-income funds in all categories during the five-year horizon. […]
To put it simply, active funds failed to beat major indexes in every fund category.
People often argue that you should not believe what you read on the Internet, but in this case my article on why passive index investing makes sense is actually free comment that’s better than what you’ll pay for from two-thirds of financial advisers.
There’s really no excuse. I could understand if two-thirds of advisers had recommended one or two active funds – despite the evidence that most under-perform – as part of a core-and-satellite approach to investing.
In other words, they might have had their clients allocate say 75% of their money into a simple, diversified ETF-based portfolio, and then add a few active funds or even stock picks to provide a little excitement and potential outperformance.
The chances are such a strategy wouldn’t outperform, but I’m realistic. I myself trade stocks and investment trusts and even indulge in a bit of market timing, despite knowing the odds are against me. Equally, I can see why an adviser might want to add a bit of flair to a client’s portfolio.
So while you could still be appalled at a statistic that two-thirds of advisers had recommended an active fund – and received a fee for it – alongside an ETF or index fund core, there might be a counter-argument.
But this is the opposite! And there’s absolutely no justification for nearly two-thirds of advisers never having recommended an ETF at all – to anyone.
People trusted these guys as the experts and have been let down. It’s like going to a doctor and being recommended a CD of whale songs and a bundle of sticks to hang from your bedroom door instead of a heart bypass.
Roll on 2013, when taking commission for offering advice will be banned.
From this week’s personal finance blogs
- What would you be willing to do for a million dollars? – Len Penzo
- How to retire on half as much money – The Oblivious Investor
- Why frugality works: The numbers – The Simple Dollar
- Five steps to six figures in seven years – Free Money Finance
- Dividend futures jump, will stock prices follow? – Political Calculations
- Your brain is hardwired to follow the herd – Steadfast Finances
- Dove: The clean past and dirty present – Weakonomics
- Does behavioral economics matter – The Incidental Economist
- Top 10 money movies of the decade – Man Vs Debt
Other interesting financial and money articles
- Stopping climate change – The Economist
- Advisers fail consumers on ETFs – FT
- Life is not a box of chocolates (John Lee) – FT
- Why I am an optimist (John Maudlin) – Stockopedia
- Keeping up with the (Dow) Joneses – The Motley Fool
- The Financial Services Compensation Scheme – The Independent
- The rise and fall of MySpace – FT
- Recollections of China’s first capitalist – The Times
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