I come in peace.
I have been hard on you in the past. At times, I was insensitive to the fact that you are husbands, wives, Moms and Dads. You have mortgages to pay and children to educate. You’re under pressure to generate revenue for your employer, and they’re not exactly a charitable group.
All too frequently, you met your revenue goals by selling products you knew weren’t suitable for your clients. Typically, these were high commission investments, like non-traded REITS, annuities, hedge funds, structured notes and derivatives. The core of your investment strategy was (and likely still is) the sale of high expense ratio, actively managed mutual funds. These funds often tacked on sales charges (called “front-end loads”), which could range from 3% to 8.5%. When investors protested, the mutual fund industry created a “back-end load,” which penalized investors who sold prior to holding for six years. In addition, these funds charged a 12b-1 marketing fee of about 1% a year.
You’re an intelligent group. You’ve known for a long time that this was a giant rip-off. Your clients would likely have been far better off in a low management fee index fund from a fund family like Vanguard. But you had bills to pay. Your branch manager was ruthless about meeting quotas, and relatively few investors knew about the benefits of index funds.
Now, everything has changed. Over the past three years, investors have pulled $525 billion from U.S. actively managed stock funds (like the ones you’ve been selling). Index and passive funds had inflows of $458 billion during the same period.
The writing is on the wall. We both know it. Investors are more savvy. They’re not falling for the shopworn pitch about your ability to time the market, pick outperforming stocks or select the next “hot” fund manager. Your business is in jeopardy.
The news isn’t all bleak. While a door has closed, a large window has opened. Instead of fighting against index- based investing, join it. It’s a much more appealing position to take with investors. You’ll be doing the right thing and impacting your clients positively.
Instead of relying on your wit and guile, and ultimately deceiving your clients, you can embrace the overwhelming academic evidence supporting index-based investing. It’s a piece of cake compared to what you have been doing.
I know what you’re thinking. How will you demonstrate your value when anyone can buy index funds directly from fund families? How will you justify your fee?
Don’t worry. I’ve got you covered. In The Smartest Portfolio You’ll Ever Own, I provide the academic underpinnings for a “SuperSmart Portfolio”, consisting of nine ETFs and index funds. The stock portion of this portfolio tilts towards small size and value stocks. It optimizes the trade-off between risk and return. It minimizes risk by including seven asset classes for stocks and two asset classes for bonds, providing broad, global diversification.
While some investors can implement this portfolio without assistance, it’s too complicated for many. Other investors, like trustees of a trust or sponsors of a retirement plan, will be strongly inclined to retain an advisor. You’ll be perfectly positioned to assist them.
Here’s another reason why this shift to a sound, academically based investment strategy is in your best interest. There’s been a strong trend towards managed accounts, where the primary revenue generator is the management fee. That fee is not affected by which investments are in the portfolio. You can do right by your clients and not sacrifice income! it’s a win-win.
Do you have an option? Are you just going to watch your clients flee to index funds? I’m offering you a far better choice. You can be pro-active. You can differentiate yourself from your colleagues who are simply hoping investors won’t figure out there’s a better way. You’ll be offering them that way!
There are hundreds of thousands of stockbrokers in the U.S. What if only 10% of you adopted my suggestion? Think about the number of investors whose lives you can change.
Finally, reach out to me. I’ll help you make the transition. I mean it.
I told you I came in peace.
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