Dan Solin’s Newsletter, February 16, 2017
Straight Talk About Investor Protection
It seems clear that the Trump administration is hell bent on gutting protection for investors and letting Wall Street have free reign. This doesn’t mean it’s inevitable you’ll become a victim. It’s actually quite simple to protect yourself from an industry known for questionable ethics, illegal conduct, and unbridled greed.
Follow these tips and you’ll be fine:
1. Don’t do business with a broker who won’t confirm in writing that he or she will disclose all conflicts of interest and will always place your interests above their own. As a practical matter, this eliminates most brokers because they won’t give you this assurance. It’s not consistent with their business model.
2. Don’t do business with any advisor or broker who claims the ability to “beat the market”, using stock picking, market timing or selecting mutual funds likely to outperform. Instead, limit your choice to advisors who espouse “evidence-based investing”, by focusing on your asset allocation, using only low management fee index funds, passively managed funds or exchange traded funds, keeping fees and costs as low as possible and deferring or avoiding taxes.
3. Confirm that your assets are held by one of the major custodians (like Schwab, T.D. Ameritrade or Fidelity) and that you can access your accounts directly on the website of the custodian.
4. Tell your employer that you want the advisor to your retirement plan to be a 3(38) ERISA fiduciary. This means the advisor will always act solely in the best interest of you and your fellow employees.
The government isn’t going to protect you from investment scams and unconscionable conduct from “frenemies”, posing as trusted advisors. Following these simple tips should keep you out of their clutches.
Shakespeare could not have been more correct when he observed, “desperate times breed desperate measures.”
There’s a lot of desperation in the securities industry — and for good reason. You’re no longer a clueless victim and are abandoning active management in droves. According to an article in The Wall Street Journal, for the 3-year period ending August 30, 2016, $1.3 trillion flowed into passive strategies. Active strategies lost almost 25% of their total assets under management over the same time period.
You’ve figured out that investing in actively managed funds, stock picking and market timing enriches the securities industry at your expense. You understand you are paying for expensive funds that are likely to underperform a less expensive index fund and that performance of the “winning” funds is unlikely to persist.
You’re now aware of the “low and declining odds that active management will outperform”, as described by Larry Swedroe in this blog post.
The ramification of your knowledge is seismic for the financial media, your broker and actively managed funds. They’re fighting back with a series of desperate acts, designed to dissuade you from abandoning them. Here’s a sampling:
Fiduciaries grow your money. Non-fiduciaries transfer your money to them. – Dan Solin