Mutual Fund Conspiracy

Yale University chief investment officer David Swensen penned a persuasive argument for reigning in the mutual-fund industry through investor education and government regulation. It is shocking how an industry, “which manages more than $13 trillion for 90 million Americans, has employed market volatility to produce profits for itself far more reliably than it has produced returns for its investors.” The racket revolves around actively managed funds. A few key points:

  • For decades, investors have suffered below-market returns even as mutual fund management company owners beat the market.
  • The Morningstar mutual fund ratings, popular among financial advisors, are great at summarizing past performance yet poor at predicting future performance.
  • The financial industry looks to the Morningstar ratings to justify its self-serving buying and selling — inherently propagating a systematic buy-high-sell-low strategy.
  • Even Morningstar concludes, in its own study, that low costs (i.e., index funds) do a better job of predicting superior performance than do the firm’s own five-star ratings.

Check out Swensen’s entire oped in the NYTimes.

The prominence of actively managed funds underscores an opportunity for a new type of oversight for advisers of individual investors. Individual investors (like me) hire financial advisers often to make up for their own lack of sophistication and time.  Even if people trust their financial adviser, their performance and accountability would most certainly increase if there were formal checks and oversights in place. I do my best, but I’m not always confident in my ability to hold my adviser accountable. I trust my adviser, but I simply don’t know what I don’t know.

I would be highly interested in paying for an independent third-party to perform an annual audit of my financial advisor’s performance. I’m not so interested in a strict pass-or-fail grade, rather unbiased critique of what’s working, what’s not and what we should consider to improve.

Published by Max Kalehoff

Father, sailor and marketing executive.

Leave a comment