In the bad old days, not that long ago, brokers for the “big box” stores recommended fund managers because
a) They were paid more or received benefits like trips or prizes.
b) They were trying to get their clients quantity discounts by using only one fund family.
c) They didn’t know any better.
So lots of unwary investors ended up with a hodge-podge of mutual funds, either all from the same fund family or a collection of funds that did not create a well diversified portfolio. Many funds were not reviewed regularly and investors hung on to them for years because no one bothered to do any analysis.
Today a lot of the landscape still looks the same. Even the “do it yourself” investor has a tendency to focus on things that may not really help them achieve their financial objectives. For example, the focus on fees has a tendency to distract from issues that are more important. Investors are constantly told that low expense index funds are the only way to go because they beat their actively managed cousins. Well, no, that’s not necessarily true. Active managers can beat index funds, and have done so over long periods. But managers need to be monitored. A smart investor needs to keep track of how a manager is performing, be sure that he’s sticking to his discipline and, finally, make sure that he has not left the mutual fund to someone else to manage.
Well-chosen active funds can pull their weight during market downturns by cushioning portfolios from the full decline. Since we can’t forecast the future with precision, getting great returns on a risk-adjusted basis is the guiding principle for the selection of stand-out managers. That’s why RIAs who are not part of one of the major firms and can give unbiased advice are so valuable.
Arie J. Korving, a CERTIFIED FINANCIAL PLANNER™ professional, has been delivering customized wealth management solutions to his clients for more than three decades. Prior to co-founding Korving & Company, he was First Vice President with UBS Wealth Management and held management positions with General Electric.