• What We Do
    • Wealth Counseling
    • Investment Advisory Services
  • Who We Are
    • Our Team
    • Research Roundtable
  • How We Invest
    • Our Fiduciary Pledge
    • Investment Approach
    • Questions To Consider
    • Our Transparent Approach
  • Insights and Research

Insights and Research

Home  »  Fees • Performance Measurement   »   Ignoring Fees Doesn’t Beat the Market

Ignoring Fees Doesn’t Beat the Market

By Preston McSwain, August 21, 2017

This essay was originally published by CFA Institute on the Enterprising Investor.


It only decreases trust and credibility.

Why did I lead with this bold title and subheading?

Because a large investment firm recently made bold assertions that I found quite intriguing:

“Contrary to popular belief, some [active] mutual funds do beat the index on a consistent basis,” and its “select” group of funds, in particular, “beat the index . . . 93% of the time.”

It all sounded great, so I gathered, arrayed, and compared information about the firm’s growth-of-a-dollar charts and its highlighted performance claims.

Specifically, I looked at three of the firm’s best-performing “select” funds versus the benchmark it says is appropriate, the S&P 500:

  • Fund A, the firm claimed, outperformed the index 98% of the time.
  • Fund B, it said, outperformed 96% of the time.
  • Fund C outperformed 91% of the time, according to the firm.

The illustration below is what I found, after deducting the fees the firm states could apply.


Fund Performance after Deducting Fees

Fund Performance vs. S&P 500

Performance figures are for the period ending 30 June 2017 and are provided by the fund company minus the maximum sales charge deduction of 5.75%.


Where’s the “consistent” outperformance?

Not one of these funds outperformed the S&P 500 over the past one-, three-, five-, or 10-year periods ending 30 June 2017 net of all potential fees.

And remember, according to the data, I chose three of the top-performing “select” funds.

I don’t bring this up to vilify any one firm and haven’t named the firm in the text. Culpability is not the point.

I’m just highlighting the marketing games our industry can play by pointing out what bold claims can all too often rest on:

Omissions

In making its outperformance claims, the firm left out large potential fees:

The upfront sales charges, which can be as high at 5.75%, that are assessed on any investment less than $1 million.

As a specific example, the promoted hypothetical investor can’t receive the returns the firm boasts about because all fees are not included in the calculations. According to the firm’s website, a $100,000 investor would be charged a 3.5% front-end sales charge. These fees are not taken into account in the growth-of-a-dollar illustrations or the 93% of the time outperformance claims.

These fees are footnoted with links to other web pages, so again, there’s nothing legally wrong.

But are these performance claims potentially misleading?

I will let you decide, but I hope most would agree that as an industry we can do better.

What is my simple message to investment product firms and fund managers?

Please help improve the state of our profession by being more straightforward.

Just admit you’re in the business of selling products (nothing is wrong with this) and openly discuss all potential fees and conflicts in simple, plain language (emphasis on “simple” and “plain”).

As CFA Institute declared in “Future State of the Investment Profession“:

“To achieve [our] potential to serve the interests of society, the investment industry must not only regain the trust of investors and the public, but retool institutions and services to demonstrate significant value in fulfilling society’s needs.”

What is my bold claim as to what will happen if you aren’t more transparent?

“Investors [will] force change by significantly reducing the demand for your services.”


 

Preston McSwain
+ posts
  • Preston McSwain
    https://fwpwealth.com/author/preston/
    Transparency, Simplicity and Peace of Mind®
  • Preston McSwain
    https://fwpwealth.com/author/preston/
    Fiduciary Wealth Partners Reading List
  • Preston McSwain
    https://fwpwealth.com/author/preston/
    If We Had A Chief Economist We Would Have to Pay Them
  • Preston McSwain
    https://fwpwealth.com/author/preston/
    Is Trying to Pick Active Managers a Loser's Game?
SHARE
Tags:
CFA Institute, Conflicts of interest, Sleights of hand
RELATED ARTICLES
Where Are Fees and Expenses Not Costs?
Generally accepted or not - Fees and expenses are costs
Ignoring Fees Doesn’t Beat the Market
A large investment firm recently claimed its funds beat the market 93% of the time. They didn't.
All articles

Follow us on social media

Search Our Ideas

Subscribe to Our Posts


Important disclosures

Most Popular

  • The Simple Alternative – Keeps On Winning
  • The Simple Alternative
  • Say It Ain’t So, Joe
  • Are We Baking Portfolios with Bad Ingredients?
  • Crucial Elements in Wealth Management: Simplicity and Transparency

Browse by Theme

  • Fees
  • Fiduciary Duty
  • Investment Philosophy
  • Managing The Market
  • Peace of Mind
  • Performance Measurement
  • Private Investing
  • Quarterly Letter
  • Simplicity
  • Taxes
  • Transparency
  • Uncategorized
  • Values

FWP Logo Dark

Fiduciary Wealth Partners is a 100% employee owned firm that serves clients in a transparent, fiduciary manner.

We do not have any fee sharing arrangements with managers and do not have any broker-dealer conflicts. In addition, you will never see an arbitration clause in our contracts.

Everything we do is focused on assisting trustees, institutions and families with investment consulting, management and overall asset planning strategies.

  • Disclosures
  • ADV
  • Privacy Policy
  • Form CRS

Useful Links

  • Investment Advisory Services
  • Wealth Counseling
  • Our Team
  • Research Roundtable
  • Our Values
  • Questions To Consider
  • Insights and Ideas
  • Contact Us

Contact us

Phone

(617) 602-1900

Email

info@fwpwealth.com

Address

177 Huntington Avenue
20th Floor
Boston, MA 02115

 

View larger map

© 2020 FWP. All Rights Reserved. Fiduciary Wealth Partners Is An SEC Registered Investment Adviser.