Win or lose, they get paid, but ask yourself this: what do they do for you to earn the money? The answers are troubling. In fact, it seems most professionals do everything except work on improving returns.
If you depend on an investment advisor or own “active” funds, watch for these seven signs.
1. Spends too much time at hearings
Reuters reported that Walter Schlaepfer, AKA “Phil Scott was honored in 2010 as Barron’s Number One adviser in the state of Washington. He was also on the publication’s top 1,000 U.S. financial advisers list this year.”
Unfortunately,
In a December 11 ruling, a three-person Financial Industry Regulatory Authority panel in Seattle wrote that it was spelling out specific abuses by Merrill and a broker known as Phil Scott in order to give them “the benefit of the panel’s conclusions so (they) can modify their conduct accordingly.”
FINRA panels rarely disclose the reasons for their awards.
The Seattle panel said Scott, whose real name is Walter Schlaepfer, distributed marketing material containing misrepresentations and omissions and used a personal investment advisory questionnaire filled out by brokers as “a disclosure device,” a practice that has the “capacity to deceive.”
Mr. Schlaepfer/Scott is still working at Merrill.
2. Babysits distressed clients all day
Sure, clients are worried, but if your guy spends all day doing social work, when does he have time to make you more money? Could it be that he just collects fees from the mutual funds you own?
Mr. Smith usually fills his workdays with quarterly client meetings to discuss family finances and retirement goals. But he also keeps a close eye on the stock ticker. If stocks fall or rally for no clear reasons, he jumps on his computer to send a calming email to clients, trying to explain the market moves.
During a flare-up in Europe’s debt crisis in June, he blasted emails from his hotel room in St. Kitts and Nevis during a vacation with his wife to celebrate their 20th anniversary. He returned to work the next week with the delicate task of soothing the nerves of a wealthy client family thinking of pulling out of stocks.
“I never expected that it would be this hands-on, with this frequency of interaction. But I understand why it’s necessary,” said Mr. Smith, a Chicago native and M.B.A. graduate of DePaul University, who dreamed of a life in finance while in high school.
The people at State Street keep sending emails like this:
3. Always agrees with the client
An advisor is supposed to advise. But it doesn’t work like this in real life:
“There’s a duty on my part to make sure that my clients are properly invested for retirement, and that means holding stocks,” Mr. Smith said. But with the market swings fraying investors’ nerves, he said, he doesn’t have the final word. “Ultimately, it’s the client’s money,” he said.
. . .
In recent months, [the client] has shared his concerns about dwindling natural resources and more-frequent droughts and hurricanes. In response, Mr. Smith helped him buy shares of agricultural and clean-water companies, not because he wants more stocks, but to protect him from a natural-resource calamity. In the event of a disaster, these stocks are likely to rise.
This is the perfect recipe for disaster. The industry knows that many clients exhibit signs of cognitive impairment or dementia:
Around the time Mr. Zerebny sketched his “Scream” picture, Mr. Smith helped reduce Mr. Zerebny’s stockholdings to a bit more than one-third of his savings from nearly 60%. The 63-year-old retired high school social worker now worries lower returns might stress his retirement. He collects a state pension from Illinois but fears government budget troubles could jeopardize his benefits.
Mr. Zerebny, who lives in nearby Deerfield, Ill., is “wise enough” to continue holding stocks but relies on Mr. Smith for reassurance, he said: “I want to be able to sleep at night.”
. . .
These days, Mr. Zerebny gets nervous even when the market goes up, fearful the rally will end. Just as surging home prices during the early part of the 2000s proved “too good to be true,” he said, he is worried the stock market is being artificially buoyed more by Federal Reserve and government policies than sturdy economic growth.
. . .
“I react more on an emotional basis, and I’m very nervous,” he said. “I remember the last time the Dow was in this range, housing prices were sky-high, we were all just sailing along and then, Bam!…The air’s getting thinner, and I wonder, ‘Can I trust this, or is this going to lead to another sharp reversal?’ “
You have to be in it to win it.
4. Paralyzed by fear
Part of the job is to manage risk, but few know how to do it. And it’s not just the little guy:
The study showed that long/short funds with quarterly redemptions generated a cumulative return of 58% since 2007.
By comparison, daily redemption and weekly redemption long/short funds, which give investors more access to their capital, posted returns of 28% and 36%, respectively, over the same period.
They “learned their lesson” in 2008/2009, but going forward, the requirement for liquidity has cost them big time:
The results of an annual survey of European family offices conducted by Campden Wealth have revealed the lowest returns on investments in the first half of 2012 in the past five years.
Single family offices (SFOs) have managed to make 3.6% on average in that period, while multi-family offices (MFOs) have been even less successful with 2%. These figures mark a significant decline from returns of around 8% reported in the previous year.
Since the onset of the financial crisis, family offices have shifted their allocations from traditional equities and bonds to real assets and riskier investment options.
For the first time since the report was launched five years ago, real estate has become the single largest asset-class for SFOs, with property allocations double those of MFOs. They have also opted for other direct investment options, such as cash and commodities.
But this shift in allocations has proven a mistake, as cash and real estate have underperformed this year compared to both higher yielding assets and even government bonds.
When risk morphs into fear and conspiracy theories, it’s time to book an appointment for an MRI.
5. Always on the hunt for new clients
Ever wonder why there is so much emphasis on marketing, sales and “relationship management”? Because there is no performance. There is an epidemic of couching lizards, hidden performance.
It takes time to do the work to make the money. Writing opinion pieces, going on TV, tweeting all day and free seminars tells you they are totally focused on SALES.
6. Attends the Lance Armstrong School of performance
From the “where there’s smoke, there’s fire” and “there’s never just one cockroach” theory, comes an investigative piece from Propublica:
To have one employee tied to insider trading may be regarded as a misfortune. But, with apologies to Oscar Wilde, to have six looks like carelessness.
. . .
Many institutional investors have so perfected the art of looking the other way that they make bystanders on a New York City subway platform look like models of social responsibility.
The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.
Makes you wonder how these funds will do, now that the Feds are breathing down their necks. More on this at In a New Era of Insider Trading, It’s Risk vs. Reward Squared.
7. Too busy indulging in his own wealth and B.S.
The investment industry does a great job of creating millionaires and billionaires — out of advisors, fund managers, and operators. The customers? Not so much. Even more amazing, they will cling to losing funds for so long that guys like John Hussman can still collect $60 million a year from just one of his funds!
Performance requires an edge. Edges need to be sharpened — with research. Ask yourself, who is minding the store when …
- Steve Cohen tends to his art collection?
- Rob Arnott is “chasing solar eclipses from the ice floes of Antarctica to the singing sand mountains of the Gobi Desert.”
- John Paulson is out there looking at vanity real estate?
- John Henry watches his Red Sox?
- David Tepper is building his beach house in the Hamptons?
- Ken Griffin is playing philanthropist, politics and benefactor of the arts?
- Paul Tudor Jones plays on his private islands and retreats?
Guys like Louis Moore Bacon and his underling Greg Coffey were smart. They cashed out, but the rest just continue to collect billions of dollars in fees even as they tell investors the best days are over. Hypocrite much?