The Individual Investor Advantage

This weekend, as I was driving back from picking up groceries, I was listening to a financial radio talk show. I wasn’t particularly impressed with the host to start with, but then he offered some advice that was so horrible it nearly caused me to veer off the road and into a ditch. He suggested that a caller not invest in stocks, because when you buy a stock, someone smarter than you is the person who is selling it.

Instead, he suggested only investing in mutual funds. Keep in mind; he’s a financial adviser who specializes in mutual funds, so we know where his bias is.

After a few minutes more of listening to the program, I had to turn it off in favor of my daughter’s insipid Kidz Bop CDs. Anyone who followed the host’s advice might as well just flush their money down the toilet.

Here’s why.

Most mutual funds underperform the market. In 2011, 84% of stock mutual funds did not beat the broad market or their benchmark index (if a fund is focused on a particular sector like technology or a region like Europe, it will have a different index that it’s expected to beat other than the S&P 500).Last year was a particularly bad one for mutual fund managers. Normally, the results aren’t quite as dismal. Over the past 10 years, 57% of funds underperformed their benchmark.

To make the radio host’s argument even more laughable, he said those “smart” traders on the other side of the stock trades included many mutual fund managers who did this for a living.

So you should be scared of buying stock from people who are bad at their jobs? Forget that. Where do I sign up to buy from them?

The weak performance of mutual funds doesn’t mean you should avoid all mutual funds. They’re appropriate for investors who don’t like to pick their own stocks and don’t want to put much effort into their portfolio other than asset allocation. But be sure you don’t chase a hot mutual fund because it posted strong performance numbers or has a popular manager.

Instead, invest in index funds with low expense ratios. If you’re investing in index funds, you’re basically just trying to match the market averages. There’s nothing wrong with that. The market goes up over the long haul and if you’re matching the market’s performance, you’ll make money.

If you’re investing in mutual funds, consider the funds in Alexander Green’s Gone Fishin’ Portfolio. These are funds like the Vanguard Emerging Markets Index Fund (VEIEX). The fund has a very low 0.33% expense ratio and has returned an average of 13.11% per year over the past 10 years.The key to the funds in The Gone Fishin’ Portfolio are the very low fees. Many actively managed funds have significantly higher costs — usually at least 1%, and sometimes much more. That means each year 1% or more of your money is going to the mutual fund company to pay for salaries, toner and Christmas parties. That money is better off in your pocket and the lower fees will improve your returns over the years.

This doesn’t mean that there are no quality mutual funds or managers who will generate solid returns for you — but with six out of 10 fund managers underperforming the market every year, are you really good enough to pick the right one every year? I’m not. That’s why most of my mutual fund holdings are in the funds recommended in The Gone Fishin’ Portfolio — inexpensive funds that are designed to simply match the market returns.

But I don’t put all of my money in those funds. I pick stocks, too. And I’ll match wits with those fund managers any day of the week. It’s not that I’m so smart and they’re so dumb. But as an individual investor, I have opportunities that they don’t.

Individual investor advantagesFor example, a stock I like that’s currently in The Oxford Club’s Perpetual Income Portfolio is Community Bank System (NYSE: CBU). It’s a small bank located in upstate New York and Pennsylvania. It has a market cap of just over $1 billion and trades an average of 244,000 shares a day.

I like it because it never took a dime of TARP money, pays a 3.6% dividend yield (4.7% based on our entry price in September) and has raised the dividend every year for 19 years.With just 244,000 shares traded per day, a large mutual fund would have difficulty buying large blocks of stock without moving the share price significantly. As an individual investor, you would have no problem picking up a few thousand shares on any given day.

Also, as an individual investor, you don’t have to worry about marketing. You’re not trying to impress anyone with which stocks you own or trying hard to beat a benchmark. However, a mutual fund, particularly one that isn’t outperforming, better have some of the hottest stocks in its portfolio at the end of the quarter, when its portfolio is revealed, otherwise, as Ricky Ricardo used to say, they’ll have some “’splainin’ to do.”Additionally, they’ll get rid of their dogs. The fund companies don’t want investors pulling their money (which reduces fees collected) because investors think the fund managers are asleep on the job. But buying hot stocks and dumping beaten up ones is usually the wrong thing to do.

If the fund manager has done his homework and likes a stock because of its prospects and/or value, selling it because it sold off and is cheap isn’t going to help investors in the long run. He should be buying. And similarly, if a stock is hot and is a momentum trade, buying it after it is popular is also misguided, as it may be difficult to sell so many shares from a big fund when the music stops.

Individual investors have more flexibility than the big guys. You don’t have to publish quarterly reports that will be scrutinized and you can get in and out of stocks whenever you want, without fear of moving the price. You can also switch your strategy at any given time.

If you decide small caps look more attractive than large caps, you can move some of your assets between the two groups, whereas a large cap fund manager is stuck in large caps, no matter how the group is performing.

Even if you’re an investor who doesn’t want to actively manage your money, don’t be lazy and hand it over to a mutual fund manager who will likely not do as good a job as you or a passive index fund will. Pick some great stocks that you expect to hold for the long term, or buy the funds mentioned in The Gone Fishin’ Portfolio. You’ll save a ton of money in fees and likely do a better job than the fund managers do. It would be hard to do worse.

Marc Lichtenfeld is the Senior Analyst at InvestmentU.com

http://www.investmentu.com/investment-experts/marc-lichtenfeld.html

How should I choose a stock brokerage?

Rule - Know what you don't need

Full service brokers
Offer help and advice over the phone or in person
Charge higher fee per trade
Advice is, at best, an educated opinion.
Becomes an expensive luxury that reduce investment returns.

Discount online brokers
Self directed stock research services
Fast, easy trade executions
Convenient, cost-effective solution
Focus on low cost brokers with a clean, clear interface.

Evaluating Investment Results of Yourself and Your Fund Managers

The decision to employ an investment professional should only be made after a thorough analysis of the past investment performance of the individual or organization under consideration. Some questions are obvious:

• How long a track record is there? 
• Was it achieved over one or more market and economic cycles? 
• Was it achieved by the same person who will manage your money, and does it represent the complete results of this manager's entire investment career or only the results achieved during some favorable period? (Everyone, of course, will be able to extract some period of good performance even from a lengthy record of mediocrity.) 
• Did this manager invest conservatively in down markets, or did clients lose money? 
• Were the results fairly steady overtime, or were they volatile? 
• Was the record the result of one or two spectacular successes or of numerous moderate winners? 
• If this manager's record turns mediocre after one or two spectacular successes are excluded, is there a sound reason to expect more home runs in the future? 
• Is this manager still following the same strategy that was employed to achieve his or her past successes?

Obviously a manager who has achieved dismal long-term results is not someone to hire to manage your money. Nevertheless, you would not necessarily hire the best-performing manager for a recent period either. 

Returns must always be examined in the context of risk. 

• Consider asking whether the manager was fully invested at all times or even more than 100 percent invested through the use of borrowed money. (Leverage is neither necessary nor appropriate for most investors.)
• Contrariwise, if the manager achieved good results despite having held substantial amounts of cash and cash equivalents, this could indicate a low-risk approach. 
• Were the investments in the underlying portfolio themselves particularly risky, such as the shares of highly leveraged companies? 
• Conversely, did the manager reduce portfolio risk through diversification or hedging or by investing in senior securities?

When you get right down to it, it is simple to compare managers by their investment returns. It is far more difficult - impossible except in retrospect - to evaluate the risks that manger incurred to achieve their results.

Investment returns for a brief period are, of course, affected by luck.  

• The laws of probability tell us that almost anyone can achieve phenomena l success over any given measurement period.  
• It is the task of those evaluating a money manager to ascertain how much of their past success is due to luck and how much to skill. 

Many investors mistakenly choose their money managers the same way they pick horses at the race track. They see who has performed well lately and bet on them.

It is helpful to recognize that there are cycles of investment fashion, different investment approaches go into and out of favor, coincident with recent fluctuations in the results obtained by practitioners.

• If a manager with a good long-term record has a poor recent one, he or she may be specializing in an area that is temporarily out of favor.  
• If so, the returns achieved could regress to their long-term mean as the cycle turns over time, several poor years could certainly be followed by several strong ones.

Finally, one of the most important matters for an investor to consider is personal compatibility with a manager.  

• If personal rapport with a financial professional is lacking, the relationship will not last.  
• Similarly, if there is not a level of comfort with the particular investment approach, the choice of manager is a poor one.  
• A conservative investor may not feel comfortable with a professional short-seller no matter how favorable the results, by contrast, an aggressive investor may not be compatible with a manager who buys securities and holds them.

Once a money manager has been hired, clients must monitor his or her behavior and results on an ongoing basis.  The issues that were addressed in hiring manger are the same ones to consider after you have hired one.

'The investment industry has been ripping off customers for far too long'

Alan Miller, founder of low-cost fund business SCM, has launched a campaign calling for greater transparency on investment fees and charges.

By Rosie Murray-West4:01PM GMT 31 Jan 2012

The True & Fair Campaign argues that the investment industry has been "ripping off customers for far too long".

"The British public faces a minefield of hidden charges," Mr Miller said, adding that people were being left "seriously out of pocket" with regards to their pensions and other investments. He said that investors were entitled to know what they were being charged.

The campaign comes the day after Fidelity warned about the emergence of "Ryanair" fund pricing – where people are charged what looked like a low upfront fee and then end up paying more on top of it. "We know investors are concerned about charges and they are becoming more complicated," he said.

SCM is launching a True and Fair Code and Labelling Scheme, allowing investors, for the first time, to compare investment products and providers with a clear breakdown of costs and fees.
Mr Miller said the new code will provide 100pc transparency by showing the whole range of fees and the resulting all-cost for investment, which will be known as the Total Cost of Investment (TCI).

However, Gary Shaughnessy, Fidelity Worldwide Investment UK managing director, said that SCM itself was guilty of 'Ryanair' pricing on some funds, because only those with large amounts could invest.

Mr Shaughnessy said: "A consistent way of showing charges is essential to restoring investors' trust in the industry and encouraging them to feel confident to save for the future."


http://www.telegraph.co.uk/finance/personalfinance/investing/9052119/The-investment-industry-has-been-ripping-off-customers-for-far-too-long.html

Performance fees catch investors

John Collett

May 7, 2011

Making sense of fee structures can be like jumping through hoops.

Deciphering complex fee structures can be like jumping through hoops, writes John Collett.

A report by investment researcher Morningstar shows some fund managers have performance-fee structures so complex, they are likely to bamboozle investors, leaving them unable to compare fees and, worse, paying more than if they had flat percentage fees instead.

''There is no standard way to present the fees and it makes it difficult to make like-for-like comparisons,'' says Tom Whitelaw, a senior research analyst at Morningstar and lead author of the report.

But fund managers argue that performance fees better align the interests of fund managers and investors.

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The Morningstar report's ''Best practices in managed fund performance fees'' shows funds with performance fees also charge a flat percentage ''base'' fee that is usually no lower than the flat fees commonly charged by other managers. In other words, some funds could be said to be double-dipping on their fee take.

The typical performance fee for an Australian shares fund is between 15 per cent and 30 per cent of the fund's returns in excess of a benchmark.

Funds investing in Australian shares will typically have the sharemarket return - measured against the performance of the biggest 200 or 300 companies - as their benchmark.

Importantly, they will also have a base fee - usually just under 1 per cent, though some are much lower.

Morningstar modelled returns over the past 10 years. It used the actual performance of Australian shares during that period and the average return of the three best-performing Australian funds. The modelling assumed a performance fee of 20 per cent on returns above the fund manager's benchmark on an initial investment of $100,000.

The modelling found that over the decade, investors would pay total fees of 3.82 per cent on the most expensive fee structure and 0.97 per cent on the cheapest - a difference of $65,763 between the two funds.

Bar too low

The Morningstar report on 18 Australian share funds with performance fees found several instances where the way the fees were structured could work to the disadvantage of investors.

The single biggest problem identified in the report was a low benchmark against which the performance was measured and the performance fee paid.

One of the share funds with performance fees covered in the report had a benchmark of zero.

In other words, the manager took 20 per cent of returns above zero. The fund also had the highest base fee - 1.09 per cent - of the 18 funds.

''We do not consider the absolute benchmark approach to be best practice,'' Morningstar says. ''It is not [in] investors' best interests to reward a fund manager that can take advantage of a rising market and charge performance fees irrespective of whether or not the fund manager outperforms an appropriate market index.''

The report did not identify the fund but Weekend Money has ascertained that the fund manager referred to is the Sydney boutique fund manager PM Capital, which was funded by Paul Moore in 1998.

Its Australian Opportunities Fund has a benchmark of zero and a base fee of 1.09 per cent.

Moore says the fee structure is different to other funds because it manages money differently. Most managers have portfolios that do not differ much from the composition of the sharemarket, ensuring that their returns are similar to the market.

''We are investors, not index managers,'' Moore says.

The good performance of his fund justifies the fees, he says. Since its inception in 2000, it has returned 230 per cent, after fees, compared with the return on Australian shares of 145 per cent during the same period. ''Investors will make up their own minds whether the fee structure is fair and reasonable and, if they think it is not, they will take their money away,'' he says.

The PM Capital Australian Opportunities Fund has a ''high-water mark'', which means any earlier losses have to be recovered before the performance fee can be charged, whereas two of the 18 funds do not have high-water marks; meaning they do not have to first recover money lost before they can charge a performance fee.

If the performance is measured every 12 months, for example, managers without a high-water mark could underperform the benchmark in one year - making big losses for investors - while taking performance fees the next year.

''A high-water mark is necessary in any performance-fee structure,'' Morningstar says. ''We believe that performance-fee structures that operate without a high-water mark act against the best interests of investors,'' the researcher says.

Regulator

Morningstar says the lack of consistency in performance-fee structures stems from the lack of any clear regulatory guidelines on how the complex components should be displayed.

This makes it much more difficult for investors to compare funds.

The fee structures are so complex, Morningstar found, that even a ''number of fund managers also appear not to fully understand all the implications of their performance-fee structures''.

To protect themselves against being charged too much, investors need to make sure that any performance fee is benchmarked to an appropriate index, Morningstar says. They need to look for a low base fee because it is a constant cost, regardless of performance.

Well-structured performance fees should include a ''hurdle'' that the fund has to outperform in addition to returns of the Australian sharemarket before a performance fee is paid. ''Ensure that the fund manager has to beat a reasonable hurdle before starting to accumulate performance fees,'' Morningstar says.

Tough line balances the ledger

Regulators in the US have taken a tough line on performance fees.

If a fund manager in the US wants to charge a performance fee, it must be a "fulcrum" fee.

If the fund outperforms its benchmark, the investor pays the fund manager the agreed performance fee.

But if the fund underperforms the benchmark, the same calculation occurs in reverse and the management fee is then reduced to account for the underperformance.

An analyst at Morningstar, Tom Whitelaw, says this is the fairest type of performance fee.

Another advantage of a fulcrum fee for investors is that it is simple to understand and makes redundant the "high-water marks", "hurdles" and "resets" of performance-fee structures of Australian funds.

Morningstar says it appears US fund managers do not have much confidence in being able to consistently outperform investment markets because, after the introduction of the regulations in the US that make it mandatory to use fulcrum fees, the number of funds charging performance fees dropped dramatically.

Whitelaw says there needs to be a standard way performance fees are disclosed in Australia so investors can easily compare the different fee structures.

 http://www.smh.com.au/money/investing/performance-fees-catch-investors-20110506-1ecgf.html#ixzz1MTDQN8u6

Michael Burry: Money managers typically get paid simply for amassing vast amounts of other people's money under their management.

Lessons from subprime to make a money manager squirm
MICHAEL EVANS
January 22, 2011

AS THEY devoured their holiday reading over summer, Australia's fund managers could not have failed to miss the name Mike Burry.

Burry is a doctor who stumbled into investing by writing a blog in the wee hours after his hospital shift that so impressed professional investors that they gave him the money to start his own fund.

He spent hours poring over financial accounts looking for an investment idea. And when he found it, he bet against the entire market, punting that the US subprime housing market was unsustainable. He bet millions and then waited - even after his own investors began to fret and started demanding their money back.

As one of the key figures in Michael Lewis's account of the origins of the subprime crisis, The Big Short, Burry's tale is one every money manager dreams about: spot a fundamental flaw in the market, invest your clients' money, hold your nerve when they panic and prove them wrong by making them hundreds of millions - plus a cool hundred million for yourself.

But as Australia's fund managers dragged their heels back to work this week, they would have taken less delight in another of Lewis's tales about Burry.

When he started his business, Burry disapproved of the typical manager's fee structure. Money managers typically take a slice of their total assets under management, meaning they get paid simply for amassing vast amounts of other people's money. As Lewis wrote, Burry's Scion Capital charged investors only its expenses, which typically ran well below 1 per cent of the assets. To make the first nickel for himself, he had to make investors' money grow.

''Think about the genesis of Scion,'' says one of his early investors. ''The guy has no money and he chooses to forgo a fee that any other hedge fund takes for granted. It was unheard of.''

It's the kind of news to make Australia's money managers shift uncomfortably in their seats. After all, waiting for them when they arrived back at work this week, they were greeted with a scorecard of their 2010 performance that showed that as a group they had a poor year. Investors were left wondering why they paid professionals to grow their savings given the median fund in the Mercer scorecard showed it had lagged the S&P/ASX 300 Index.

Surely investors who simply followed the benchmark themselves would have come out ahead of the median investor in Mercer's annual scorecard? And they wouldn't have paid fees.

But money managers are quick to point out that one year is too short a time to judge their efforts. Paul Fiani's Integrity Investment Management, for example, posted a three-year performance better than many other fund managers who had a stronger 2010 than he did. Over three years, Integrity is just outside the top 10 on the scorecard of more than 130 funds.

Fiani says many gains last year were made at the risky end of the market.

''Last year was all about small resources. The market was basically flat and, overall, small resources were up 30 per cent. So, if you weren't at the high-risk end of the market you lagged the benchmark. We run a pretty rigorous fundamental value investment process and there's no way you could justify being invested in that high-risk end.''

Managing client expectations is tough for money managers. Quarterly and yearly report cards add to the pressure, particularly when investors are told to invest for the medium and long term. As the world enters a low-growth phase that experts expect to last for five to 10 years as the debt hangover plays out, investors may have to adjust their hopes.

Simon Marais, who managed the best-performed fund last year at Orbis, says the importance of individual stock-picking will rise because of low global economic growth.

But what about fund managers being asked to manage their expectations? Australia's investment community enjoys a weekly flow of 9 per cent of every worker's salary into the superannuation pie that helps grow funds under management. And, remember those fees based on funds under management?

Michael Lewis was brutal passing judgment on Wall Street money managers who were being paid to manage investments but did not see the looming subprime disaster: ''What are the odds that people will make smart decisions about money if they don't need to make smart decisions - if they can get rich making dumb decisions? The incentives on Wall Street were all wrong; they're still all wrong.''

Investors rely on the experts. They are willing to pay to have an expert make decisions for them. But given the structure of the system - and the constant drip of compulsory super payments - what are the consequences of bad decisions? Not enough emphasis is placed on performance-based reward.

Aligning the interests of fund managers and investors says, ''my dinner is riding on your success too''.

This week the Australian Prudential Regulation Authority released figures showing retail super funds posted sharply lower returns than average for the sector over the past decade. And when taking inflation into account, many have gone backwards over that time.

The introduction of plain vanilla products into the retail market as a result of the Cooper super review will provide a benchmark in coming years on how they perform against active funds run by the big boys.

Cutting fees like Mike Burry may not make money managers heroes in the eyes of the industry. But if they followed his lead their images would rise a notch or three in the eyes of investors.

http://www.smh.com.au/business/lessons-from-subprime-to-make-a-money-manager-squirm-20110121-1a036.html

Related:
Learning from Michael Burry: from being a medical resident to being regarded as one of the greatest investors in recent history.

Betting on the Blind Side

Advisers: Who should you trust with your money?

ADVANCED INVESTING

Advisers: Who should you trust with your money?

Investor Education Fund

Published Tuesday, Mar. 31, 2009 9:49AM EDT

Last updated Tuesday, Mar. 23, 2010 11:31AM EDT

"There are no requirements for managing billions of dollars, but before somebody can trim your sideburns, he or she has to pass some sort of test. Given the record of the average fund manager over the last decade, maybe it should be the other way around." – Peter Lynch, Beating the Street

MORE FROM THIS TOPIC

• How your adviser is paid
• Poor adviser practices that can be harmful to your financial health
• Advice on assessing your adviser: A consumer checklist

How do you find a good adviser?

Although Peter Lynch’s comment is focused on fund management, the minimum requirements to become a licensed adviser are easier to get than in some other professions that have much less of an impact on your long-term well-being. In Canada, there are many people that are eager to manage your money but it can be difficult to find somebody that will do it well.

The best ones don’t necessarily drive posh cars, wear expensive suits, or have big corner offices. But they do share these three characteristics:

• superior service
• consistent returns and with reasonable risk
• a focus on your success first, before their own.

Unfortunately, too often you can only learn how an adviser measures up after you have entrusted your money to them. There is no common rating system that lets you sort out the good advisers from everybody else. But there are three things you can -- and should – check before you choose an adviser:

• Qualifications
• Experience
• Performance

After all, it’s your money that’s on the line -- not theirs. Make sure you’re putting it into the right hands.

1. Assessing an adviser’s qualifications

The fact that an adviser has the basic qualifications to work in the industry will not tell you very much about their skill level. To register as an adviser, he or she only has to meet the bare minimum qualifications to operate in the industry. So when you look at qualifications, look beyond the minimum.

What to look for:

• Check that the adviser and their firm are registered and in good standing with industry regulators. Check now.
• Find out if the adviser has any additional qualifications, such as chartered financial analyst or chartered accountant. It takes considerable work and expertise to achieve these and other professional accreditations. This means they can offer added insight and a richer perspective to you.
• See if the adviser has made a commitment to ongoing professional development and skills development. A person who is committed to continuous learning will more likely serve you as a valued adviser, and not just sell you products.

What questions should I ask before I choose an adviser?

2. Assessing an adviser’s experience

Merely having experience in the industry does not make someone an excellent adviser. Experience may help an adviser understand and assess financial markets, but it does not guarantee the right focus on client returns. Nor does it necessarily teach advisers to focus on the long-term value of protecting their clients from the intense industry pressure to generate commissions.

The best advisers have learned, through experience, to make sure that costs are reasonable; that returns are fair; that recommended strategies and products are among the best available; and that clients feel comfortable and confident through good markets and bad.

What to look for:

Find out how long the adviser has been working in the industry and how long they have been working for this specific company. Learn about their philosophy and their company's investing philosophy.

Check that the adviser works with a broad range of products, not just one or two specialties, so they can help you find the right investments for your stage in life.

Interview a number of advisers before you choose one and ask them about their experience and investment philosophy. For instance, ask them what lessons they have learned over the years, and what they do differently today than they did five years ago (or when they started in the business). You can have a very interesting conversation with someone if you ask them about mistakes they have made and what they learned from them!

3. Assessing an adviser’s performance

It takes a long-term view and considerable emotional maturity for an adviser to balance making money for themselves with fair returns for their clients. As we will explore in future articles, most advisers are paid by commission -- and that commission often brings an incentive to make certain decisions.

The best advisers focus on returns rather than commissions. They understand the effects of fees and capital losses on client returns. They also know how to prepare clients for the volatility of financial markets.

Unfortunately, this type of adviser is less common than you think and takes a concerted effort to find. Make sure you:

• Take the time to interview advisers to uncover their philosophy, their commitment to their profession, and the type of service that they will provide to you.
• Make it clear to your adviser that you will monitor the relationship based on the relative performance of your portfolio against a reasonable benchmark.

Investors need to demand low-cost and market-comparable performance from their investments. This happens far too rarely today – and investors need to change this.

What to look for:

• Make sure the adviser has good references and a demonstrated track record.
• Check how the adviser has performed in both up and down markets.
• Ask how long they have worked with most of their clients. Talk to at least three clients the adviser has worked with for five years or more.
• Talk about how the adviser is paid. The best situation is where you and the adviser profit or lose together. Next best is an advisor who is paid to provide advice, but has no financial stake in the decisions you make. Neither of these are very common as the commissioned sales model is standard in the industry.

The problem with commission selling

One of the biggest enemies of long-term returns are fees. Commission selling can become problematic when it comes to fees because some of the most popular products are the most expensive for consumer because they are so lucrative for the salesperson.

For example, Canadian equity mutual funds with fees of approximately 2.5% are some of the most popular investment products in Canada. If these funds regularly provided returns that outpaced the Canadian equity market over the long-run, this strategy would make sense. However, this usually isn’t the case- only a handful of funds have outpaced the market consistently over the long run, despite the 1000s of funds (literally!) that are available.

Despite the fact that most mutual funds trail the markets in terms of return, you don’t often see full service brokers that recommend investing in an exchange-traded fund when a similar mutual fund is available. The adviser needs to get paid, and the mutual funds offer higher fees- even if it means generally below market returns for you. This is one example of how commissions create incentives for advisers to do questionable things for your portfolio.

Remember: advisers are important- but they can’t do it all

Investors need to be aware of what their advisers can and can’t do. An adviser can be great at some things, such as:

• adding value with access to good research
• offering tools and advice regarding asset allocation
• helping you maintain investing discipline and focus.

In the early stages of a relationship they can help you through all of the documentation to define your investment type and asset allocation. They can help you access proven, low-cost managed and index products and help you screen out much of the bad product.

However, investors need to watch their portfolio closely and put pressure on their advisers to keep fees in line with overall returns. After all, just because somebody is qualified to do a job, or has experience, does not mean that they will behave in a way that maximizes your investment return. So learn as much as you can about an adviser before you put your hard-earned money in their hands.