Let me clarify my hatred. I don't hate all mutual funds per se. I hate the way they are used by the vast majority of financial advisers who charge a fee for their services. It makes my blood boil. It makes me so mad that I woke up this morning and had to come straight to DIY Stocks to tell you about it.
A friend of mine volunteered to act as a case study for the experiment that is DIY. I figured it's easier for people to learn about their own situation if we use specific examples from real life.
At first I was kind of disappointed because my friend and her husband have done everything right. They are super-organized, savers at heart, have already retired (which is the feet-to-the-fire test of how good your investment program is), and are living the life of everybody's dreams. How could anything I have to say possibly improve their situation? Nothing was broken.
Of course their investment accounts came with personalized annual reviews, fancy booklets printed in vibrant color at least 30 pages long and full of bar charts, pie charts, line graph comparisons, risk-reward scatter-plots, graphs in the shape of triangles, graphs in the shape of cubes, maps of investments by geographical region. Alpha, Beta, and R-squared indicators. Weightings and Valuation Multiples. Equity investments were divided down into High Yield, Distressed, Hard Asset, Cyclical, Slow Growth, Classical Growth, Aggressive Growth and Speculative Growth. This template is a Morningstar product, one of the most highly respected names in fund analysis and widely used throughout the industry.
I've been reading the language of investing since 1979 - and I'm really good at it - but I couldn't figure out what the heck this report was telling me.
Except I did understand one thing: buried in the middle of the report were the actual performance results of my friend's investments. Her husband's assets had realized 7.44% versus 14.39% during the same period for the S&P 500. Her accounts had realized 5.74% versus 20.22% for the S&P 500 since she had used their services.
But that's not what made my blood boil.
What made me absolutely furious was when I happened to notice that all the graphs in the annual review read Year-to-Date for 2013 and yet they started in February. What the heck was that about? So I went back and checked the market performance in January of 2013. Turns out the S&P had gotten off to its best start since 1997 and returned 5.2% in a single month, the month their adviser so conveniently forgot to include - because if he had, my friend - my honest, hard-working, trusting friend - even she might have noticed how much she had under-performed a non-managed index and asked questions.
The one fact I couldn't find anywhere in the report was how much this firm was charging for their advice. Let me guarantee nobody in this business works for free.
Normally I try to give people the benefit of a doubt. But these reports are pure and simple gobbelty-gook designed to make people feel stupid. If you can't figure out what you are paying or what you own or why you own it, it's not your fault. It's a system that has been designed to produce maximum revenues for service providers while keeping you helpless. What is presented as objective fact, is not. It is carefully selected facts chosen to make the adviser look good. In this case (not at all uncommon), I'd call it outright fraud.
And if this were my money, I wouldn't pay this guy another dime.*
*www.vanguard.com is the web address for Vanguard funds. The symbol for the un-managed S&P500 Index fund is VFIAX - and last year it returned 32.33% JANUARY to December.
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