Shopping for Funds

Last Saturday, I was forty-five minutes early for an appointment, so I decided to wait in my car and listen to the radio. I listened to The Mutual Fund Show. This program is hosted by Adam Bold, the founder of The Mutual Fund Store. Although I’ve listened to the show before, I was especially struck by the amount of self-serving and disingenuous comments made in such a short period of time.

In a recent article called Agendas, I mentioned Ric Edelman, another radio show host/money manager. Bold and Edelman each manages billions of dollars of assets through networks of advisors around the country. They both seem like nice guys and occasionally deliver some good advice. My problem with their management styles is the ridiculously high fees they charge and the hypocrisy of their sales messages. They present themselves as consumer advocates - while they vilify brokers and insurance agents – yet I’m not sure they are any better for investors.

The first caller to The Mutual Fund Show was a few years away from retirement and a participant in the government Thrift Savings Plan (TSP), which is essentially a 401(k) for federal employees. Bold implied that the caller’s money could be invested better if the account holder was at retirement age and could rollover the account. Bold failed to mention that the government TSP is one of the best investment opportunities available anywhere, with no advisor fees and miniscule fund fees of about 3/100th of 1%. In contrast, The Mutual Fund Store’s fee is typically a full 1% to 1.5% in addition to fund fees often well above 1%.

As the show’s host, Bold kindly offered to sell the caller his quarterly advisory service. This service would supposedly help with the allocation within the TSP, even though the caller had already smartly chosen to take advantage of the plan’s pre-packaged mix of low-cost funds. The caller’s current choices would likely meet his needs quite well.

Another caller wanted to find a replacement for a fund that he believed was doing poorly. To his credit, Bold acknowledged that the current fund was actually pretty good, but then named some potential substitute funds. I had never heard of any of the funds he mentioned before, even though I have been following the fund industry for over fifteen years and at one time was familiar with every top-rated fund.

There are a couple of reasons that these funds were unfamiliar to me. First, I stopped closely tracking managed funds several years ago, when I became convinced that index funds and exchange-traded funds (ETFs) are superior. Secondly, new funds like these come along all the time and frequently are like the shiny new toy a child receives. They receive a lot of attention at first, but eventually get discarded like Woody in Toy Story.

Whenever I hear an advisor recommend managed funds, I want to ask why they no longer recommend the same funds that they did a few years ago. The answer is likely that the previous funds have not done well and should be replaced. My follow-up question would then be - why did you recommend them in the first place? If you are such a good evaluator of fund managers, why did you pick bad ones?

The truth is that few managed funds beat index funds and ETFs of the same category over extended periods of time. Some will by chance out-perform, but it is doubtful that any advisor is going to spot them ahead of time. When you realize that a portfolio should contain different types of funds, this problem gets compounded. Therefore, the chance of a collection of managed funds beating an entire portfolio of index funds and ETFs is negligible. In a recent video interview with Morningstar, passive investing expert, Rick Ferri, discussed this phenomenon and also will provide more insight in his upcoming new book The Power of Passive Investing.

Before heading into my appointment, I heard Adam Bold give a long monologue comparing hiring a professional lawn care service to retaining a full-time investment manager. I interpreted his comments about treating “dead patches” in the lawn to mean that people can do the work themselves, but really shouldn’t.

Let me first say that I use a lawn service to cut my grass every week during the summer. It’s a great time saver for me. Even so, I still don’t want to pay a year-round retainer fee (including fall, winter and early spring) when no work is needed, nor do I want to employ someone to watch my grass grow in between cuts. This is essentially what you are doing by hiring a full-time money manager. More importantly, hiring a lawn service might cost $20 a cut and save two hours each time, whereas a portfolio can be self-managed in just a few hours a year (if done properly), while saving thousands of dollars a year.

Buying managed funds or even hiring someone to pick the next great fund manager for you is an exercise in hope over logic. There are much better ways to address your portfolio management needs. If you don’t want to undertake the moderate amount of maintenance required to enjoy the power of passive investing, you can hire an hourly-based advisor like me, or a low-cost investment manager like Rick Ferri.

So if you want to be a smart consumer, shop for index funds and exchange-traded funds (EFTs). As an extra shopping tip, don’t even bother visiting The Mutual Fund Store for these funds. I don’t think you will be able to find ETFs on their store shelves any time soon.