Question About Mutual Fund/Unit Trust Performance Data and Financial Services Professionals

Are 3 and 5-year Mutual Fund Performance Data of Value?

One of my newsletter readers had an interesting question. He asked:

“One of the most commonly used and maybe the best advice is to look at the 1,3,5 year perfomance and the rating among peers. Then why don’t the funds at the bottom lose all potential new customers and all the owners sell? Are there some hidden factors?”

Well, the hidden factor is that most investors don’t necessarily care about 3 and 5-year performance numbers, and I don’t either. I look at far more recent data since the economy is constantly changing and different criteria apply now as opposed to 3 or 5 years ago.

The rating among peers is, well, overrated. If you look back 5 years, you would find yourself in the depth of the last bear market. Using the peer rating, would you then have selected a fund that, say, only lost 20% while the peers lost 23%?

I don’t think so. The idea is to avoid bear markets altogether and only move back into the market once an uptrend has been established. Then you can select funds that are in tune with market momentum and current economic conditions.

Original article here.

Should Financial Services Professionals be Compensated via Commission?

OK, so I am somewhat biased because I run a fee-only advisory practice.

However, over the past 5 years, I have received hundreds of phone calls and e-mails from some of my 17,000 newsletter readers complaining about being misled by unscrupulous stock brokers, who were more interested in their financial well being than in their clients’.

Calling up a client and peddling a fund that will provide the salesperson with a great commission, but will do nothing for the investor, is simply unethical to say the least. It does remind me of the great commercial a few years ago with the now classic line “let’s put some lipstick on that pig.”

There are certainly a number of conscientious brokers in existence who have their clients’ best interest at heart despite being commission based; unfortunately, they are a minority.

To me, getting a client into an investment is only the first step. The second is to guide him along the way and make sure that his position is liquidated should market circumstances require that this is in his best interest.

An advisor can best represent this unbiased evaluation if he is fee based and not hungry trying to chase the next large commission checks.

Original article here.