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I just watched Frontline's most recent documentary on the follies of actively managed accounts. Should I put most/all of my retirement savings into passively managed funds? What about all the hidden fees that are not reported in actively managed funds?

May 01, 2013 by Robert in  |  Flag
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5 votes
Peter C. Karp Level 20


Regulations like 408(b)(2) and 404(a)(5) have made fees more transparent and easier for plan sponsors and participants to understand. Fee regulations have helped everybody fulfill that fiduciary role. Fee information is important to know and understand, but it shouldn’t be a key driver in the decision-making process. Although fees exist, they exist for a reason in most instances. There is a significant value associated with these services. It is not—and it should never only be about fees. If you were having trouble with the law, would you simply look for the cheapest lawyer? Certainly not. For something as important as retirement savings, you should not base your decision solely on cost either. For us, it’s about giving sponsors lots of choice in their plan and value for the fee that is charged. We see lots of plans today that have the ability for active investments and a choice of an index product. The decision between passive and active should also take into account employee demographics.

The quality of management is generally a key component of a successful operation. Managing a mutual fund is no exception to this rule. There are two important fund managerial qualities: tenure and structure. However, it is worth noting that a fund's investing style, growth, risk and return profile, trading activity, costs and performance are all a product of management's efforts. How well management "scores" in all these areas is an important consideration for mutual fund investors.

The index funds are passively managed which means that their portfolios mirror the components of a market index. Index mutual funds are an easily understood approach to investing in broad segments of the market. They are used by investors who are looking for market exposure in a certain sector or style of asset management at a low cost. Indexing has been called investing on autopilot but that is where the trouble is. The funds need to be watched and managed given the market environment. The metaphor is an appropriate one as managed funds can be viewed as having a pilot at the controls. When it comes to flying an airplane, both approaches are widely used.

Well-run managed funds that have long-term performance records that are above their peer and category benchmarks are also excellent investing opportunities. There are a number of top-rated fund managers that consistently deliver exceptional results. It is worth remembering that despite their impressive long-term records, even top-rated fund managers can have bad years. Such an occurrence is little cause to abandon a fund run by a highly respected manager. Typically, managers will stick to their fundamental strategies and not be swayed to experiment with tactics geared to improving results over the short term. This type of posture best serves the long-term interests of fund investors.

Whether to use active or passive managed funds depends on your risk tolerance, investment goals and investment savvy. You should work with an experienced advisor to help you make the most prudent decisions based on your specific goals. Please contact us if you would like further guidance.

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  May 03, 2013 from San Francisco, CA

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4 votes

Don't be fooled by the marketing, there is no such thing as a truly passive investment strategy. If an active decision isn't being made by a mutual fund manager at the security selection level, then it is being made by an advisor at the asset allocation level. Different investors are going to have different returns based on the ACTIVE decisions made by those investors and their advisors.

If one advisor puts a client in 50% equities and 50% bonds, and another puts a client in the same index funds but with an allocation of 80% equities and 20% bonds the returns are going to be very different.

In the end every advisor is an active manager, and in order to get your money to the best money managers you may want to consider using more asset allocation funds in your investment approach. Diversify by manager, not by asset class. If you have a moderate risk tolerance, find five good managers of five asset allocation funds with that objective. If all of the managers agree that it's not a good time to own treasuries, then you should feel pretty comfortable with the allocation that they have decided upon.

You can have Warren Buffet manage your money! Just buy Berkshire Hathaway!

Comment   |  Flag   |  May 09, 2013 from Santa Monica, CA

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3 votes
Rich Winer Level 20

NO!!! When I'm considering a mutual fund, I look at the manager or management team, track record relative to comparable funds , level of risk and volatility relative to comparable funds, where and how the fund fits into my portfolio and whether or not it's appropriate for my needs and objectives. Fees are of much lesser importance to me. Yes, if I'm considering two identical funds, I would pick the lower cost alternative. However, if a fund meets my primary criteria and its net return meets my needs, objectives and expectations, I could care less about its management fees and expenses. If those fees and expenses ever inhibit the fund's returns, I can always sell. Your primary concern should be whether the funds in which you are investing are appropriate and meet your needs and objectives. If the answer is YES, then you have nothing to worry about. If you're not sure, consider hiring a financial advisor to assist you. You will get a lot of differing opinions on this subject. All I can tell you is that I've been successfully managing my clients' portfolios using mutual funds for more than 18 years and fund fees have never inhibited their returns or kept any of my clients from meeting their retirement goals.

1 Comment   |  Flag   |  May 01, 2013 from Woodland Hills, CA
Rich Winer

FYI: Here's a rebuttal to the Frontline documentary from Brian Graff, Executive Director of The American Society of Pension Professionals & Actuaries... http://www.asppanews.org/2013/04/24/frontlines-view-of-retirement-industry-as-commodity-is-dead-wrong/. His point is that planning isn't just about fees, it's about service. I would add that it's also about good advice and financial education.

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Flag |  May 01, 2013 near Woodland Hills, CA

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3 votes

The Active vs. Passive debate is an eternal one. It has become more relevant during the recent Secular Bear Market that started in 2000. During this period, when Active money management should have beaten Passive money management, less than half of Active money managers can claim that they outperformed their benchmarks after fees and costs.

However, a better and more middle of the road approach is to combine both approaches in a Core and Satellite framework. You can use passive investments to build the Core and add active Satellites. This way you will not only bring your overall costs down but also have a shot at outperforming broad market indices.

Comment   |  Flag   |  May 01, 2013 from Appleton, WI

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Kevin J. McNab Level 19

I use a majority of passive funds. However, I do use a small percentage of actively managed funds. To say that fees don't matter goes against what I would consider is common industry knowledge - fees do matter when choosing funds. As noted earlier, many studies and data clearly indicate that a large percentage of actively managed funds do not outperform their respective index over the long term. My opinion is if you would like to put more risk in your portfolio (probably not) and bet on failure, then choose actively managed funds. Indexed funds may seem boring, but they are the correct way to invest if you believe in the efficient market hypothesis - most of your returns come from the asset allocation you choose. Indexed funds also prevent style drift - the risk that a fund manager is going to deviate from the objective of the fund. I hope this helps.

Comment   |  Flag   |  May 02, 2013 from Westminster, CO

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2 votes

Hi Robert! Regardless of any issues that the retirement plan industry may or may not have, this is the system we have in place. I believe we have to do the best we can with what we have to work with. So, the most important thing you can do is save, save, save. If you can save in a tax-advantaged way through your company's retirement plan or an IRA or Roth IRA, then I say do it. Select funds that fit your comfort level, and spread your money around by diversifying into various asset categories. Some funds will have lower fees than others, and I am always a fan of that, but more important is getting value for your money. If a fund has a fee of .35 and consistently under preforms the market, it may not be the right fund for you. If a similar fund charges 1.17, has strong management and processes in place and shows positive performance, then that may be the better fund.

No one is going to change our retirement system overnight, so make the most of it and don't be afraid. Just be open to new information and be willing to change as the industry does.

Comment   |  Flag   |  May 01, 2013 from River Hills, SC

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Hi Robert, all answers here have good points but I would tend to agree more with Rich Winer. I am willing to pay to have a particular product or service. Plus I always feel more comfortable knowing someone I trust and / or admire is navigating the ship so to speak. Sleeping comfortably at night is an important part of managing emotions in the investment process.

The above referenced information was obtained from reliable sources, however Lantern Wealth Advisors LLC and Lantern Investments, Inc. cannot guarantee its accuracy. The information presented herein is for presentation purposes only and is not intended to provide personal investment advice. Lantern Wealth Advisors LLC and Lantern Investments, Inc. do not provide tax, accounting or legal advice.

Comment   |  Flag   |  May 02, 2013 from Melville, NY

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2 votes
Lee Munson Level 16

Okay folks - the odds are against you statistically when you invest in a group of active managers versus passive managers. Then you have to define what an active or passive manager is. The line is not always clear when you compare an index funds to factor based funds available from places like DFA or WisdomeTree. Right there you start more bar fights among financial advisors to last a lifetime. You want to know if you should put most of the money in passive funds? Yes. Why? You don't know what you are doing, your choices probably suck, and while no fee is hidden the fact that a so-called economist from the Frontline documentary didn't understand an 'expense' ratio was a fee doesn't leave me confident that the average US worker would see a fee unless it hits you in the head. You see - people seem to think their 401k is a free service. Perhaps the costs should be paid by the employer, but that doesn't make it true. The bottom line is that you are paying for it, so pay the least for getting the most. If you don't have a seasoned pro to help - don't make a bet in a casino that is designed for you to loose 80% of the time. Oh, and one other thing - I love Boogle, but when the answer to retirement is to buy his index fund and never sell it - we know more work needs to be done when people need to actually distribute money to live on.

Comment   |  Flag   |  May 07, 2013 from Albuquerque, NM

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Here's some more information on the Frontline piece that is worthy of review written by Fiduciary News writer, Chris Carosa. It talks about industry reactions as well as some of the info that was not included and the motivation in a 4 part series: the Good, Bad, Ugly, and the Final Take.

Here's the link to the Ugly section.


Comment   |  Flag   |  Jun 27, 2013 from Alexandria, VA

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2 votes
Dushyant Pandit Level 17

Managed accounts: If you have identified a specific or skilled portfolio manager or a specific investment strategy, then managed accounts may be the only viable option for you. But, finding a skilled manager or focusing on a specific investment strategy is not a simple undertaking. (Institutional investors for example have teams and consultants whose full time job is to basically try to do this). In the absence of some unique insights, passive investments are a good approach. And, listening to media, tautologically, is not a unique insight.

There are, however, many other important considerations such as those identified in the other answers, which you should also consider.

Hidden fees – that is all they are: Hidden. They are not secret! So a reputable advisor should be able to put them in writing for you. The important thing is to simply ask about all fees, expenses and costs and ask that they be disclosed and in writing.

PS I have also posted a guide “Stocks, Bonds and Mutual Funds”, that might be a useful: Click on my profile to access it.

Comment   |  Flag   |  Jun 27, 2013 from Summit, NJ

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