Should You Fire Your Financial Advisor?
“My financial advisor retired,” said Joan Smith, “so I hired another advisor to manage my money.” I changed Joan’s name to protect her identity, but plenty of investors will relate to her story.
“My new advisor put together an entirely different portfolio, compared to what I had before,” Joan told me by email. “On January 12, 2021, he put my $412,000 into several mutual funds.”
By mid-May, it had fallen to $401,000. That’s a drop of 2.7 percent. “I know that markets can fall,” she said, “but my portfolio fell during a 5-month period when stocks went up.”
Joan was right. Between January 12th (when she invested that money) and May 14, 2021, Vanguard’s U.S. stock market index gained 8.77 percent, measured in USD. Vanguard’s International Stock Market Index gained 4.27 percent. Vanguard’s Global Stock Market Index gained 6.78 percent. Bonds didn’t fare as well. But even Vanguard’s Total Bond Market Index, which dropped 1.69 percent, beat Joan’s portfolio over the same measured period.
That’s why Joan was asking, “What’s going on?”
I wanted to tell Joan that five-month performances are rarely worth measuring. But I saw a glaring red light when she sent me her portfolio statements. Her advisor selected funds based on their past performance.
At first brush, this sounds smart: Pick funds that have beaten their peers over a 1-year, 3-year, 5-year or 10-year period. Common sense says they should keep winning. But unfortunately, it doesn’t work like that. As proven by the SPIVA Persistence Scorecard, actively managed funds that perform well during one measured time period typically stink the next.
That’s why Joan’s portfolio smells. She owns six actively managed funds and one ETF. All seven funds had beaten their peers (often by a lot!) before Joan’s advisor selected them. But since Joan bought them, they have all underperformed their respective benchmark peers.
The Virtus KAR Small Cap Growth fund is one such example. According to Morningstar, it posted a spectacular 10-year average annual return of 19.61 percent. In 2019, it gained 40.26 percent. In 2020, it soared another 43.28 percent. Impressed by these returns, Joan’s advisor made this her largest equity holding on January 12, 2021. But since Joan bought the fund, it dropped 6.32 percent to May 14, 2021. Meanwhile, Vanguard’s U.S. stock market gained 8.77 percent over the same time period. In other words, the U.S. stock market index thrashed Joan’s largest stock market holding by more than 15 percent over just five months.
Joan’s six other funds aren’t any different. They destroyed the returns of their peers (and their benchmark indexes) before Joan’s advisor selected them. But after she bought them on January 12, 2021, they all underperformed their actively managed category peers and their benchmark indexes to May 14, 2021.
Buying funds based on their past performance is like choosing a lottery ticket based on last week’s winning numbers. If you have a financial advisor, odds are high that your advisor likely does the same. But don’t slash their tires or hurl insults. In most cases, they don’t know any better. For example, when a financial advisor studies to become a CFP (Certified Financial Planner), the course material doesn’t warn them against chasing past performance. Nor does the course material explain that, over time, low-cost index funds beat most actively managed funds. Couple that with the fact that advisors often earn commissions when they recommend actively managed funds. That’s almost never the case with index funds, which is why so few advisors recommend them.
If it’s any consolation, advisors buy actively managed funds for their own accounts too. One 15-year research study published in The Journal of Finance, explains that the typical advisor underperformed an equal-risk adjusted benchmark of index funds by about 3 percent per year. On a compounded basis, that’s about 55 percent over just 15 years. To do that, they bought actively managed funds and chased past performance.
Instead of continuing to hold a handpicked collection of last year’s winning funds, Joan could fire her advisor. She could then switch her money into one of Vanguard’s all-in-one portfolio funds (which investors could buy, via Swissquote). I’ve listed several such funds that would suit British expats, below. These include exposure to British and global stock market indexes, as well as British bonds.
Investors who won’t be repatriating to the UK, might prefer something more global. The funds listed below for other nationalities are globally diversified with stock and bond market index funds, but they don’t include a lean towards a specific region, other than a composition reflecting global market capitalization. In other words, the bigger the market, the higher the exposure.
Any of these all-in-one portfolio funds would be better for Joan. They would align with an evidence-based strategy that doesn’t drive her account by looking through a rear-view mirror.
Vanguard’s All-In-One Portfolios For British Expats
Approximate Fund Allocations*
|Fund||Vanguard Life||Vanguard Life||Vanguard Life||Vanguard Life|
|Composition||Strategy 80% Equity||Strategy 60% Equity||Strategy 40% Equity||Strategy 20% Equity|
|Fund Purchase Code||GB00B4PQW151||GB00B3TYHH97||GB00B3ZHN960||GB00B4NXY349|
|Minimum Starting Investment||1000 GBP||1000 GBP||1000 GBP||1000 GBP|
Source: Vanguard UK
*I listed four allocations above. But each fund actually comprises more than four index funds. However, based on each fund’s internal holdings, the allocations above are accurate within 1 or 2 percentage points.
And in my next story, I’ll describe their globally listed counterparts, which are priced in Euros.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
Swissquote Bank Europe S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Swissquote Bank Europe and Swissquote Bank Europe accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Swissquote Bank Europe.
Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.