The Secret To Better ReturnsPosted on March 19, 2015
This article was first published on Talk Magazine Shanghai January 2015 edition.
Imagine you are a financial adviser who has the secret formula for better returns. The path that ensures that your client makes an extra 1-2% p.a. if not more, every single year. This isn’t a get rich scheme we are discussing, but a proven method with support from hundreds of academic papers and thousands of researchers globally including the Chartered Financial Analyst (CFA) institute which trains the best asset managers globally. Would you educate your clients on the truth?
The real answer is, most don’t, because they don’t want you to know.
The reason they don’t share this information is that it would hurt their commission-based business. Many try their best not to believe the truth, despite the overwhelming evidence. As the French Philosopher pointed out long ago, “A man is incapable of comprehending any argument that interferes with his revenue”. They just don’t WANT to believe, so they don’t. This also means they can’t and won’t tell their clients.
The answer is also vital. It is the reason why the vast majority of offshore investments have underperformed the markets the last two years. Did your offshore portfolio produce a gain of about 30% in 2013 and 15% in 2014? If you are in an offshore investment, the answer is almost certainly, “No, not even close”.
So what is the secret?
But what is the answer? It might seem obvious, but the answer is you should avoid anything high cost (both funds and accounts) and only invest in low cost funds that track a broad index. The problem for most advisers is that there is no commission anywhere to be seen in that model, hence the silence. Even managing a group of index funds in an account for a small annual fee is far less than what most advisory firms want to take. A fee based managed account should be the model, but isn’t. So clients continue to suffer in silence, quieted by their embarrassment.
Swensen spells out the truth.
It is very easy when you know the truth, but let’s not take it for granted. Are lower cost funds actually better? You can, and should, Google it, but let’s provide some examples. David Swensen, the renowned long-time investment manager for Yale University’s endowment, puts it thus; “The 96% of funds that fail to meet or beat the Vanguard 500 Index Fund lose by a wealthdestroying margin of 4.8% per annum”. When the average market return is about 7.5%, that’s quite a loss.
What about academic surveys?
But that was just an opinion (well informed though he is), so what about academic surveys? Are higher fee managers better? In fact, it’s the opposite. A research paper, Mutual Fund Fees Around the World (Khorana, Servaes, Tufano), examined the fees and track record of 46,580 funds globally and found an inverse relationship between fees and performance, even after allowing for the impact of said fees. The only thing that was correlated with fund fees was the fund manager’s profits! Not the clients’ returns. The reason for the ability of these poor fund managers to attract money is their ability to pay commissions to brokers.
Who gets those commissions? The commission based adviser of course. Living in Shanghai, and Asia in general, there is another group of fees that hobble returns even after the fund manager has taken his share; the fees of the investment product or investment platform. Many big companies, and even banks like HSBC in the past, have sold expensive offshore products labelled as “savings plans” or “investment bonds” that in fact charge fees of 3% to 6% per annum, carefully hidden in the fine print. With so many cuts for each layer from the fund manager, insurance company and commission based broker, it’s a wonder any of these accounts eke out a gain.
So, is it a lost cause?
What are good options for the average person at home? There are two good options. Firstly, you can take the self managed route and open up an online discount brokerage account with low cost provider like Saxo, E-trade or Interactive Brokers and then focus your portfolio on a few index funds. Or, if you lack the
time and patience to pick exchange traded funds, which can be tricky when it comes to bond funds, you can and should find a fee-based financial advisor who will charge a small annual fee for an ‘at-call’ account. The US based Wealthfront is great for US residents, but there are also a small group of advisory firms in Asia who can also handle your account, risk profile and currency choice to build a low cost portfolio that will deliver the returns you should enjoy.
Now you know the true secret to investing success, there is nothing stopping you from finding the best. Time to get online and to trade yourself or find a fee-based advisor in your area.
About Caterer Goodman Partners
Caterer Goodman Partners is a Shanghai based wealth management firm established with a clear vision to provide a new level of personalized financial planning services for expatriates in Asia. Our financial advisors provide guidance for our clients in all areas of investment, specialising in managed accounts, money-market funds, retirement planning and alternative investments. At Caterer Goodman Partners, we offer our advice and experience to provide low cost, tax-effective and simple solutions to match our clients' interests.
About Owen Caterer
Since graduation Mr Owen Caterer has worked with the Queensland Premier's Department in Trade Facilitation and then as a financial adviser in Shanghai from 2005 until 2010. He then rose to Senior Adviser, then Business Development manager and then to Chief Investment Officer responsible for portfolios to a value of US$280 million across Asia. Following that Mr Caterer left to found his own firm with a partner in the financial advisory and wealth management area. This focused on developing China and Asia's first fee-based financial advisory (rather than commission-based). This has grown to now have 8 staff and and managing almost US$35 million for clients throughout Asia. This business success was recognized as a finalist in the 2013 ACBA in the Start Up Enterprises category and are one of a small number of foreign managed firms to have a full asset management license in China. Owen has also been active in the community volunteering for the Australian Chamber of Commerce in Shanghai and acting as the Vice-Chair of the Small Business Working Group (2012-2014) and as the Co-Deputy Chair of the Financial Services since 2013 until the present. They have continued to grow their business and havenow been selected as a small group of companies who are platinum members of the Australian chamber of commerce. The achievement they are most proud of is their efforts to reform the financial planning industry in China and push it away from a hard-sales commission driven model to a more ethical management fee and long term customer service model. Owen has a Graduate Diploma of Applied Finance from the Securities Institute of Australia of which he was a member as a Fellow of Finance for many years and also has an undergraduate degree from Griffith University in International Business. Owen's interests are tennis, running and his wife and two children. He speaks fluent Chinese, first arriving in China in 1997.
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