Swedroe: UK Exceeds US In Common Sense

April 06, 2015

 

Some Advisors Target Small Investors
Second, there are thousands of fee-only advisors willing and able to work with investors that have smaller portfolios. Many such advisors are paid on the basis of an hourly fee, allowing them to work with investors with fewer assets.

 

Third, there are now many firms that offer financial advice to investors with smaller portfolios via the Internet and do so at very low fees.

 

In short, there’s simply no reason for the SEC to not require the fiduciary standard for anyone giving financial advice. And any elected official who doesn’t support such a proposal very clearly will not be doing their own duty to their constituents.

 

The Problem With Funds-Of-Hedge-Funds
The other investment area in which the U.K. is ahead of the U.S. relates to funds-of-hedge-funds and investor behavior. Funds-of-hedge-funds typically charge fees of 1-and-10, or 1 percent of assets plus 10 percent of gains, on top of the already high 2-and-20 fee charged by the average hedge fund.

 

Five years ago, U.K. funds of hedge funds had assets of £3 billion. Today, that’s down to less than £400 million, a drop of 87 percent. If anything, the pace of the decline has accelerated over the last few months, first as Lyxor Focus Fund was liquidated, and now Dexion Absolute and Acencia Debt Strategies are about to give back approximately half their assets to exiting shareholders.

 

In the U.S., fund-of-hedge-funds assets are down from their peak in 2007 of about $800 billion, but investors are exiting at a much slower pace. As of 2014, such funds still had about $670 billion in assets—a drop of only about 14 percent over the prior seven years.

 

David Swensen, Yale University’s chief investment officer, called funds-of-hedge-funds “a cancer on the institutional-investor world” and said they “facilitate the flow of ignorant capital.” U.K. investors appear to have taken Swensen’s advice much more seriously than investors in the U.S.

 

Adopting the fiduciary standard for all financial advisors and abandoning the scourge that is the fund-of-hedge-funds are two ways U.S. investors can improve their results. If the SEC won’t mandate the requirement for the fiduciary standard of care, then investors can solve that problem for themselves by requiring it of their advisors and demanding that their employers provide a retirement plan where the firm managing it is a fiduciary.


Larry Swedroe is the director of research for the BAM Alliance, a community of more than 150 independent registered investment advisors throughout the country.

 

 

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