Pg L5: Terms “independent” and “advisor” have become confusing. Titles are confusing too – wealth manager, financial advisor, broker, broker-dealer, RIA, etc. It is not a given that an advisor will act in the “best interests” of a client and potential conflicts may not be disclosed. There are big differences between “suitability”, “due-diligence”, “best interest” and “fiduciary”. Beware of “flexibility”, often a code word for high-fee/commission, illiquid products. New regulations going into effect in June won’t clarify the muddle of terms. While RIAs are held to fiduciary standards, many have dual/multiple-registrations and how they act may depend on the role(s) played. Compliance and regulatory oversight vary at firms. Conflicts may continue with disclosures [the SEC way].
Pg L9: Independent brokers make money via platform, asset management, sponsorships/marketing-allowances, cash-sweeps, advisors, clients, margin, lending [to advisors, clients]. LPL Financial [LPLA] is the largest independent broker.
Pg L10: Richard Thaler, U Chicago, investment firm Fuller & Thaler, Economics Nobel 2017. Specializes in behavioral finance. Many people don’t max out on their 401k/403b and mechanisms such as auto-enroll with annual escalations help. Target-date funds simplify decision making for many. Investors tend to be overconfident in their investing abilities. People rely on specialists in many other areas, and they should do so for investing for the most part. Markets have been resilient in the face of many global uncertainties. Demographic changes may explain puzzling bond inflows and equity outflows. Forward guidance by the Fed has behavioral aspects – it has had more impact than was initially thought. Algorithmic trading has some of the same faults as trading by humans – not surprising as some humans wrote those algorithms. AI/machine-learning may work better in some structured areas such as medical diagnostics, but markets have more randomness. Growth has outperformed value, but these things run in long cycles. His firm emphasizes small-cap cap stocks not because of small-cap factor effect [he says that he doesn’t believe in it] but because that is where his small firm can add value – mega-caps are over researched. He has been analyzing decision making by sport teams. Some of their decisions are not rational but they persist – e.g. NFL teams punt too often.
Pg L12: Many ETFs that don’t get sufficient traction [under $50 million AUM; 1,000+ such ETFs now among 2,400+ total] are shutdown; there were 1,000 ETF closures in the past decade. To be safe, stick with ETFs with $100+ million AUM. What to do [sell, hold, wait] depends upon asset allocation, tax consequences, liquidity, availability of similar ETFs. There may be large tracking errors as the ETFs prepare for liquidation by raising cash. Beware that few days before liquidation date, the ETF will stop trading but proceeds from liquidation may not be available for 2-3 weeks after the liquidation date. Generally, it is good idea to get out of the ETF soon after the liquidation announcement to avoid being trapped in the liquidation drama.
ETF assets are concentrated with 65% AUM with 2 firms [BlackRock, Vanguard] and 90% with 5 firms [BlackRock, Vanguard, State Street, Invesco, Schwab]. Schwab and Vanguard have not shutdown any ETFs [they are more careful with launches] while several others have done pruning regularly [ishares/BlackRock (22%), State Street (23%), Invesco (32), etc]. Annual open:close ratio now is 1.5:1 and this is healthy even though closures cause bad experiences for the holders. ETNs may be shutdown suddenly for other reasons.
Pg L14: Your fund firm decides who manages the fund, its ER, whether keep it open, close or shutdown. Operations [manager turnover, fund policies] may be affected by whether the fund firm is public or private.
Pg L40: In 2019/Q4, among general equity funds, growth did the best; specialty funds did the worst. Among other equity funds, health/biotech, precious metal did the best; short-funds, utilities, real-estate did the worst. Among fixed-income funds, convertibles [really hybrids] did the best; long-term fixed-income did the worst [not very refined in Lipper mutual fund categories listed in Barron’s].
The wild wild west of financial advisers will continue since they have a lot of influence in DC.
1) It's so easy to create only 3 titles, what courses + experience the FA have to pass and all must be fiduciaries.
2) But my best idea is that FA can only be paid by their clients and the FA must issue a receipt for that. This means they are not allowed to be paid in any other way. Just like a CPA gets paid by the hour, a FA should be the same.