Why Don’t We Get a Market Rate of Return On Our Investments?

by John Berzellini

The 2011 spread between the average investor return and the S&P 500 return was 7.85% (see Dalbar on left side bar). As usual, the S&P 500 Index outperformed the average main street investor.

The Annual Dalbar Analysis continually points to investor behavior as the root cause of the failure to realize a market rate of return.

The indexers point to the expenses of active money managers as the reason for underperformance.

The active money managers argue that the returns are net of expenses.

The do it yourself investor has access to analytical tools, surveys, free advice from  dot.orgs,  dot.gov, banks, broker dealers the mutual fund complex, and legions of blogers.

Twenty years of surveys and analysis pointing out destructive financial behavior, direct access to low cost index funds , availability of financial information and education on the internet, modern portfolio theory, the three factor model, absolute return strategies, and ETFs  have done very little to help the main street investor obtain a market rate of return.

What is the problem?

It is the combination of the financial industry’s intentional failure to clearly distinguish financial advice from financial product sales support, the ever increasing complexity in financial products , and a general mistrust created by a lack of transparency in the financial industry’s retail product distribution system.

What is the solution?

1.) Hire an advisor that sits on your side of the table and acts as your financial intermediary in a complicated market place.

In many cases you will find the total cost of independent advice is less than the cost of tainted advice provided by the creators of financial products.  For example, JBA  does not receive trading commissions, and passes along fee based institutional pricing to clients.

2.)Take a comprehensive approach to financial planning.

Contrary to their advertizing;  banks, broker dealers, and insurance companies  do not offer comprehensive financial planning  (see “Defining Comprehensive Financial Planning” posted May 14,2012)

A comprehensive approach is not all about money management.  For example choosing the correct social security claiming strategy and portfolio withdrawal method can go a long way in making sure you do not out live your assets.

Under the right circumstances, a social security strategy alone can add over $200,000 in additional income during a retiree’s life time. Banks don’t make money on this kind of advice!

What should we expect?

Expect a market rate of return less expenses. In the 2011 Dalbar Analysis example above, a market rate of return less a 1% advisory fee produces 6. 8 %  more return than the average investor received in 2011.

Expect a holistic approach to your retirement plan as opposed to a product sale approach.

Expect the peace of mind that comes with knowing  your advisor is working for you rather than some faceless committee in a bank or insurance company.