The underlying problem is that investment advice has become a “product,” and investment advisers steer prospective clients right into their own products.
Today’s investors looking for investment advice end up seeking it directly from the point of sale of these products.
Beyond mutual fund companies, the point of sale runs the gamut, from large brokerage firms and registered investment advisers to hedge funds and bank trust departments.
A 2008 SEC study found that nearly 95 percent of investment advisory firms with individual clients also provide proprietary portfolio management services for individuals. These firms make their money through portfolio management services, not by dispensing investment advice. Many of these firms claim that they have no products to sell, instead they say that they provide a service – make no mistake, portfolio management services is a product.
How often at the end of a sales presentation do you think investment advisers (who are held to a fiduciary standard) sit back and tell a potential new client that they may be better off going to a larger firm with more experience or better resources? Or, as Mr. Swensen suggests, explain to a prospective lucrative client that their investment objectives can be better met by investing in a low cost index fund? They don’t. With sales quotas to fill and fierce competition for new business, the name of the game in asset management is to get the money in the door and start generating fees.
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