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Addressing Inherent Conflict of Interest




 By Bob Payne, Managing Director and Chief Investment Officer (CIO)

I saw an investment portfolio recently that was unintentionally comical, and clearly illustrated the conflict of interest inherent in some of the investment firms out there. In this case, the advisor actually worked for a specific mutual fund company, and every solution he provided to the client was based on his own company’s mutual funds.

Three Keys:

Investors must be wary of firms that stand to directly benefit from the products they provide

A lack of portfolio diversity can render investors vulnerable to market fluctuations

The bull market that has existed since 2008 may obscure unwise investment allocations

The first step they took was to put the client’s money in that company’s index fund, which is the S & P 500 Index. Then they also took the growth side of the index, buying that firm’s growth portfolio. After that, they purchased another growth portfolio mutual fund, then the blue chip growth portfolio fund, and then the select growth strategy fund. So the redundancy was just ridiculous.

Then they took the value side of the S & P 500, which the client already owned with the index fund, and bought the enhanced value index fund. Following that, they purchased the growth and income fund of that particular company, and finally the equity fund. So the return in every one of these funds was identical, and there was absolutely no diversification whatsoever. We live in a world where you can invest in as many as 10,000 to 12,000 stocks, but this company just chooses to own the same 500 over and over and over again. I guess their pitch is even though they own Apple in every fund, the names of the funds are different.

But the client was OK with that because his portfolio has been performing well. Yes, of course it has because we’ve been in a bull market since 2008. The problem is, what’s going to happen tomorrow or next week or next year? This client is fully committed to the S & P. It could go up, but what happens if it goes down? He’s at a point where he’ll need to pull from that portfolio in the next couple years, so a huge hit would be disastrous.

We ran a back test on that portfolio, which is currently worth about $2.5 million, to see how it would have performed in a down market. The result was eye-popping, with the portfolio taking a 40-percent loss that equates to $1 million in real-dollar terms. The rationale I hear from many people is, since the stock market performs better over time than anything else, why not just ride it out?

Well, it’s true that if you look at any 20-year rolling period in the history of the stock market, an investor will not lose money. The problem is if this client and his wife need money from their portfolio over the next couple years and it takes a big loss, they’re not in a position to just wait until the end of a 20-year period to ensure they don’t lose money. Their income needs won’t go away because the market is down. That’s why it always pays to diversify your investments.



Interested in learning more about what impact this could have on your future financials? Contact one of our expert advisors today:

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