Another Advisor Just Doesn't Get It

This year has been pretty interesting, particularly because I've had some disagreements with other financial advisors. I wrote an article in a medical magazine comparing commission based advisors vs. fee only advisors and focused on the hidden fees you pay when commission based advisors sell you mutual funds. I also revealed the conflicts of interest that commission based advisors have when they sell you products. Well, another financial advisor read the article and wrote his opinion.

Here is his diatribe followed by my response:

"I cannot believe this article was ever published given the extreme inaccuracies given here. Dr. Mazumdar has a right to his opinion but at least give factual information to start.

First, Dr. Mazumdar overlooks the breakpoint feature when it comes to A share investments. Yes, some A shares may charge as much as a 5% fee in investments but that goes down with larger investments. For example: American Funds has equity mutual funds with a max sales charge of 5.75% but on $500,000 the fee would only be 2% or $10,000 NOT $25,000.

Second, clients are free to move their funds to various mutual funds within the same family at NO COST. This means that if market conditions or personal situations change the client may change their allocation without paying the sales charges again. If an advisor changes mutual fund companies completely this is a practice call switching that will get that advisor into hot water with their compliance department and/or FINRA.

I have no idea where Dr. Mazumdar gets a figure of the average mutual fund expense being 1.50% either. Take American Funds for example again, The Growth Fund of America costs investors .68% per year - LESS THAN HALF. Also, he outright lies saying that 12b-1 fees are .25%-1%. Class A mutual funds are .25% maximum! Some are less than that even. Only B and C shares provide 12b-1 fees of up to 1% and he doesn’t even address those here.

Finally, he suggests using mutual funds with annual expenses of .2% - these are called index funds or NON MANAGED FUNDS. To compare the performance of a portfolio of managed funds versus non managed funds of 30 years and assume all things are equal except the fee is plain stupid. The whole reason why advisors recommend funds that are managed funds is to have active managers work to achieve higher returns and beat their benchmark index!

What a terrible piece of work and even worse periodical to publish this crap."

Here is my response:

"Looks like I hit a nerve! That’s great because physicians deserve to be told the truth about the way financial advisors operate and the poor advice many physicians receive from advisors.

I’m assuming that you are a financial advisor based upon the comments you’ve written. In that case I seriously question your competency. Let’s take your diatribe and rip it apart piece by piece.

You state that I am “stupid.” I admit I’m not the smartest guy in the world, but l did get accepted to Johns Hopkins medical school--among the top medical schools in the world--at the age of 19 and graduated from there. So I probably have a reasonable level of intelligence. I also specialized in emergency medicine and practiced for a number of years. The vast amounts of data that an emergency medicine physician expertly and accurately analyzes in record time during a single emergency department shift far exceeds what your brain as a financial advisor can handle in a whole month. Think I’m kidding? Join me on a Friday night shift in the ER--you’ll probably have multiple episodes of urinary and bowel incontinence since you won’t be able to handle the stress (I suggest you bring a few extra pairs of underwear and lots of deodorant). I also passed the CFP® Certification Examination and I'm a CERTIFIED FINANCIAL PLANNER™ professional, something which your industry regards highly.

You sound like a politician not only with the language you use with words such as “crap” but also because you come up empty handed when presenting any academic evidence to back up your claims.

First, you state that the “whole reason why advisors recommend funds that are managed funds is to have active managers work to achieve higher returns and beat their benchmark index.” This suggests that you believe in active investment strategies, which attempt to beat the market index by either stock picking or market timing, or by picking the winning mutual fund managers ahead of time. If you believe in active management, you need to do 3 things:

Wear a shirt that says on the front “I CAN’T ADD.”
Wear a shirt that says on the back “I CAN’T READ.”
Wear a cap that says “I CAN’T THINK.”

The academic literature is clear on this issue--the majority of actively managed funds underperform their respective market over a 5 year period. Standard and Poors keeps track of active funds and calculates what percent beat the index. In their latest study they conclude that “the only consistent data point we have observed over a five-year horizon is that a majority of active equity and bond managers in most categories lag comparable benchmark indices." A great paper 20 years ago by Williams Sharpe--a Nobel Prize winner--showed that by simple addition and subtraction it is mathematically impossible for the average active investor to beat a passive investor. A study 3 years ago by Fama and French from University of Chicago and Dartmouth showed that the percent of active fund mangers that beat the market was no higher than what is expected by random luck. There are lots more academic studies drawing similar conclusions.

Second, Morningstar and other sources stated that the average mutual fund expense ratio a few years ago was about 1.5%. Vanguard estimates it as 1.2% to 1.3%. Since it appears that you don’t know basic math, an average usually means that there will be some funds with an expense ratio below the average and other funds with expense ratios above the average. I did not state that all funds have expenses of 1.5%. Regarding 12b-1 fees I stated that they are between 0.25% to 1% annually and that is a true statement. Perhaps you should be familiar with the products you are selling. In other articles I have addressed Class B and C shares--again perhaps you should read and think before you write. You also state that the breakpoint might “only be 2% or $10,000” if you buy $500,000 of a class A share fund. That’s far too high a fee for a client to buy a fund. I wish emergency medicine physicians could make that kind of money by saving someone’s life! And then you ignore the annual expense ratio on top of that sales charge. You also fail to discuss all the indirect fees you pay by using active funds--poor tax efficiency, underperformance, lack of diversification, etc.

That gets me to a much more important point which you and many commission based advisors usually fail to bring up with clients--the inherent conflict of interest that is created when an advisor is paid by the funds he sells. Perhaps you are afraid of the “F” word: fiduciary. You see, physicians are fiduciaries to patients--we are legally and ethically required to place a patient’s interest above our own. If you get paid by selling financial products you have an inherent conflict of interest and are not acting as a fiduciary to the client and are not placing the client’s interest first. How objective are your recommendations if your compensation is tied to financial products? That’s analogous to a physician getting paid by the drugs he recommends to a patient instead of the advice he gives. But you didn’t mention that at all did you?

Physicians deserve better advice from financial advisors. My passion for writing this column stems partly from exposing what goes on in the financial services industry so I can educate other physicians and make them better investors.

So you can dislike this publication, but I think the authors and editors of this publication do a fantastic job of educating physicians. Maybe you should go to medical school so you can understand the other articles--that is if you can get in. I can assure you the bar to become a physician is set far higher than the bar to become a commission based salesman.

Finally, here’s a piece of advice from Mark Twain you may want to heed:

“It is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt.”