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Yesterday’s Post = Confusion?
Yesterday I ran a post titled ‘Current Benchmarks for Active Management Are Too High‘. Somehow, the reader comments focused on financial advisor compensation. While I agree financial advisor compensation and value received for said advice requires scrutiny, this is completely separate from what I was talking about. Perhaps it would be better if I drew an analogy.
Two identical twins, Warren and Benjamin, run an investment management company called Double Dollar Capital. They do everything the same. They both run Canadian Large Cap investment portfolios and always pick the exact same stocks to buy or sell at the exact same time. They both charge the exact same investment management fee of 0.50% per annum. The only difference is that Warren deals directly with high net worth investors who are charged 0.50% per year (and do not use a financial advisor), but Benjamin acts as a sub-advisor for Mutual Fund Company XYZ. (Mutual Fund Company XYZ sells a fund called the XYZ Canadian Large Cap Fund, but Benjamin is the portfolio manager. XYZ pay Benjamin 0.50% per year.) XYZ adds in a trailing commission to financial salespeople and other administrative costs for selling this mutual fund version. This brings the MER up to 2.00% for investors in the XYZ Canadian Large Cap Fund.
Stock Picker’s Digest is trying to determine the best stock-pickers for Canadian Large Cap investment mandates.
I’m saying that Warren and Benjamin’s performance is the same as it relates to Stock Picker’s Digest’s rankings.
The commenters are saying, “let’s talk about the cost of financial product distribution instead and try to determine if it’s worth it.”
The points they raise are valid and I agree with them, but this discussion is totally separate from what I was talking about. I think this would’ve been more clear if I had retitled the section “Indexes Are Not An Appropriate Benchmark” to “Indexes Are Not An Appropriate Benchmark for Gauging the Pure Stock Picking Ability of Mutual Fund Managers”.