Journal of Financial Planning: March 2015
Vern C. Hayden, CFP®, is president of Hayden Financial Group LLC in Westport, Connecticut, contributing editor to TheStreet.com, and author of Getting an Investing Game Plan.
Dear Tony,
Here’s a little saying that sums up your book, MONEY Master the Game: 7 Simple Steps to Financial Freedom: “People who think they know everything are a great annoyance to those of us who do.”
I have put together a panel of RIAs, fiduciaries, and CFP® professionals. The purpose of the panel is to serve your hunger for the truth about the essence of financial planning. Just so we are on the same page, financial planning helps put a person’s financial life together and includes issues like cash flow, income planning, tax planning, investment planning, retirement planning, insurance planning, and estate planning. It isn’t just that a person’s whole financial life is composed of these parts; the most critical thing to understand is that we must have insight as to how these parts interact with each other to make somebody’s life more successful and meaningful.
Here’s your panel—keep in mind these are just a few of the people who have impacted peoples’ financial lives all over the world: Harold Evensky, Rick Adkins, Mitch Anthony, Jonathan Guyton, George Kinder, Ross Levin, Dan Moisand, Deena Katz, Michael Kitces, Guy Cumbie, Nick Nicolette, Paul Auslander, Janet Stanzak, and many more.
You mean you haven’t heard of any of these giants in the financial planning profession? They can be your personal brain trust. But be careful, a couple of them might suggest the market should not be anybody’s benchmark, especially the S&P 500. They would likely tell you a personal benchmark has more to do with a person’s goals, risk tolerance, and the time they have to work things out. Maybe a client needs only a 5 percent return to meet their goals. The hell with the index.
Love Affair with Indexing
I have several gripes about your book, but I only have space to discuss one—your love affair with indexing. I have to disagree with you.
To make my point, let me tell you how your beliefs would have cheated an investor out of more than $59 million. First, you have to take the time to get the American Funds 2014 ICA Guide. In it is something us old-timers call a “mountain chart.” Over time, you have to climb over a lot of negative stuff while the market keeps going up.
Let’s say we have a guy named George who is 81 years old. In 1934 when he was born, his parents gave their baby boy a gift of $10,000. They sat down with a mutual fund salesman who convinced them to invest the money in this brand new fund called Investment Company of America. There was a fee to get in; it cost them 5.75 percent to make the investment, and they had only $9,425 left to actually be invested. The parents decided to not tell their son about the investment. They put all the information about it in a sealed envelope. On the envelope they wrote, “Do not open until you are 81 or have an extreme emergency.” When George opened it, he almost had a heart attack. He found out the investment was worth $97,503,469. That’s millions. That’s a compounded annual return of 12.2 percent. Out of curiosity, George wanted to find out what the S&P 500 did over that same time. His CFP® practitioner figured it out for him. The S&P 500 grew to $38,345,055. That’s a compounded annual return of 10.9 percent. George thought, “I’m glad they didn’t have any of those fancy index funds around in those days. It might have cost me a little over $59 million.”
Who would have thought a difference of 1.3 percent per year would add $59 million? Like you say in your book, it’s the miracle of compounding; sometimes it pays to do that “load thing.” But Tony, with the way we manage money today, we can eliminate any load on any fund we use. I wonder how much money investors with your friend Paul Tudor Jones didn’t get. The typical hedge fund has a 2 percent/20 percent formula; a 2 percent annual fee plus 20 percent a year over a certain amount the investor gets first.
The Death of Indexing
Tony, you have to check out the book Capital: The Story of Long-Term Investment Excellence. It was written in 2004 by the legendary Charles Ellis, managing partner of Greenwich Associates. (He wrote the standard for asset allocation, Winning the Loser’s Game. You should add him to your new brain trust.) His book Capital is about the extraordinary history of the Capital Group Companies. By the way, the Capital Group manages all of the American Funds, a fund group that pays commissions. (Did you know that fiduciaries can take commissions? Get in touch with Don Trone or Blaine Aikin. They are the real experts on fiduciary.)
You’ll never guess who wrote the introduction to the book Capital. It was your friend, Burton Malkiel, author of A Random Walk Down Wall Street. On page XIV he says, “The S&P and Wilshire returns (2 common indices) are shown for the same 30-year period over which the funds’ returns are measured. The table shows that investors would, in fact, have been better off by investing in those mutual funds managed by Capital, the American Funds. Capital has indeed produced above average and even well above average market returns for investors.” Charles Ellis agrees in the text of the book. In other words, there are exceptions to indexing.
When I first read that, years ago, I did a little research. That research resulted in my May 2004 Journal column “The Death of Indexing.” Boy, did I have fun with that. For instance, in one of my examples there is a fund called First Eagle Global. For many years, this fund was managed by a Frenchman named Jean-Marie Eveillard. He was a student of the legendary Columbia University professor Benjamin Graham, founder of value investing. His most famous student was Warren Buffet. Here’s a summary of his track record as an active fund manager from December 31, 1978 to December 31, 2005. It assumes a $10,000 initial investment, with a 5 percent sales charge, so the net investment was $9,503. At the end of the period the fund was worth $490,887 and the S&P 500 was $296,824. That’s about 2,000 percent more on a cumulative basis—a difference of $194,063. Can you imagine that your advice would have cost the investor that much? The fund did underperform the S&P 500 10 out of 25 years. But it only had two negative years adding up to a measly –1.56 percent. The S&P 500 had five negative years with a cumulative loss of –51.15 percent.
Truth or Dare
Let’s pretend we’re playing truth or dare, and it’s your turn for “truth,” Tony. I hand you the list below and ask, “Is it true you have no conflicts of interest with the following entities? You don’t own any of them, and you weren’t paid by any of them? Nor were any of your family or friends paid on your behalf?”
- HighTower
- JP Morgan
- Stronghold Financial
- Bridgewater Associates
- America’s Best 401k
Tony, it doesn’t matter to me if you own anything or get paid. You should, because you are like a walking commercial for them, and as far as I can tell, they’re all good companies. As you know, it’s our fiduciary responsibility to look for full disclosure on these things.
You’re a genius at storytelling. I read every word of your book, and I enjoyed reading your book because it made me think and react. Your book has a lot of great information that can help people, but some of it is questionable.
Please pay attention to your new brain trust. They are all leaders and geniuses. And if you really want to help the American people, contribute at least a million dollars to each of these nonprofit organizations: the Foundation for Financial Planning and the National Endowment for Financial Education. This could be a huge legacy for you.
That’s all for now,
Vern