Fiduciary Links: Separating skill from luck

In his post last week for Morningstar Advisor's Markets & the Economy Blog, Michael Zhuang (who also writes the very good The Investment Fiduciary blog) uncovered a study from the Journal of Finance that seeks to separate luck from skill in alpha. The study finds that most skill is wiped out in fees and expenses and money managers who provide real alpha are virtually nonexistant. This leads Mr. Zhuang to wonder how advisors justify their value. He also asks in the comments section of the post if past performance is advisors' number one criteria in fund selection.

If it is by claiming you can find that needle in the haystack, then it would seem you are taking a significant risk of not coming through. And if past performance is your primary consideration in fund selection, it would seem that you are more likely to be getting in after the manager's luck has run out. Unless you have a magic formula for fund selection, this study is another layer of evidence that advisors would be better served focusing on and communicating a strategy based on diversification and geared to achieve investor goals, not a pursuit of alpha.

Now on to the rest of the week's best links.

In the news:

• Collective trusts are a new alternative to mutual funds in 401(k) plans [Wall Street Journal]
• An interview with TD Ameritrade's Tom Bradley touches on fiduciary issues [Registered Rep]
• Ex-regulators leading the way in lobbying regulatory agencies [NY Times]
• While 12b-1 fees get scrutinized, soft dollars escape regulators' microscope [InvestmentNews]
• Scott Simon declares MPT and diversification "still good" [Morningstar Advisor]
• Matt Hutcheson: fiduciary crusader [Retirement Income Journal]
• Tamar Frankel: fiduciary thinker [Investment Advisor]
• Community foundations should think twice before allowing a donor's wealth manager to manage assets [Investment Advisor]
• More mutual fund fee scrutiny doesn't mean better performance [Forbes' Zenvesting Blog]

From the organizations/associations/government/academia:

• A fiduciary stress test for plan sponsors to make sure they are fulfilling key obligations [Vanguard]
• Five tips for plan sponsors to select and monitor fiduciary advisors [Reish & Reicher]
• A direct link to the online form to submit comments on the SEC fiduciary study [SEC]
• The Committee for the Fiduciary Standard is asking advisors to let the SEC know thatfiduciary standards are a must for protecting investosr [The Committee for the Fiduciary Standard]

From the blogs:

• A conversation on advice vs. guidance [The 401(k) fiduciary advice blog]
• The rest of the "Ten things you're probably still doing wrong as a plan fiduciary" list [PLANSPONSOR Perspectives]

Have a link we missed? Leave them in the comments section or email us at blog@fi360.com. For more of the best links during the week, make sure you follow us on Twitter.

Comments

[James Morgan - Puritan Financial Advisor]

If it is by claiming you can find that needle in the haystack, then it would seem you are taking a significant risk of not coming through.