The Investment Advisory Industry

Registered Investment Advisors (RIAs) and Broker-Dealers play a crucial role in managing and guiding clients' investments. However, there are several inherent issues that investors should be aware of when considering their services. Let's look into some of the prominent problems associated with wealth managers:

1. Lack of Transparency: One significant problem is that many advisors primarily act as intermediaries for investment products and do not have a clear understanding of the outcomes these products may produce. This lack of knowledge can stem from various reasons, such as inadequate research or a focus on pushing specific financial products because management simply requires them to. As a result, clients may end up with investments that are not in line with their financial goals, potentially leading to suboptimal returns and products with high fee structures.

2. High Management Fees: Another concerning aspect is management fees. While it is reasonable for advisors to be compensated for their expertise and services, excessively high management fees can significantly erode the returns on investments over time. Clients may be unaware of the impact of these fees on their portfolios, especially over time, as they might not be clearly disclosed or thoroughly explained during the initial consultations. As a result, investors may find themselves paying more than they bargained for and achieving lower net returns than anticipated.

3. Performance: Another significant concern is the historical evidence of poor performance for active managers compared to passive investment strategies such as index funds or exchange-traded funds (ETFs). Studies have consistently shown that the majority of active managers fail to consistently outperform the market over the long term, often underperforming their benchmark indexes after accounting for fees and expenses. This persistent underperformance raises questions about the value of active management and the potential benefits of adopting a more passive and cost-effective approach to investing.

4. Hidden Costs and Taxes: Many clients are not fully aware of the underlying fees and taxes associated with the investment products they are placed in. Apart from management fees, there may be additional expenses like transaction costs, 12b-1 fees, expense ratios, redemption fees, and administrative charges that can eat into the overall returns. Moreover, certain investments may trigger tax implications, impacting the investor's bottom line. The lack of transparency on these costs can leave clients feeling misled and frustrated.

5. Flawed Asset Allocation: Proper asset allocation is a critical factor in determining the success of an investment portfolio (the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash). However, some advisors may make poor decisions regarding asset allocation, which can lead to suboptimal results for their clients. For instance, advisors might tend to allocate a significant portion of a client's portfolio to bond investments to appease those with a “lower risk tolerance” or shorter time horizons. While this approach may provide stability in the short term, it could hinder growth needed over the long run, particularly for clients who have cash flow needs.

In conclusion, while Investment Advisors can be valuable partners in managing one's financial future, it is essential for investors to be aware of the potential issues associated with their services. Transparency, clear communication about fees and costs, and strategic “goal based” asset allocation are crucial aspects that investors should consider when engaging with any industry professional. As with any financial decision, due diligence and open discussions with the advisor are key to ensuring a successful and fulfilling investment journey.

Note: Interlaken Advisors does not offer investment or portfolio management services.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

Money Market Funds

Due to an increase in the Bank Term Funding Program, investors may worry about its effect on money market funds. Although traditionally thought of as risk free investments, a money market fund can become illiquid if it holds securities that become difficult to sell or cannot be sold at a reasonable price. Money market funds invest in short-term, low-risk debt securities such as treasury bills, commercial paper, and certificates of deposit, among others. These securities are typically highly liquid and traded in large volumes in the money markets. However, if there is a significant event that affects the liquidity of these securities, it could cause a money market fund to become illiquid.

Here are some factors that could cause a money market fund to become illiquid:

1. Credit events: Money market funds invest in debt securities issued by various entities, including corporations, municipalities, and financial institutions. If any of these entities default on their debt, it could lead to losses for the money market funds that hold their securities. This could lead to a loss of confidence in the market and a decline in liquidity.

2. Market disruptions: Market disruptions, such as sudden spikes in demand for liquidity or a lack of buyers in the market, could also cause a money market fund to become illiquid. If many investors are trying to sell their shares at the same time, it could put pressure on the fund's ability to meet redemption requests.

3. Regulatory changes: Changes in regulations governing money market funds could also impact their liquidity. For example, if regulators restrict the types of securities that money market funds can hold or change the NAV calculation method, it could impact the liquidity of the fund.

4. Systemic events: Systemic events, such as financial crises or market panics, could also cause a money market fund to become illiquid. During such events, investors may seek to sell their shares in the fund to meet their liquidity needs, which could lead to a decline in the fund's NAV and liquidity.

In summary, a money market fund can become illiquid if it holds securities that become difficult to sell or cannot be sold at a reasonable price due to credit events, market disruptions, regulatory changes, or systemic events. It's important for investors to understand the risks associated with money market funds and the fund's investment objectives, risks, and expenses before investing.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.

2023 Outlook

Investors are wondering what's in store after last year's bear market. Many predict that a recession will occur this year, with many expecting the economic downturn to hit in mid to late 2023. Business leaders and company surveys also indicate a widespread agreement that contraction is imminent, with 98% of CEOs seeing a US recession in 2023, according to the Conference Board's poll. However, wise investors know that the more an event is anticipated, the more it is mitigated. Most CEOs have prepared their companies to withstand the volatility of a low-growth environment. For example, big tech has already cut jobs and become leaner, freeing up cash flow to account for lower growth and offsetting losses to total profitability.

It's important to remember that profit is the difference between revenue and expenses. Good CEOs try to increase revenue while decreasing expenses, thus raising profitability and the company's enterprise value. If CEOs anticipate lower growth, they take action to reduce expenses.

Moreover, a recession does not necessarily mean that stocks will falter. Stocks usually move ahead of news, not after. The expectation of a recession means that fear has been priced into the market, thereby reducing its future impact on global equities. The bear market seen in 2022 may have been the market pricing in the expectation of a future recession. This also leads to the potential for large positive gains, should no actual recession occur. Positive surprises are bull market fuel, and nothing is better for markets than a widespread fear never coming true.

Investors tend to focus on negatives and discount the possibility that things are better than they seem. Households still remain flush with cash, unemployment is low, and wage growth is high. Input costs have dropped significantly since the spikes seen in 2021. Energy, materials, and shipping costs have dropped sharply from their highs, and supply chains continue to heal and become more fluid. Although the markets can do anything over the short term, patience will be rewarded. As Sir John Templeton said, "Bull markets are born on pessimism."

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss, including the loss of principal. Past performance is no guarantee of future returns. The content contained in this article represents only the opinions and viewpoints of the Interlaken Advisors editorial staff.