The vast majority of advisors employed by the first 3 types of firms are licensed and compensated to sell investment products. As a result, client portfolios are built one good idea at a time and may eventually resemble a collection of investments rather than a properly diversified portfolio designed to maximize returns, eliminate unnecessary risk and minimize tax.
Enlightened investors also recognize how difficult it is to consistently and accurately predict the best securities, which money manager will outperform, or when to be in or out of the market.
These attempts fail for the simple reason that predictions are often wrong. In the ultra-competitive investment industry and largely efficient investment markets, where everyone is using the same public information, it is mathematically impossible for all investors to outperform. Yet market outperformance through astute recommendations is the implied benefit offered by brokers, mutual fund managers, and advisors.
Enlightened investors ask, “Are the pros beating the market(s) return?”
The answer is found in the Standard & Poor’s Indices Versus Active Funds (SPIVA) Canada Scorecard, where the performance of mutual fund managers is compared to their respective market benchmark.
Enlightened investors know portfolios implemented with index funds get market returns (before fees) with less chance of underperformance. They understand that they only keep returns after fees and taxes are deducted and that indexing frees them to focus on a strong portfolio structure that reduces these frictional costs. They are the ones asking advisors, “Why don’t we just index?”
These early adopters of modern portfolio management focus on the things that they can control and they are looking for financial services outside of those offered by banks, brokerage firms and mutual fund companies.