TodaysAdvisor.com

Main Entry: ad·vise
Pronunciation: \əd–'vīs\

Function: noun
1: recommendation regarding a decision or course of conduct 2: information or notice given 3: an official notice concerning a business transaction

That's Merriam-Webster's definition of advice and Capital Group's Martin Romo knows that the definition is incomplete.

The story of Capital Group. For seventy-nine years Capital Group has been delivering as promised. Its mutual fund family, American Funds, is the biggest fund family in the world and one of only a few families to avoid the tech bubble insanity of ten years ago. Yet the group is now the victim of its biggest outflow of assets ever, $33 billion in redemptions in 2009 alone. And what egregious sin caused this stampede? The firm had a bad fourteen months. Out of seventy-nine years. Seriously.

From October 2007 through the end of 2009, Capital Group's funds were outpaced by the majority of their competitors. Both retail and institutional investors snatched their chips off the table and bolted out the door, looking for downside protection. ETF's, here I come!

Know when to eat your own dog food. This is the era of luring more assets than the other guy, and index funds and ETF's are lapping the field. Yet, in the April 2010 issue of Bloomberg Markets, The Capital Group executives made it quite clear that they will not be offering index funds any time soon. Martin Romo is head of research at Capital Group. Said Mr. Romo, "Market share is not our objective. The great majority of our history, we've been selling something that people don't want to buy: advice. And it's not our obligation to change the advice to make you feel better." Obviously, the folks at Capital Group don't think index funds are better than managed funds. That observation is blunt. And it highlights a dilemma for every Financial Advisor in the world. Capital Group can afford to resist temptation. It manages $1.18 trillion. You don't. Exactly when and why do we abandon our own advice for something new and different?

It's all about self-preservation. Ask the owner of a clothing store what he would do if his customer insists on buying a green suit or nothing, no matter how obvious it is that the guy would look better in a blue suit. We abandon our own advice when the Big Three (you, the media, and the competition) realize that if you don't do something soon, your asset base will be fair game for the scavengers. Ask any Advisor in the world what would happen to any investor who decided to stick with American Funds for the rest of his life. We all know that client would fare very well in the long run. The problem is that if we stuck with American Funds, not only would we be right, we'd be dead right. Our notion of self-preservation is tied directly to our client's fear of loss. That fear is not helped by daily pricing. If I were king of the world, mutual funds, stocks, bonds, ETF's etal would only be allowed to publish their prices once a year. Maybe.

Getting back on top. American Funds may recoup those long-gone assets. A lot of Advisors chipped in last year to help restore Putnam's luster, after too many years of dismal public perception. Lipper/Barron's rated Putnam America's number one performing fund family. Voyager and, indeed, all of Putnam's large cap funds, performed beautifully.

Not so coincidentally, this resurgence has led to a broad acceptance of Putnam's Absolute Return funds. I have heard the absolute return story and I'm a believer. Yet I see in the June issue of Forbes an article entitled ‘The Problem with Absolute Return Funds.' The article tells me I'd be better off with a plain old balanced fund. This article is probably not going to stir up much dust. Let me amend this last sentence. This article is probably not going to stir up much dust, as long as Putnam keeps delivering superior performance. And, believe me; everyone at Putnam knows what bad performance can lead to. But the article does cause an ever so small twitch.

You're in control. How you deal with the Putnam's and the American Funds' of the world is your business and your business alone. No one not in your shoes can ever fault you for any decision you make in defense of your client's financial well being. Your clients must reach their goals and you must make a living. Not one soul at Putnam ever once criticized or begrudged any Financial Advisor for redeeming, in good times or bad. Putnam understands the consequences of its actions. If you get out, you get out. If you stay, you stay. Your critic does not deal with reciprocal action. You do. In August of 338 B.C., Demosthenes fled the Macedonians in a battle that claimed the lives of three thousand Athenian soldiers. To anyone who called him a deserter or a coward, Demosthenes replied, "The man who runs away may fight again." Time has changed that expression over the years. "He who fights and runs away will live to fight another day."

I know exactly why money moves around and I don't argue the rationale. You owe it to yourself and your clients to consider alternatives when your current strategy is not working. I just don't want to see you get sucked into Wall Street's proclamation that newer is better. People who create new products have an ax to grind.

Remember the basics. Because I always migrate back to basics, I want to remind you that managed accounts are not better than ETF's. ETF's are not better than mutual funds. Mutual funds are not better than stocks. Stocks are not better than bonds. Balanced funds are not better than absolute return funds. Index funds are not better than managed funds. Variable annuities are not better than municipal bonds. They are all different and serve different purposes. Obviously one asset class will at some point outperform another asset class. You're allowed to acknowledge and participate in superior performance. It's okay to shift gears. That's cruise control. That's not timing.

I know you know all of that. Nonetheless, it's important to revisit this issue because the creators of all these products would have you believe otherwise. We all have to keep shoveling our clients' assets into the mouth of the Wall Street blast furnace every day. We've got to get the money from our clients and Wall Street has to get it from us. Our best client is our competition's best prospect, and our competition is determined to show our client everything new, exciting and certainly better than whatever it is we have him investing in. The competition is forever trying to rob our client of his or her patience. And we are forever being forced to respond. Nobody wants to be accused of inaction.

But new is not always better. Sometimes it is. And sometimes it isn't. You don't owe it to yourself or your clients to buy into every hot new product that comes down the pipe. While I know you won't be too quick to jump into the new, I urge you to not be quick to write off the old. While I hear the vocal minority saying that American Funds will never recover, I'm not quite ready to bet against seventy nine years of success. You can't say you're seventy nine years old unless you've been around for seventy nine years. Mutual funds did not replace stocks and ETF's will not replace mutual funds. When you introduce your client to a new concept, don't say it's better than the old concept. Leave that door open.

There's no such thing as the perfect product. Since long before you or I got in this business, Wall Street types have been trying to convince Advisors that they have just created the perfect product. The perfect product does not and will not ever exist. Do you remember not too many years ago a mutual fund wholesaler telling you that for this month only, closed end funds are better than open end funds. "Next month, open end funds will be back to being better. But for the next thirty days, your clients will be better off in our closed end IPO." The unsaid threat was that if you don't show this offering to your client, the bad guys across the street will. And your client would jump all over it.

Don't be fooled by "new." People love the newest, latest and greatest anything. They seek it out. That's the fuel that Apple burns. That's exactly why Apple stock is attractive, even at twenty three times earnings. Don't play that game. You and I are not in the technology industry. We're in the "get the children educated and get mom and dad retired to Arizona" industry. You are not paid to give the client one tool and then constantly replace that tool with a better tool. You are paid to create a complete toolbox with the proper tools for the appropriate task. The process, not the product, will get the client retired.

Sometime tomorrow or next week or next month, someone is going to introduce you to the next perfect product. Heed the words of Pliny. In 77 A. D., Pliny the Elder translated in Naturalis Historia an ancient antidote for poison: Take two dried walnuts, two figs, and twenty leaves of rue; pound them all together, with the addition of a grain of salt; if a person takes this mixture fasting, he will be proof against all poisons for that day.

Take the news of the next perfect product with a grain of salt.

Don can be reached through his website: www.campconnelly.com