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Mutual Fund Outflows Out of Control: Where to Find Financial Advice?

By Jim Fink on January 26, 2012

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In these turbulent times full of worries about Europe’s debt crisis, political dysfunction in Washington, a U.S. recession, and Iran’s nuclear program, investors are scared. In fact, investors have been scared since before the market crash of 2008 and confidence has never returned.

How do I know this?

Morningstar Report on Mutual Fund Outflows

On January 13th, Morningstar (NasdaqGS: MORN) released a report on mutual fund outflows during 2011 and the news is not pretty:

U.S.-stock funds shed $17.7 billion in December alone and about $84.7 billion for the year. In a year in which the overall equity market was flat, 2011 was the worst year for outflows since $121 billion fled in 2008. This past year also marked the sixth consecutive year of U.S.-stock outflows.

It just goes to show that investors dislike not only negative returns but also volatile returns. As Morningstar stated above, 2011 was a flat year, but it was also one of the most volatile markets in history including a nauseating 20% plunge between July and October. The years of 2008 and 2009 were even more volatile than 2011. Fund outflows continued in 2009 and 2010 even though the stock market made substantial gains.

Bottom line: investors simply want to get off this crazy equity roller-coaster ride. And equity mutual fund flows were not helped last year by news that in the period ending September 2011 bonds had outperformed stocks over the past 30 years for the first time since before the U.S. Civil War in 1861.

The calendar year of 2012 does not promise to be much better. As the Morningstar report concludes: “Regardless of what happens in U.S. equity markets, it’s hard to imagine this outflow trend reversing in 2012.”

Cause of Mutual Fund Outflows is Not the Desire to Be a Self-Directed Investor

One could interpret the fund outflow data as nothing more than a protest against high mutual fund management fees and poor active-management stock picking rather than as an indictment of equity investing generally. Investors could, after all, simply be taking charge of their own financial destinies and becoming self-directed investors. Academic studies have demonstrated that self-directed investors outperform those whose investment assets are controlled by financial advisors (but not on a risk-adjusted basis).

But such an interpretation does not explain why U.S. corporations have slowed issuance of new equity and bought back so much of their own stock that the number of shares outstanding in S&P 500 companies actually shrank during the fourth quarter of 2011 for the first time since the first quarter of 2009. Interestingly, Morningstar reported that fund flows for international stock funds were basically flat (compared to the $84.7 billion outflow in U.S. stock funds) even though their 2011 performance was much worse than the performance of U.S. stocks funds (-13.7% vs. 2.1%, including dividend reinvestment). Just another example of how bad investors are at market timing and how they based investment decisions based on the past rather than the likely future.

Investor Survey on What Makes a Good Financial Advisor

Nope, investors are flat-out scared and they probably are fleeing stock mutual funds for more, not less, personalized financial advice. This begs the question what investors are looking for in a financial advisor? One answer can be found in a recent joint survey conducted by Paladin Registry and byallaccounts. Some interesting facts from the survey:

  • 68% (i.e., two thirds) of those surveyed use a financial advisor
  • Almost 89% of people using financial advisors are 41 years of age or older, with the largest plurality (45.7%) between 51 and 65.
  • The largest chunk of a person’s retirement assets are in 401k-type accounts opened at work.
  • Almost half of all people with financial advisors found them through a referral from a friend or colleague
  • But a surprisingly-large 24% found their financial advisor through the Internet!

Perhaps the most interesting factoid in the survey is that people consider experience, investment philosophy, and ethics more important in selecting a financial advisor than the advisor’s historical track record of performance. For me, track record is most important but apparently most people need to “like” their advisor. Then again, track records can be fudged (few are audited) or based on either luck or excessive risk taking, so trust is all-important and people believe that the best way to gauge future investment performance is by philosophy (return on money) and ethics (return of money). I guess that’s why banks handling investment accounts call this part of their business “trust” departments.

The Grass is Always Greener With a New Financial Advisor

If you’re trying to build up an investment clientele, don’t despair – 62.8% of survey respondents said that they are considering firing their current financial advisor, with almost 25% saying a change is likely.

My take: no matter how crowded the investment advisory business gets, there will always be room for new financial advisors who are competent and trustworthy.

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  1. avatar
    Tom Tinacci Reply January 27, 2012 at 3:50 PM EDT

    After selling off all my mutual funds to get away from the downturn of the market, I have checked off some new fund that are more suited to the market sectors that are showing signs of life and growing returns. Everything is modestly cheap, and there is a wide variety of sector picks. I now have bought a limited amount of funds , and they are doing well inspite of the ups and downs. So far they are all in the plus side . They just need to be tracked regularly, which I feel I have to. No advisor is going to give your fund that much attention no matter what you pay in fees.

  2. avatar
    Tom Tinacci Reply January 27, 2012 at 3:40 PM EDT

    As an individual investor, I have found through the years that no one can look after your money and finanaces better than you.It pays to educate yourself about stocks, bank yields, and all the necessary data associated with them. If you can buy stocks with a fair amount of confidence, then you can take apart a mutual fund , and make a good judgement as to what is a good pick, and which is a dud. Six months ago I sold off all my mutuals that were at least 90 days old. They were doing very well for the time I bought them, until the market started to go south.They were in various sectors, so there was an exposure to a broad spectrum of the market. The returns were excellent, the fees were modest to low, but as the individual stocks that made up the fund turned down, so did the fund . Before all the gains that were made went too low, I sold them off. If these funds were with an advisor I would have lost almost all for sure. All they would be able to tell me was thats how a bad market climate reacts. So to hell with them. Do yourself a favor learn what to look for , what to pay, and what you could see as a return. You’ll be glad you did.