The Derivative Project

Bloomberg ETF Analyst Promotes New Wall Street Wolf— In Sheep’s Clothing?

Bloomberg ETF Analyst Promotes New Wall Street Wolf— In Sheep’s Clothing?

Bloomberg ETF Analyst Promotes New Wall Street Wolf— In Sheep’s Clothing?

Just because something costs less, does not mean it adds more value, after all fees.

Bloomberg ETF Analyst, Eric Balchunas, saw the movie Wolf of Wall Street, and came to the same conclusion Not On My Nickel did based on working in the industry.  Financial intermediaries add an extra layer of cost, without adding any value.  They pose risks to Ponzi schemes and excessive fees that do not deliver any value.  Financial intermediaries could rob one of their nest egg, as the Martin Scorcese film, Wolf of Wall Street demonstrated.

Not On My Nickel agrees with Mr. Balchunas on this premise, stated here from his January 2014 article, “Cut Out the Wolf of Wall Street with ETF’s.:

“A major example is the $13 trillion mutual fund industry. When a broker sells a mutual fund, they get a cut, albeit one that’s far smaller than what the brokers in the movie got for their sales”.

Bloomberg’s Balchunas Promotes New Wolf–In Sheep’s Clothing?

However, from there we depart from Mr. Balchunas’ proposed solution to “wolves” selling mutual funds.  He proposes one should simply buy a portfolio of Exchange Traded Funds. It costs less. He then proposes one might want to consider paying a financial intermediary a fee for this portfolio of ETF’s, such as that of “progressive” Wealthfront.  Ironically, Wealthfront has the exact same business model –they charge a financial intermediary fee–just like the brokers or “registered investment advisors” that sell mutual funds.  We hardly call that progressive.
Mr. Balchunas proposal is flawed on several fronts:

(1)  He equates “cheap” with quality and superior performance, without any thorough analysis and no measurable performance history.  Why would anyone throw their money into an “advisor” with no proven performance history.  Currently, Ameriprise employees are suing their employer, Ameriprise, (Krueger et al  v. Ameriprise Financial et al) for putting their retirement accounts into mutual funds with no performance history.  Using Wealthfront is the exact same concept!

(2)  He decries financial intermediaries as “wolves”, but then goes on to propose a new class of financial intermediary, that charges a fee to package ETF’s, without any proven performance displayed or filed with the SEC.

(3)  He does not propose a thorough analysis of the 1 and 5 year returns of the portfolios offered by his recommended Wealthfront.  He says they are “progressive”, but shows no performance history, after all fees, compared to actively managed mutual funds, accessed without a financial intermediary.

Retirement investors have another option:  they can be given the tools, training and transparency to access top money managers without a financial intermediary. They can be provided bona-fide financial education, not conflicted by financial intermediaries in the workplace. Not On My Nickel does just that.

(4)  The “wolves” selling mutual funds that Mr. Balchunas refers to have no accountability after all fees.  The new wolves in sheep’s clothing have lower fees, but again, no accountability for performance and an ambiguous fiduciary status.  One has no idea of actual performance, after all trading costs or have any historical concept of portfolio turnover, that could be a significant drag on performance.

(5)  Wealthfront’s SEC filings, clearly state their brokerage firm, Wealthfront Brokerage, may not provide best execution on their client’s trades.  That is a red flag today with Congress’ investigation into the material conflicts of interest for retirement investors with dark pools.

(6)  Who is the custodian for your money?  It matters as one well knows post Madoff.  The SEC has issued warnings on custodians, as in this March, 2014 Bulletin, “Significant Deficiencies Involving Adviser Custody“.  Only use a custodian with a minimum of a ten year history.  Wealthfront’s current custody firm emerged from bankruptcy and has not been in business for even four years, as currently organized.  There may be no issues with their custodian,  but with lack of history, there are more unknowns.
(7)  Betterment and Wealthfront do not file their holdings with the SEC, thus an investor cannot see a history of a proven investment style, based on a consistent investment philosophy.  As Not On My Nickel reported last July, Betterment had long-dated TIPS in their ETF portfolio, causing a significant drag on performance.  Within four months, Betterment changed their holdings and dropped the long-dated TIP.  That is a red flag and displays an inconsistent investment style or poorly conceived computerized model.  Further, the fact that Betterment appears to be now calculating historical performance without this TIP is contrary to SEC mandated reporting standards.

Next Steps

We recommend the Bloomberg ETF Analyst complete his story.  Ask Wealthfront and Betterment (including their performance with the long-dated TIP!) for their returns, since inception,  ending 6/30/14 for an ETF portfolio of large cap growth, mid cap growth, international and balanced. Request the comparable data, with comparable allocations, from Not On My Nickel and compare the two portfolio’s performance, side-by-side, after all fees, for one, five and ten years.
Ask Wealthfront and Betterment if their new business model is based on non-discretionary or discretionary asset management and why it is significant to the retirement investor.  Ask Betterment why they switched to a discretionary model, from non-discretionary, without an official press release.  That is a significant departure with no official statement.

Betterment’s Jon Stein is Going for $100 Billion Assets under Management -

Jon Stein, CEO at BettermentMultiple $100 billion times .35%, that appears to be Betterment’s singular focus, in lieu of what is in the best interest of the retirement investor.
Betterment packages ETF’s for a low fee, as Bloomberg‘s analyst recommends that one consider a type of ETF packaged service.
  • But is the investor better off with the financial intermediary fee, plus the ETF fee, that approximates the best in class active managers’ fees?
  • Would an hourly fee suffice to select the ETF portfolio, as opposed to an excessive annual assets under management fee?  If not, why not?
  • Are these discretionary or non-discretionary accounts?  Does the Bloomberg ETF analyst know why that is a most crucial question to the retirement investor?  How is the concept of fiduciary altered by investing in a non-discretionary portfolio of packaged ETF’s compared to investing directly with a money manager registered with the SEC that files regular performance figures in a discretionary account?
  • Does  this “new financial intermediary fee” charged by a Wealthfront or a Betterment deliver superior returns, after all costs, to the retirement investor for the past one year and five years? One cannot make that determination without performance figures.

Wealthfront Appears to have the same Singular Focus, as Betterment – Fee Income for their Investors

Wealthfront CEO Tweet on AUMBased on Wealthfront’s CEO’s recent tweet, it also appears the race is to gather assets under management in lieu of providing rationale to investors on why their model is superior to a combination of top-performing active and passive managers, with a ten-year history.
 One would feel more comfortable if a Wealthfront CEO were addressing the Senate Banking Committee’s concerns with dark pools and answering the question if  Wealthfront’s volume is being funneled to these dark pools, in lieu of wasting time tweeting on their every increasing assets under management that may be volume trades and income to Weathfront’s Brokerage and not its clients’ portfolios.
  •  What other seasoned portfolio managers’ goals are publicly express their success in gathering assets under management?  Is this not a red flag?

“There is No Evidence that Asset Growth is Paramount to Capably Managing Money”

A Morningstar analyst just wrote about the management of TIAA-Cref’s mid-cap value fund (TCMVX) and expressed concerns with a focus on increasing assets under management:
“Closeness to its benchmark dampens its appeal.” …”In 2010 management announced an aggressive expansion effort including plans to launch new funds and double its mutual fund assets…There is no evidence that asset growth is paramount to capably managing money.”
What does the financial intermediary deliver in added value after all fees?  The Bloomberg ETF Analyst provided no definitive value, after all fees, based on performance. Again, just because something costs less, does not mean it adds more value, after all fees.
Every firm that Mr. Balchunas cited in his article does not file publish return history, audited, at the SEC.  Every Not On My Nickel researched money manager does.


Why Pay A Fee to Under Perform an Index?


Mr. Balchunas is recommending an investor settle for the relevant index minus a financial intermediary fee.
Let’s compare the Vanguard International Index Mr. Balchunas recommended, compared to a Not On My Nickel researched benchmark international fund, Oakmark’s International Fund (OAKGX) and another Vanguard International Index., VXUS.  This is before financial intermediary fees for the index funds.
Bloomberg Recommended ETF v Active Fund

Remember the Power of Compounding for Our Youth

As the above graph indicates, 2013 showed the power of active investing in lieu of simple investment in index funds, before paying a financial intermediary.
The yellow line is the Vanguard International Index fund, VXUS,  recommended by Bloomberg ETF Analyst Balchunas. The blue line, is an actively managed international fund’s performance, researched for Not On My Nickel subscribers, based on our strict criteria.
Not On My Nickel subscribers access this fund or other comparable ones, directly, without any financial intermediary fee, at their 401K brokerage window or through their IRA brokerage account.
They execute the trade on their own. Yes, the active management fee to the money manager may be slightly higher than the ETF fees, but the performance is exceptional, compared to the ETF and they have access to regularly published returns, that exceed the relevant index, at the SEC.
Red Flags:  This fund, VXUS, the red line in the graph above, recommended by the Bloomberg Analyst does not even have a three-year performance history. Vanguard has had a comparable international index fund, VGTSX, that has underperformed its index this year.  It was put on a watch list by Morningstar earlier this year for underperforming its relevant index.
Not On My Nickel does not research money managers and funds for retirement investors, unless there is a minimum 5-year track record of performance and investment style.

The Financial Intermediary Channel for Investment Selection, that Developed with 401(k)s,  is Flawed

Not On My Nickel’s new retirement platform eliminates any type of financial intermediary.  The new model of retirement investing empowers every retirement investor with the tools, transparency and access to only the best–who publish holdings, portfolio turnover, and regular performance against informative benchmarks.  Not On My Nickel’s portfolio managers don’t earn money from dark pools, in addition to managing money your retirement portfolio.
Not On My Nickel connects the retirement investor with the so very few portfolio managers that have a singular focus on acting as an ERISA fiduciary and managing a portfolio.  There is complete transparency, as to style and performance.