DALBAR Responds to Edesess Article Published in Advisor Perspectives (10/9/2017)

BOSTON, Oct. 11, 2017 -- Lou Harvey of DALBAR, Inc. issued the following statement in response to Michael Edesess' "Investors Do Not Underperform their Investment":

If this was a first offense and had no visibility, I would laugh it off as uninformed rambling. But this is not the first offense and the article has gained some credibility by being carried in a respected publication.

This is not a laughing matter, but a serious threat to all who seek to act in the best interest of investors.

The underlying premise of the article as carried in its headline is that “Investors do not underperform their investments”. The article promotes the notion that investor performance is as good as it can be and gives an absurd reason for any belief to the contrary… a fictional error in a DALBAR calculation.

All who champion the cause of improving investor returns must rise up to challenge this nonsensical conclusion and the preposterous and false argument on which it is based. The facts of underperformance are published on DALBAR’s Website, www.DALBAR.com/QAIB .

The conclusion that “Investors do not underperform their investments” flies in the face of the basics of mutual funds. These basics make it impossible for any more than 1% of investors to ever outperform an applicable index and causes the average investor to lag that index by several percentage points. The author and anyone who chooses to believe this absurd conclusion should understand the myriad of performance limiting factors that guarantees that over 99% of investors have and will underperform indices:

• Non-uniform acquisition and withdrawal dates… performance is measured over specific time periods but investors transact on every business day
• Sales charges (loads, 12-1 fees, redemption fees, etc.) are not included in the calculation of benchmark returns
• Operating expenses that pay for the management, operations and distribution of investments are not factored
• Portfolio trading costs that are incurred every time a fund buys or sells a security are absent from indices that trade “free”
• Asset allocations into low performing asset classes such as cash and other defensive investments
• Dividends and capital gains taken in cash are excluded since indices assume that all distributions are reinvested
• Leakage from loans, margin interest, fees or other deductions never occur in an index
• Opportunity cost of being out of the market during periods of appreciation is never experienced by an index which is assumed to always be fully “invested”
• Investor trading activity ebbs and flows unlike an index that reflects a buy and hold posture
• Psychological factors such as loss aversion, herding and excessive optimism do not influence the benchmarks
• The irrational belief that higher prices (expenses) will yield better investments is derived from consumerism where the expectation is that prices in some way reflect value

The theory that most investors actually earn benchmark level returns is in contradiction to the fact that the balances in their individual accounts show underperformance.

If investors did earn index level returns, there would be no point in educating and advising them or creating solutions that improve performance. In other words, the work that the investment community and DALBAR have done to bring investor performance closer to index level returns would have been pointless since “investors do not underperform”. This supposition is contradicted by the fact that investor performance has significantly improved over the two decades since DALBAR’s analysis has been published.

Furthermore, there is the economic absurdity that the revenue generated within the financial community is created without a net loss of investor returns. Compensation received by the entire financial community is derived from investors.

Claiming to have discovered a (non-existent) calculation error in DALBAR’s methodology and blaming this for the general acceptance that investors underperform applicable indices is ridiculous on its face, in addition to being false.

Edesess goes on to accuse Morningstar of being a co-conspirator in this alleged massive fraud. Morningstar stands accused of quantifying one of the causes of investor underperformance. This implausible theory of a conspiracy underscores the absurdity of the article.

For the record, QAIB uses the actual balances in investor accounts each month to calculate investor profits or loss after all performance limiting factors are considered. This reflects the personal return that the average investor would see on a statement. Representations to the contrary are false. Additional research is used to identify solutions that reduce the underperformance. A compendium entitled Managing Investor Behavior that covers two decades of such solutions was recently published and is available from DALBAR.

DALBAR, Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. Launched in 1976, DALBAR has earned the recognition for consistent and unbiased evaluations of investment companies, registered investment advisers, insurance companies, broker/dealers, retirement plan providers and financial professionals. DALBAR awards are recognized as marks of a superior standard of care in the financial community.

Contact: Cory Clark
617.723.6400
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