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The ZAG study also looked at the annual timing performance gap for actively managed funds versus index funds. Not surprisingly, market-timing investors in actively managed no-load funds underperformed buy-and-hold, no-load active investors by 1.14 percentage points. Pure no-load, index-fund investors suffered no performance gap at all.
That's why C is the best answer to that multiple-choice question posed earlier.
Advisers vs. brokers
Mercer Bullard, a co-author of the ZAG study and a securities law professor at the University of Mississippi School of Law, says the study has significance beyond highlighting the underperformance of investors in broker-sold funds.
"There are many regulatory implications that arise from this study, the most prominent of which is the need at a minimum to require brokers to act in the best interests of their clients," he says. "Unfortunately, the SEC continues to oppose holding brokers who provide investment advice to a fiduciary standard."
Bullard has been calling for this change for years as president and founder of Fund Democracy, an advocate for mutual fund shareholders.
Many people don't understand what all the fuss is about, but here's a basic explanation: Brokers must meet a suitability standard, meaning they must choose investments suitable for a client. Investment advisers must meet the higher fiduciary standard of having to act in the client's best interests. The suitability standard is looser than the fiduciary standard.
Get it? Many people do not, according to the study that the SEC commissioned to see how the public perceives the business practices of brokers and advisers.
"Even though we made attempts to explain fiduciary duty and suitability in plain language, focus-group participants struggled to understand the differences in standards of care," the report states.
"Furthermore, focus-group participants expressed doubt that the standards differ in practice."
What's the difference?
The "Investor
and Industry Perspectives on Investment Advisers
and Broker-dealers" report, conducted
by Rand Corp. for the SEC, concludes that even
though investors don't understand key distinctions
between advisers and brokers, such as their duties
and the services they offer, they were very satisfied
with the services they received -- mainly because
of the personal attention they got.
"We do not have evidence on how levels of satisfaction vary with the actual financial returns arising from this relationship," the report states. "In fact, focus-group participants with investments acknowledged uncertainty about the fees they pay for their investments, and survey responses also indicate confusion about fees."
These investors are probably also confused about the returns they're getting with the help of their financial hired guns. But the ZAG study certainly provides plenty of ammunition for investors to fire their brokers. If investors adopt a buy-and-hold strategy and pay closer attention to their own investment returns, they would likely experience much higher levels of satisfaction all around.
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