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Benz, Kitces Debate Advisor Investment Accountability

By Jeff Berman

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What You Need to Know

  • While the performance of mutual funds vs. indexes is closely monitored, the same can't be said for active investment choices by advisors, she argues.
  • However, this is a longstanding problem, according to Michael Kitces, who says it's hard to achieve accountability when there is no industry benchmark.
  • The discussion follows the news that Vanguard acquired Just Invest, a firm that offers direct indexing tools.

Just how accountable advisors are for the active investment choices they make for clients was debated by Morningstar’s Christine Benz and Michael Kitces on Twitter.

“I can’t help but worry that accountability for investment choices is going in the wrong direction,” Benz, Morningstar’s director of personal finance, tweeted Tuesday afternoon.

“We monitor the heck out of how mutual funds perform v. indexes, but who’s there to oversee these active investment choices that advisors are making?” she asked.

She was reacting to news that Vanguard entered into a definitive agreement to acquire Just Invest, a provider of tax-managed, tailored wealth management technology, including Kaleidoscope, a direct indexing offer.

“That’s not a new problem though, Christine,” Kitces, head of planning strategy at Buckingham Wealth Partners and co-founder of XY Planning Network, tweeted in response on Wednesday morning.

“Financial advisors have been building portfolios [of] funds & ETFs for 20 years now. With no standardized measurements or accountability of how their models or client-specific portfolios are performing,” he said.

He went on to point out: “In fact, overwhelming majority of advisory firms publish no track record of their results, & refuse to. Primarily BECAUSE ‘every client’s portfolio is customized to the needs of the client,’ which means there is no clear benchmark. Which is fair. But also weakens accountability?”

However, he went on to tweet: “That means the idea that ‘it will be hard to benchmark advisors’ performance when portfolios are customized’ is really just a continuation of the status quo?”

Benz and Kitces declined to elaborate on their comments.

Agreeing with Benz, Nicole Boyson, associate professor of finance at Northeastern University, tweeted: “I’m with you Christine. Reasonable people can disagree about active versus passive, but it remains empirically true that low cost index funds are very, very (very) often the best choice for the typical household. Research since say 1968 bears this out.”

Boyson added: “One possible solution is to erect higher barriers to entry for advisers, to ensure their competence. Easy to say, of course, but surely hard to do (look at some of the CFP scandals).”

Pictured: Christine Benz

Jeff Berman

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