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Synopsis of Balentine’s Fifth Anniversary Event with Charles D. Ellis

In mid-March, Balentine celebrated our Fifth Anniversary, and we were fortunate enough to have many clients and friends join us for that event. The celebration was truly a thank you to those first movers who trusted us, brought their capital to us and referred us their clients and friends. We could not have made it this far without them. How appropriate then as we celebrate our fifth year as Balentine that the CFA Institute launches its Future of Finance initiative—a global effort to shape a trustworthy, forward-thinking financial industry that better serves society.

To that end, we were thrilled to have Charles D. Ellis join us. Charley is the author of 16 books including Winning The Loser’s Game and his latest Falling Short: The Coming Retirement Crisis and What To Do About it. Charley joined Balentine Chairman and CEO Robert Balentine and Balentine Chief Investment Officer Adrian Cronje for a Q&A session about important issues facing the industry. Below is a summary of key points from that session.

Pay attention to the fees that you pay for expected value added.

There are typically two types of fees that people pay: fees for advice and fees for implementation. Paying advisors for advice is justified if they serve to help alleviate some of the common mistakes investors make (see below). Implementation fees relate to the costs of actual funds or vehicles an investor purchases to express that advice and can be either active or passive. Simply by virtue of its name, passive investing evokes a negative connotation. However, as many areas of the investment landscape have become more efficient, passive investing (aka indexing) has become a more cost effective, better performing alternative to active investing. In fact, SPIVA® Scorecards consistently show that active managers are underperforming their respective indices across a variety of asset classes. In fact, 91.81% of Mid-Cap Growth Funds were outperformed by the comparison index, the S&P MidCap 400 Growth, on a 10-year basis[1].

 The challenge then, according to Mr. Ellis in his article “The Rise and Fall of Performance Investing” has been to find a manager who is “more hardworking, more highly disciplined and more creative than the other managers…and more by at least enough to cover the manager’s fees and compensate for risks taken.” That is why at Balentine, we typically choose passive indexing for highly efficient asset classes and save active management fees for less efficient markets such as hedge funds and private capital or in situations where we need a manager to be highly selective and nimble versus an index which would have exposure to a broader and riskier opportunity set.

Avoid these common investment mistakes:

  1. Not saving enough: As Robert Balentine wrote in an op-ed for the Atlanta Business Chronicle, “We have spent too much, saved too little and lived beyond our means. Simply put, we are a financially illiterate nation.” Having enough savings to retire is truly the first thing that every investor needs to address.
  2. Listening to the noise: Much of the financial/market coverage should be viewed as purely entertainment. The day-to-day market movements and economic data releases are actually relatively unimportant to individual investors. What is really important is YOU! Your own goals, needs and unique situation are what matters to your portfolio more than how much a particular index went up on any given day.
  3. Believing folklore: Many common rules of thumb and investment folklore are actually not good advice at all. One example is the rule of thumb that many use to subtract their age from 100 to plan their stock/bond allocation. Using this advice, a 30 year old would have 70% in stocks and 30% in bonds. However, this does not take into account any personal spending, risk tolerances, lifestyles, alternatives, cash needs, etc.  We believe that it is better to work with an advisor to tailor a portfolio to your unique needs.
  4. Not seeking professional advice: Mr. Ellis likened giving an individual investor control of his investments with allowing a 12 year old to drive. It has nothing to do with intelligence or competence, but everything to do with experience.  Paying fees for advice via hiring an advisor can help inexperienced investors navigate the noise and the folklore and, more importantly, take a long-term approach to investing. Even when individuals invest passively, they obliterate many of the returns by trying to “time the market” and moving in and out at the wrong times. DALBAR’s annual Quantitative Analysis of Investor Behavior (QAIB) report examines the returns that investors actually realize and the behaviors that produce those returns. While since inception, the S&P 500 returned 11.11%, the average investor’s return was only 3.69%[2] – a difference of 7.42%!

Differentiate between the economics of the business and the values of the profession. 

While it is important to seek advice, it is doubly important to understand the type of advice you are seeking. The investment landscape has become so crowded with fiduciaries, brokers, dually registered and hybrid advisors, it is often difficult for investors to differentiate. It is, as Mr. Ellis said, a travesty that so many people have ignored this topic for so long. However, this is all beginning to change. As Robert recently wrote in another Atlanta Business Chronicle op-ed, the fiduciary fight is heating up in the wake of President Obama’s plans for sweeping reforms in our industry.

We at Balentine have been discussing this issue for several years; indeed, it was a part of Balentine CIO Adrian Cronje’s article “Revisiting the Winners’ Game” in 2013, (a response to Mr. Ellis’ “The Winners’ Game). Most organizations, Mr. Ellis said, have come to grips that choosing between professional disciplines and fiduciary disciplines is a one-way street. Following the money – in other words understanding how your advisor gets paid – is paramount. While nothing is certain, proper due diligence can help alleviate worries and provide more peace of mind when it comes to protecting your hard-earned capital.


[1] Source: SPIVA® Scorecard as of 12/31/2014.
[2] Source: DALBAR 2014 Study. Annual total returns since inception (First QAIB study was released in 1984) as of 12/31/2013.

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