Money Managers Who Make Sense

The financial service industry is rife with conflicts of interest.

Big brokerage houses like Merrill Lynch, Raymond James and Edward Jones (to name just three) end up receiving kickbacks from fund companies for referring their products to clients. Academics have coined it “pay to play” fees.

The fact that a company like Edward Jones has a publically traded fund company like Putnam on its preferred fund list is laughable, considering how poorly Putnam funds, as an aggregate, have performed over the years. It works like this:

Edward Jones Broker 1 to Edward Jones Broker 2: “Hey, these Putnam funds are pretty bad, don’t you think? Why do we recommend them to clients?”

Edward Jones Broker 2 to Edward Jones Broker 1: “You don’t know? If we recommend Putnam’s funds, Putnam can slip us cash, round the world trips, golf course memberships and more.

The practice is referred to as “Pay to play” fees. To read about these in detail (and to see who else is guilty of it!) check out David Swensen’s, Unconventional Success: A Fundamental Approach to Personal Investment.

Swensen’s book is mind-blowing. And as the revered endowment fund manager at Yale University, the man knows what he’s talking about.

To shield yourself with information on how poorly (in terms of mutual fund investment returns) publically traded fund companies do (relative to non- profit companies like Vanguard, TIAA Cref and private businesses like Dimensional Fund Advisors) as well, check out William Bernstein’s latest book, The Investor’s Manifesto:  Preparing for Prosperity, Armageddon, and Everything in Between.

Amidst the industry’s muck, however, are a few heroes.

And Robert Wasilewski appears to be one of the good guys. Robert Wasilewski, of RW Investment Strategies is a Registered Investment Advisor and  his goal is to set investors up with index funds, charge them just 0.4% annually, and then essentially fire himself when the investor gets the hang of this very simple process. I’m guessing that the guy sleeps very well at night. (Contact Robert for more info.)

Robert’s methodology is along the same lines as the San Francisco based Aperio Group  which you can read about in the fabulous article: “The Best Investment Advice You’ll Never Get”.

I haven’t used Robert Wasilewski’s services, nor have I spoken to the people at Aperio.

But I can tell you this: they’re great places to start your research, if you’re looking for a fair investment advisory service.

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School and Millionaire Expat: How To Build Wealth Living Overseas. My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions.

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11 Responses

  1. Jean says:

    Let me share one personal story, if I may, to put into perspective where I was as the novice making my first investment mistakes and where I am today. After I first started teaching overseas, aside from rolling over a 403b plan of mutual funds into an IRA, I walked into my local bank in Minnesota and spoke with their "advisor" about what might be a good way to invest some of my money. With little knowledge of how this all worked, I went on the "you know best" premise – how could I go wrong? She (who, not long after, disappeared from the bank) put me into a Roth IRA of Putnam mutual funds. During the financial bubble, that account had risen as much as 27% above the principal (now, we'd have to take out the A-share commission and all other fees), but just this past week was at 15% under the principal (and remember those fees). Talk about poor performance! There are other missteps I've taken with the larger, all-service brokerage firm. I'll call these my life experiences, but 'backward' learning. As the saying goes, "they got the gold mine, and I got the shaft."

    The consolation is that I'm still young and, equipped with the right knowledge, am now transferring it all & setting up with the type of investment advisor you describe as the "good guys", AssetBuilder, Inc. They operate based on Scott Burns' investment approach ( and work only with Dimensional Fund Advisor index funds. I believe I am getting on the right track and with plenty of time in front of me to make the most of my money without all the added unnecessary fees. I hope to give you a promising report down this road.

  2. I look forward to hearing about that promising report Jean. Thanks for sharing your story.

    I have some interesting data on Putnam funds in front of me right now.

    They are, first of all, a public traded fund company, so their top priority is to their shareholders–not the investors in their funds.

    They are such a well-known name brand based on their sales strategies, not their performance. According to a speech given by John Bogle, "The New Order of Things–bringing Mutuality to the Mutual Fund" Putnam had (when he spoke to the George Washington Law School on February 19,2008) a full 62% of their funds ranking with just one or two Morningstar "Stars" and only 4% of their funds had 4-5 Morningstar stars.

    Who was at the top of the heap, in terms of top ranking?

    #1 Vanguard

    #2 DFA

    #3 TIAA-Cref

    But do most brokers/advisors recommend Putnam over these three? Of course–you know that they do.

  3. I should probably clarify that the "Pay to play" fees go beyond the normal trailer fees and commissions that go from a mutual fund company (like Putnam) to the brokerage company (like Raymond James or Edward Jones)

    The perks going to the brokers come from the higher expenses that the "pay to play" companies charge their mutual fund investors. And because they charge higher fees, their returns (like Putnam's) tend to be lower, as an aggregate, than they would be with lower cost fund companies.

    Brokers who choose "Pay to play" funds for their clients are putting their own interests ahead of their clients.

    The Wall Street Journal published that Edward Jones gets perks (from Putnam) that "Pay for Caribbean Cruises and African-wildlife tours for Jones brokers"

    Edward Jones, upon reading this very public exposure of their conflict of interest, dropped Putnam from their preferred list

    And they attempted damage control by publishing a full page adverstiesement in the New York Times, on November 6, 2003, suggesting that they were "completely unaware" of it corrupting brokers.

    Other fund companies that bribe brokers for preferrential treatment include Fidelity, Capital Group (American Funds), AIM/Invesco and Pimco.

    In the case of the "American Funds" fund company:

    "American Funds dressed up these arrangments with fancy names like 'execution revenue', 'target commissions' or 'Broker Partnership Payments.' But when you look beneath the cloak of legitimacy, the payments are little more than kickbacks to buy preferential treatment. Investors deserve to know that. The law American Funds violated is based on that simple principle"

    –Califonrnia Attorney General Bill Lockyer, commenting on a securities lawsuit filed against American Funds

    Press release dated March 23, 2005

  4. Jenn T says:

    Just a thought on this Andrew. If a fund has performed really well, does it matter if the broker received extra compensation for it? I'm an indexer myself, but a friend of mine has a lot of her money in a fund that has beaten the S&P 500 over the past 15 years or so, and it's from one of the "pay to play" companies you mentioned.


  5. Jenn,

    Most investment books and magazines suggest that about 80% of actively managed funds lose to the indexes. But after survivorship bias and taxes, more than 95% lose over a lengthy period of time.

    As for your friend’s fund, you haven’t mentioned what it is, so I can’t do the exact numbers on it, but here’s something you might find interesting:

    First of all, roughly 70% of American mutual fund money is in taxable accounts. You can only put so much money in a tax-deferred account before you run out of room, and then you're left with investing in taxable accounts.

    Let’s assume that your friend's fund has been amazing, beating the S&P 500 by 15.2% overall, over the past 15 years.

    This would be an amazing accomplishment.

    Here’s an example of what it would have needed to do, to beat the S&P 500 overall by 15.2% (I’m just using these percentages as examples)

    $10,000 making 5% per year for 15 years = $20,789.28

    $10,000 making 6% per year for 15 years = $23,965.58

    There's a 15.2% overall difference between $23,965.58 and $20,789.28.

    Beating the S&P 500 by 15% over a 15 year period is an amazing accomplishment.

    But in a taxable account, it wouldn’t look so cool.

    This is according to Arnott and Jeffrey, as cited in the Journal of Portfolio Management 19, no. 3 (1993):19

    A typical U.S. actively managed mutual fund sells more than half of its stocks in a given year. This is a turnover of 50%.

    But if an investor faces 35% capital gains taxes, that hypothetical 6% return for the "market beating" fund becomes just 4.1% after taxes.

    The Vanguard S&P 500 index fund would be lowered hypothetically from 5% pre-tax to 4.3% post tax as an average, because its turnover is exceptionally low in comparison to the actively managed fund.

    So a stellar actively managed fund has to beat an index fund by more than 1.2% annually, in a taxable account, just for it to break even with the index.

    The odds are high that your friend’s fund hasn’t done this.

  6. DIY Investor says:

    @Jenn T

    One thing to keep in mind is that many funds have beat the S&P 500 over a number of years because stocks have done poorly and they hold bonds. What your friend wants to do is to look at if the fund is strictly all stock or is in fact a balanced fund. If it is a balanced fund then even though it beat the S&P 500 it may have done poorly.

    Also, make sure your friend is getting returns after all fees.

    The turnover point Andrew makes is important also. The name of the game in taxable accounts is how much you have after taxes.

  7. DIY Investor says:

    I appreciate the "…one of the good guys" label.

    One of the strongest pieces of evidence to me of the validity of the low cost indexed approach, which in fact Dan Solin brings out well, is that institutional investors – mutual funds, college endowments etc. – that have well compensated, extremely bright staffs – are increasing their exposure in the indexed assets.

  8. DIY investor is right,

    But there are also actively managed funds with 100% stocks that have beaten the S&P 500. After taxes, though, they're like an endangered species.

    Hey Robert, have you ever run the after tax numbers on Bill Miller's fund? Even pre-tax, he's behind the S&P 500 index after having a couple of bad years. But I thought it was so funny that he was so celebrated for beating the index for 15 years, when his taxable liability was greater than the advantage he created through performance.

  9. DIY Investor says:


    A suggestion: once your advisor sets up your asset allocation and invests in DFA funds you may want to set up your own benchmark to see how you might be able to do on your own.

    Here is a resource that may help you – it tries to line up DFA and similar Vanguard funds.
    Note that it includes expense ratios for similar funds which you'll probably also find interesting.

    I suggest you question your advisor closely on how the asset allocation is done and his or her views on rebalancing.

    I believe that 1 year to 1.5 years from now you will be able to manage your own money and may want to consider going that route.

    For the record Vanguard and DFA are both tops in the index fund arena.

  10. Jean says:

    @DIY Investor

    Thank you, Robert, for the suggestions. I appreciate your intentions in supporting my investment choices and possible eventual move to doing it myself. One thing I should share, that you would not have known or perhaps understood, is that the fact that I live and work overseas makes this all a bit more 'complicated'. It had me "red-flagged" almost immediately with Vanguard. That was the first route I took, knowing that they're the premiere index fund group to work with, but they refused to let me open up a new account with them. Unfortunately, they don't wish to work with new clients who reside overseas, even if you are a US citizen in good standing. Actually, few low-cost brokerage firms or large fund companies are able to. Anyway, through Andrew's suggestion to check into AssetBuilder or the Aperio Group, I ended where I am now – quite pleased, I might add, that I have a vehicle to begin investing in index funds. I'll certainly follow up on your resource and discuss with Andrew the idea of setting up my own benchmark. I had never considered that. I have already discussed with the advisor how the asset allocation is done, how new investment contributions are handled and how rebalancing may take place. They are clearly focused on cost efficiency and a "buy and hold" approach to investing. I do appreciate that DFA is a so highly rated.

    Once again, thanks for the Solin talk at Google. I've just borrowed his Smartest Book on Investing . . . , as well as The Dick Davis Dividend.

  11. Good post Andrew! I'm going to ask my wife to buy me Swensen's book for my birthday this summer. I'm sure I will find it a good read (as you did) while relaxing on the patio in the summer sun.

    I must say, I'm impressed about Wasilewski's approach.

    @DIY Investor – nice work!

    Definitely not a predator on prey. I wonder how many other advisors would consider this route as more evidence mounts that index investing trumps active investing? Seems like a great way to buy a loyal client base? How would this change markets over time; if most investors became passive and not active?

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