None. Nada. Zip. Zero!

by Paul Sutherland

Posted May10, 2010

Current Observations

May Edition

May FAQs

by Barry Hyman

An Opportunity Not to be Missed

by Kevin Russel

PDF Version

There was a recent article in Bloomberg BusinessWeek that recently caught my eye. Titled "Rich Pumped for Fees in Private Banking 'Conflict of Interest'," the article revealed some of the unsound practices and fee structures implemented by some financial advisers that serve only to benefit themselves rather than their clientele.

The article described how some investment firms have fee structures that incentivize advisers to steer their clients to riskier, more expensive products (e.g., hedge funds, structured products, annuities, etc.), rather than acting in their clients' best interests. The article also pointed out how one adviser had identified 17 different ways firms earn revenues, which often include fees, commissions and expenses that were neither transparent nor disclosed to their clients. Clients were often not aware of the substantial conflicts of interest that can exist, for example, between brokerage firms, trust companies and private banks. Firms, of course, receive investment management fees, which most often are all that a client will see. The client may not realize, however, that their adviser might also receive transaction commissions, trustee fees, accounting fees, fee-sharing, front-end/backend commissions or 12b-1 fees from mutual funds, annuities and such. Expenses can be very substantial, and of course it is hard for a consumer to analyze the cost-benefit-value equation in the complex world of investing.

Unlike some of the practices described above, FIM Group does not charge more for "growth" accounts or less for "yield income accounts," so there is no incentive or benefit to placing a client in a higher-risk investment category. In fact, our fee structure is the same across all four of our main investment strategies. Plus, we not only fully disclose all costs to our clients in a transparent and straightforward way, we are committed to controlling expenses and minimizing the erosive influence that high commissions, hidden fees and expenses can have on a portfolio. FIM Group is a fee-only adviser – which means we cannot receive commissions, fee-sharing payments, or referral fees from trust companies, brokers, banks or any entity or person. None. Nada. Zip. Zero! We only receive the fees that our clients pay, which are fully disclosed and detailed on each monthly and quarterly statement. Through our flexible, global strategy we do invest from time to time in closed-end funds (CEFs) and holding companies that may receive a management fee, but FIM Group is neither incentivized nor compensated when we carefully select investments for our clients. Our job is to seek out the best value and build our portfolios one security at a time, taking into consideration the full investment process.

Doing the Right Thing

We have a huge incentive to control expenses for our clients. Why? Because it's the right thing to do. We believe that there should be no other reason to do something with integrity and virtue than simply because it is the right thing. If Wall Street had done the right thing and operated with virtue rather than greed, they probably could have completely avoided the problems they experienced in the last couple of years. But as the saying goes, "You can't regulate morality."

So is managing a company based on principals and virtue "Pollyanna pie-inthe- sky idealism" or raw and uncooked wisdom? I don't know really – especially when I see Wall Street executives and brokers make hundreds of millions selling junk that they know is junk by misleading or obscuring the reality to unsuspecting or even "sophisticated" investors.

Virtue vs. Greed

I think it is logical to think about the "virtue vs. greed" equation when investing for clients. Should we invest in questionable businesses no matter how profitable the outcome? Should investors hire managers with legacies that show a trail of woe to its shareholders, clients and rank-andfile employees (while these managers and their kin are often well-rewarded with bonuses made on the short-term speculation)? Should investors be values-neutral in their investing? The tsunami of 2008 and the aftershocks we see today tell us it is a loser's game to invest with those that are values-neutral and that lack an ethical, sustainable, virtuous business philosophy. So I believe defaulting to doing the right thing – the virtuous thing – is the proper course for investors.

Little by Little...

At its roots you'll find that consistent, positive compounding performance comes from many little "right decisions." Decisions about controlling fees, for example, add up over time, as does making quality decisions about investing. It all adds up over time … a little bit here and a little bit there. FIM Group is proud of our track record. If you would ever like to compare your FIM Group performance against another manager, index, benchmark mutual fund, entity, inflation, money market or your Mom's investment club's performance, we'd be happy to run the numbers for you. We are committed to integrity, transparency, virtue and performance. If you have any ideas on ways we can improve, no matter how big or small, feel free to let us know by e-mail, phone, snail mail or in person.

Politics and Bailouts

Sadly, taxes, politics and bailouts are part of this value conversation. FIM Group manages all of our taxable portfolios to maximize after-tax returns. Politics will have an effect on tax laws and capital flows because of incentives and bailouts, which seemed to have upset "economic natural order" in the U.S. and overseas. Countries have in some cases allowed risks to be borne by society (bailouts) and rewards to be kept by the taxpayer. Foolish, arbitrary politics creates a moral hazard when risk management and prudent business strategies are trumped by recklessness reinforced by taxpayers' bailouts. When bad decisions by businesses cause no pain, then a reinforcement loop happens that continues until something changes. Things are a changing in Washington, but right now for business it seems like we are playing a game where the rules keep changing. Things, however, will stabilize as they always do. The new normal, for awhile at least, will be more bone-headed regulations, harder-to-understand tax laws, new layers of incentives and disincentives, and a Congress and White House ill-equipped to say "no" to anything that has to do with spending. I am not melancholy in this assessment. Democracies are reactive systems, so things will need to get overregulated and Congress will have to say "yes" one too many times before voters say "enough," and the dismantling cycle starts once again. Any student of American history knows this. Any student of world history knows this. And for that we have lots to be grateful for and reason to be optimistic.