Financial advisors faced with low yields and market volatility have grown “spineless” over the last four years as they let nervous clients tell them how to invest, says Bob Auer, a former Morgan Stanley (MS) broker who now runs his own mutual fund.
“Advisors have become spineless, and clients are leading the conversations. After four years of bad markets, advisors are just in survival mode,” said Auer, who founded Indianapolis-based SBAuer Funds LLC along with the Auer Growth Fund (AUERX) and now serves as its lead portfolio manager.
As an RIA himself, Auer (left) says he thinks like an advisor, so it disturbs him to see his friends at both wirehouses and independent shops giving in to clients when they should show leadership in bringing clients to sound, long-term portfolio strategies.
Advisors Are ‘Beaten Into Submission’
“Today, the pressure is so great to preserve the client’s capital. Advisors want to do what’s right, but they’re not going to do that. The clients hear about the fiscal cliff, Europe and the Middle East, and they’re bombarded. Advisors play along. They’ve been beaten into submission.”
(Auer’s willingness to be an outspoken opinionator may stem from the fact that he was a stock market columnist for the Indianapolis Business Journal and wrote a weekly full-page column for eight years from 1996 to 2004.)
The U.S. stock market is at a five-year high, but clients’ satisfaction with advisors is at an all-time low, according to Auer, who added that the stampede into bond funds has created an overcrowded trade, “or advisors have given up and are just investing in exchange traded funds.”
Auer warns that advisors who lack leadership are ultimately setting themselves up for a fall.
“When the market does turn around, advisors will be in passive mode, and they’ll lose their clients anyway,” he said.
To be sure, Auer is sitting in the catbird seat because he left Morgan Stanley at the perfect moment. He departed his position as an investments vice president on July 19, 2007, at the top of the market when the Dow Jones industrial average hit its penultimate all-time high of 14,000, just behind the all-time high of 14,165 on Oct. 9 of that year.
“I typed up my resignation on that day, when every account I had was at a record high,” Auer recalled Thursday during a visit to New York.
During the next couple of weeks after his early retirement, Auer distributed his 600 clients among his Morgan Stanley colleagues. One of those colleagues decided that the widow he now worked with had too much stock, so he put 80% of her portfolio into bonds – a move that confirmed for Auer that he had made the right choice in reassigning her account.
Auer Growth Fund Struggles
Another somewhat unusual choice for Auer: he has made no attempt to sell his fund to his former Morgan Stanley clients. Rather, he lets investors find the fund themselves.
The Auer Growth Fund, started in December 2007, uses an actively managed strategy that identifies fast-growing companies at what Auer calls “ridiculously low” prices, meaning companies that are up 25% in profits, up 20% in sales and with a P/E ratio of 12 or under. While AUERX is about three years old, Auer tested his strategy in a separately managed account for more than 20 years.
According to Morningstar data, the long-only domestic U.S. equity fund has $73.6 million in assets, a “high” fee level of 1.71% in expenses and a one-star rating of a possible five stars. Over three years of annualized returns, the growth of a $10,000 investment in AUERX would be negative, at $9,258. Within its category of mid-cap blend stocks, the fund scores poorly – in the 98th percentile of the 425 funds in the category, year to date.
Auer spoke openly about his frustration with the fund’s performance, saying that since the beginning of 2008 his fund hasn’t seen a single period of beating the market for the day, week or month – since last week, when he saw hopeful signs that small-cap growth is doing better than index funds.
Despite the fund’s performance, Auer remains faithful to his strategy, as does MicroCapClub founder and private investor Ian Cassel in an April 8, 2012 blog post:
“The Auer Growth Fund launched at probably the worst time for any long only fund in recent history,” Cassel writes. “Since going public, annual returns have been inconsistent, -54.48% 2008, +32.31% 2009, +3.16% 2010, -4.16% 2011. So overall, $1 invested in 12/2007 would be worth 62c today. Even though the fund has gone through a choppy patch, I’m very interested in the investment strategy and look forward to tracking the performance over the next decade.”
CORRECTION: An earlier version of this story misrepresented the Auer Growth Fund's 98th percentile ranking within its Morningstar category. It should have been stated that the fund scored poorly, not well.