Buy & hold vs. financial behavior: 'Frontline' asks the wrong questions

The battle endures. No one much writes about this war much, except maybe me. A “Frontline” piece on PBS a few months ago partially argued that fiduciary standards for advisors and brokers were better than suitability standards. And the piece did a lot more, angering many. The show:

                Lambasted suitability;

                Vilified retirement plan results;

                Attacked financial advisors and retirement plans;

                Did not spend time on the most important things of all: the financial psychology of how investors behave and how some brokers and advisors behave;

                Spent a helluva lot of time on 401(k) plans; and

                Did not discuss the ethical pledges of ChFCs, CLUs and CFPs or the roles of employers and pension providers.

In other words, PBS’s “Frontline” gave a one-sided, Bogle-centric and extremely incomplete picture of the investing world. It was the worst kind of journalism: incomplete storytelling.

See also: My conversation with Frontline

Bogle-centric?

Jack Bogle, the founder of Vanguard, built his firm on indexing. He has long held that indices are the very best way for everyone to invest. The fees are lower and the results are better, he says again and again. That’s true some of the time, but not all of the time.

For example, in three recent blogs, I proved, without a great deal of thought, that a simple Franklin Templeton portfolio using high-expense C-shares over the 12.25-year period ending March 31, would have creamed the S&P 500 index dramatically. (I also promised that I could have realized about the same result with Fidelity Advisor funds or American Funds.) In a subsequent blog, I demonstrated that one stock, Berkshire Hathaway B — with high expenses tacked on, just to make it tough — would have also decimated the S&P 500 index, despite the fact that the 12.25 years contained the worst decade in Berkshire history. In a third blog, I ran the S&P, via SPY, with zero expenses, and it was barely half as good.

Mr. Bogle may be right some of the time, but he’s not right all of the time, and, with the advent of electronic trading — computers awaking and springing into action, buying, selling or shorting, triggered by a gazillion software algorithms reacting to any and all news affecting the stock market — he may be right much less of the time than he was in the last century.

“Frontline” lionized Mr. Bogle and indexing.

Pensions, generally

The ubiquitous 401(k) plan was widely adopted because it was (1) a cheap date with very low expenses; and (2) shifted the risk-taking from the employer to the employee. There are other good reasons — for example, employers could not trust themselves to use a long-term conservative interest rate in defined-benefit assumptions. When employers hit a home run in defined-benefit interest, earning say 10 percent in a year, the employer would then lobby regulators to allow raising the rate assumption. This would require less in the way of deposits — robbing Peter and never even trying to pay Paul back — and the employers would instead use the funds for current non-retirement expenses. This ultimately created a woefully underfunded, unsupportable and unsustainable monster.

Big company pensions

It’s popular to think that it’s to everyone’s best interest to make a 401(k) plan work well for employees — after all, executives are employees too, right? To the contrary, most people in big-company executive suites make money in stock, salary, bonuses and options. Big companies want cheap 401(k)s, not good 401(k)s. Increasingly, CEOs act like royalty, using companies as fiefdoms — there is often little accountability to shareholders or to employees.

Small businesses — the heartbeat of America

Small-business owners — some small businesses are larger than you might think — often make most of their money when they sell their company down the road, at or near retirement age. Again, the 401(k) is often a relatively small piece of the pie, and again, the incentive is on cheap over good.

Advisors specializing in 401(k) plans

There are two kinds of advisors in this space. One handles maybe one or two plans because he or she handles investments for the owners. The other is an individual or firm who does nothing but 401(k) plans. In either event, the advisor compensation is lousy, and therefore, the portfolio work sinks in order to meet the level of pay.

I once handled a 401(k) plan for close to 12 years, and the participants had good results. (I charged 1 percent or so and more than 90 percent of employees used my portfolios.) At the end, though, portfolio expertise and results lost out to low costs.

Payroll accounting firms

This seems cost efficient, since such firms handle payroll reporting and the issuing of payroll checks or deposits for businesses; they have all the employee big data in house. In practice, costs are the winner and portfolios the loser.