Personalized Portfolios Are Under Attack

Instead of outlawing this dangerous devolution toward depersonalized investment advice – which is built for everyone and custom tailored to nobody – lawmakers and the U.S. government have encouraged it.

The Pension Protection Act of 2006 – or as I like to call it, the “Pension Destruction Act” – encourages people to adopt TDFs as default investment vehicles in employer-sponsored defined contribution (DC) retirement plans. As a result, approximately 72% of all 401(k) plans offer TDFs.

Only a tiny minority of people within the regulatory community recognize the hazards of packaging and selling mass-produced financial products that have been marketed as customized retirement portfolios. 

At the American Retirement Initiative’s Winter 2015 Summit, SEC Commissioner Luis A. Aguilar said:

“Investors in these funds are not assured they will have sufficient retirement income at the target date, and there is no guarantee that investors will not lose some, or even all, of their investment. Recent experience has shown this to be true. For example, in 2008, investors who invested in funds with a 2010 target date found themselves facing average losses of 30%, just two years before their presumed retirement date. Some of these investors faced losses as high as 41%. Unfortunately, these losses only grew in the following year. This experience should have served as a wake-up call that target date funds were not performing as advertised. Yet, as of today, the Commission has not enacted a single new rule dealing with target date fund disclosures.”

Financial peddlers may try to package what they’re selling as something new and improved, but advisors and their customers should be rightly skeptical. In his 2008 letter to Berkshire shareholders, Warren Buffett correctly warned, “Beware of geeks bearing formulas.”

In summary, a financial advisor’s job is to know their customer. After that, it’s to build an appropriate investment portfolio that is customized to meet that customer’s objectives.

When your clients ask you what to call the wonderful thing that you just built for them, here’s what you say: It’s the 59/41 portfolio!

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Ron DeLegge’s is founder and chief portfolio strategist at ETFguide. Join his next free monthly Portfolio Workshop for financial advisors.