There are nearly 32,000 mutual funds (all share classes) and over 1,900 ETFs, according to Morningstar, Inc. Then there are closed-end funds, UITs, individual stocks and bonds and a host of other securities. How do you, as advisor, stay abreast of this massive universe? In this post, we will discuss a few things you may want to consider.
When I began my journey as an independent advisor in 2007, I quickly realized this is an issue of great importance. Being somewhat of a data nerd, to solve this dilemma I created a Fiduciary Scorecard.
I considered every data point available in the Morningstar Advisor Workstation database and selected the 25 to 30 I deemed most relevant. From there, I used Microsoft Excel formulas to crunch the numbers and produce a total score for all mutual funds and ETFs.
It should be noted that I use trailing five-year data and each fund is compared only with funds in its specific Morningstar category. Hence, I am not comparing apples to oranges, except perhaps when a Morningstar category contains an eclectic group of funds, such as Nontraditional Bonds or Multi-alternative funds. Here are the broad categories I use in my Fiduciary Scorecard analysis:
1) Risk (Absolute)
2) Risk (Relative)
3) Performance (Relative)
4) Performance (Pure)
As an example, if a fund received the maximum number of points on each data point, its Fiduciary Score would be 100%. If a fund does not have data for all five years, it is not penalized. In short, a fund’s score is based on the following formula:
Total Points Possible