November is financial literacy month -we need to be educating the regulators first!

I thought I would extend the previous post on past performance, bearing in mind that November is financial literacy month, and wangle in a point about regulatory dissonance.

My first point is this:

Before you buy any fund, active or otherwise, you need to have good fix on your intended asset allocation, not just globally, but within markets (sectors, styles, market cap). 


In order to have a good fix on your intended asset allocation you need an asset allocation benchmark (which also requires a portfolio discipline) against which you are able to relate current market, economic and financial conditions. 

If you do not have strong views about markets, sectors, and styles (etc.), and a sound structure underpinning valuation analysis and decision making, then you should stick to a market allocation and use an index fund.   How else do you know what you want, where you are and where you are going?

If you have strong views and a disciplined allocation process, you may want to use a more narrowly focussed ETF to under/over weight particular areas, because even here active is not yet warranted. 

But you might also feel that the ETF does not fully access the value you want, or may overexpose you to risk, and may move to a niche manager of that particular style or segment.  Irrespective, you need a significant valuation/risk management reason to buy an active fund.   Active fund selection is not the first decision!  

So just what is the relevance of this to regulation?

Well: how many of your average “investment advisors”/salespeople actually have a detailed valuation, allocation and management framework?    

I find it very hard to believe that regulators continue to allow actively managed investment vehicles, many of which are specialist vehicles with risk/return profiles at variance with that of the market, to be sold to ordinary investors without disclosure about the risks and realities of selecting actively management funds.  

As discussed, you need fairly sophisticated processes to be able to make a suitable investment decision, so where on earth do the recommendations come from without a reference point and a rationale? 

How can active funds be suitable recommendations in the first place? 

In Canada fund performance on point of sale documents does not need even need to be benchmarked to a relevant equity index.  All the regulators are willing to do is to benchmark performance to cash, and this is just a proposal tagged onto a project that has been in development since the dinosaurs.  The lowly cash benchmark has not even been agreed yet.

How can we expect better regulation when regulators seem oblivious to basic investment facts?  

November is financial literacy month, but perhaps we need to be regulating the regulators first!

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