Ignoring Fees Doesn’t Beat the Market


It only decreases trust and credibility.

Why did I lead with this bold title and subheading?

Because a large investment firm recently made bold assertions that I found quite intriguing:

“Contrary to popular belief, some [active] mutual funds do beat the index on a consistent basis,” and its “select” group of funds, in particular, “beat the index . . . 93% of the time.”

It all sounded great, so I gathered, arrayed, and compared information about the firm’s growth-of-a-dollar charts and its highlighted performance claims.

Specifically, I looked at three of the firm’s best-performing “select” funds versus the benchmark it says is appropriate, the S&P 500:

  • Fund A, the firm claimed, outperformed the index 98% of the time.
  • Fund B, it said, outperformed 96% of the time.
  • Fund C outperformed 91% of the time, according to the firm.

The illustration below is what I found, after deducting the fees the firm states could apply.

Fund Performance after Deducting Fees

Fund Performance vs. S&P 500

Performance figures are for the period ending 30 June 2017 and are provided by the fund company minus the maximum sales charge deduction of 5.75%.

Where’s the “consistent” outperformance?

Not one of these funds outperformed the S&P 500 over the past one-, three-, five-, or 10-year periods ending 30 June 2017 net of all potential fees.

And remember, according to the data, I chose three of the top-performing “select” funds.

I don’t bring this up to vilify any one firm and haven’t named the firm in the text. Culpability is not the point.

I’m just highlighting the marketing games our industry can play by pointing out what bold claims can all too often rest on:


In making its outperformance claims, the firm left out large potential fees:

The upfront sales charges, which can be as high at 5.75%, that are assessed on any investment less than $1 million.

As a specific example, the promoted hypothetical investor can’t receive the returns the firm boasts about because all fees are not included in the calculations. According to the firm’s website, a $100,000 investor would be charged a 3.5% front-end sales charge. These fees are not taken into account in the growth-of-a-dollar illustrations or the 93% of the time outperformance claims.

These fees are footnoted with links to other web pages, so again, there’s nothing legally wrong.

But are these performance claims potentially misleading?

I will let you decide, but I hope most would agree that as an industry we can do better.

What is my simple message to investment product firms and fund managers?

Please help improve the state of our profession by being more straightforward.

Just admit you’re in the business of selling products (nothing is wrong with this) and openly discuss all potential fees and conflicts in simple, plain language (emphasis on “simple” and “plain”).

As CFA Institute declared in “Future State of the Investment Profession“:

“To achieve [our] potential to serve the interests of society, the investment industry must not only regain the trust of investors and the public, but retool institutions and services to demonstrate significant value in fulfilling society’s needs.”

What is my bold claim as to what will happen if you aren’t more transparent?

Investors [will] force change by significantly reducing the demand for your services.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/CSA-Archive


Preston McSwain

Preston McSwain is the managing partner and founder of Fiduciary Wealth Partners, an SEC registered investment adviser and multi-family office that is focused on high-net-worth investors.
Previously, McSwain was a managing director at Neuberger Berman and Lehman Brothers, where he was instrumental in the growth of the firms’ UHNW trust and wealth management divisions. He began his career at State Street Bank & Trust.
McSwain received a BS in Finance with a concentration in Investment Management from the University of Alabama at Birmingham. He currently sits on the board of the Overseers of the Peabody Essex Museum, and is a member of the Economic Club of New York.


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