Followers of financial news may have heard increased chatter about “reverse churning” recently–that is, advisors putting their clients’ money in fee-based accounts but doing little or no trading in the account, creating the appearance that “nothing” is being done on the clients’ behalf. This is controversial because the nature of the accounts allows the advisor to collect a fee regardless of activity. When the Securities and Exchange Commission fined AIG last month, alleging it had levied unnecessary fees on mutual fund clients, reverse churning was part of the charges.
To be clear: advisors should always act in the best interests of their clients, and doing any kind of duping or manipulation simply to gin up unnecessary fees is absolutely wrong. That said, the idea of advisors being fined for having too little activity in their clients’ accounts is a curious one in the current market. If you’ve invested in U.S. stocks over the past seven years, “do nothing” is probably the smartest strategy you could have had.
Let’s recap. The market turmoil caused by the Financial Crisis reached its peak in March, 2009. The S&P 500, having fallen more than 50% from its high, bottomed below 700. Right now, the benchmark index is hovering around 2,050, meaning it has roughly tripled since that time. If you kept your head about you during the crisis and bought when fear was at its highest, you’ve seen incredible gains, particularly on a total-return basis.
Furthermore, some volatility aside, the market’s path since 2009 has been pretty much straight up. Even the past 12 months–which has seen two corrections, or drops of 10% from a peak–has demonstrated a persistent upward bias. Despite concerns over China’s growth, the oil market, Federal Reserve policy and earnings growth, indexes aren’t far from record levels, and the long-term outlook still looks strong. Had you entered the market at any point since the market bottom, you wouldn’t have been faulted for sticking to a “buy and hold” strategy.
The question we should ask: Is this market unique or are investors generally smart to “do nothing” with their holdings?
The answer, as is all too often the case, is much more complicated than a simple yes or no. In addition to personal variables such as the investor’s time horizon, risk tolerance and cash on hand; market and economic conditions must be taken into consideration. Seven years after the crisis has ended, and with the Federal Reserve beginning its path toward normalization of monetary policy, the environment is likely changing, and will probably require a more active hand in portfolio management going forward. And while odds are pretty good that stocks in general will be higher in a decade’s time, performance divergence in various markets and sectors is equally as likely.
In times of uncertainty, you want your advisor to step in and protect your holdings. And your advisor should generally be reviewing your account to ensure it is allocated and diversified appropriately for the economic environment. But when the sailing is generally smooth, as it has been over the past seven years, it shouldn’t be a problem if your advisor declines to make changes just for the sake of making them. As a matter of fact, convincing fully invested investors not to act turns out to have been the most profitable advice in recent years.
This article was written by Oliver Pursche from Forbes. This reprint is supplied by BNY Mellon under license from NewsCred, Inc.
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