On the weekend I read an excellent blog post: The Difference between an Investment Firm and a Marketing Firm by Jason Zweig, author of the Intelligent Investor column for the Wall Street Journal.
In hos post, Zweig includes a copy of a speech that he delivered to the Investment Company Institute in 1997 entitled Putting Investors First.
Its a short but important speech that clearly explains why its important to entrust your money to an investment firm and not a marketing firm. In it, Zweig also provides a useful checklist on how to tell the two apart.
How do a marketing firm and an investment firm differ? Let us count the ways:
- The marketing firm has a mad scientists’ lab to “incubate” new funds and kill them if they don’t work. The investment firm does not.
- The marketing firm charges a flat management fee, no matter how large its funds grow, and it keeps its expenses unacceptably high. The investment firm does not.
- The marketing firm refuses to close its funds to new investors no matter how large and unwieldy they get. The investment firm does not.
- The marketing firm hypes the track records of its tiniest funds, even though it knows their returns will shrink as the funds grow. The investment firm does not.
- The marketing firm creates new funds because they will sell, rather than because they are good investments. The investment firm does not.
- The marketing firm promotes its bond funds on their yield, it flashes “NUMBER ONE” for some time period in all its stock fund ads, and it uses mountain charts as steep as the Alps in all its promotional material. The investment firm does none of those things.
- The marketing firm pays its portfolio managers on the basis not just of their investment performance but also the assets and cash flow of the funds. The investment firm does not.
- The marketing firm is eager for its existing customers to pay any price, and bear any burden, so that an infinite number of new customers can be rounded up through the so-called mutual fund supermarkets. The investment firm sets limits.
- The marketing firm does little or nothing to warn its clients that markets do not always go up, that past performance is almost meaningless, and that the markets are riskiest precisely when they seem to be the safest. The investment firm tells its customers these things over and over and over again.
- The marketing firm simply wants to git while the gittin’ is good. The investment firm asks, “What would happen to every aspect of our operations if the markets fell by 67% tomorrow, and what would we do about it? What plans do we need in place to survive it?”
Having met with hundreds of different fund managers over the years, I can attest to the truth of Zweig’s observations. I have highlighted the issues that I think are either especially dangerous to an investor’s long-term wealth or prevalent in the industry.
Very few fund managers are either 100% marketing or 100% investment firms. The reality is that most sit on a continuum somewhere between the “white” of investment and the “black” of marketing. This will always be the case as every business active involves a degree of marketing.
Sadly, the poor results of most fund managers suggest that many fund managers are a darker shade of grey than they should be.