During his summer break from college, my son tried to sell me on the merits of the popular television series Burn Notice. In this TV drama, Jeffrey Donovan plays Michael Westen, a former covert operative who unjustly receives a "burn notice"—an espionage-style termination that results in the immediate eradication of his assets and influence, leaving him isolated and alone.
The finance industry has a similar practice. I call it the burned notice. The courts call it a Notice of Pendency of Class Actions. Ironically, within days of my son's eloquent appeal for the TV drama, I received yet again a burned notice, this time from the United States District Court of Maryland. The notice came courtesy of the fine work of Strong Mutual Funds and my former investment advisors.
Somehow, the folks at Strong found a way to accidently commit the crime of market timing, short-term or excessive trading, and various forms of portfolio churning all resulting in a $140 million settlement for 458,000 burned investors. The burned notice instructed me that I should simply and carefully read pages of legalese, research my past holdings (which, by the way, I never knew I had, courtesy of my former wealth manager's fund-of-funds investment methodology), enter the correct data (better not miss a detail or into the round file your appeal will go), and mail the document to receive some unknown bit of the settlement. How does that sound as a pleasant way to spend your Saturday afternoon?
My mutual fund journey painfully reminded me of the important concept of agency risk—the possibility a firm's manager will not act in the best interest of its shareholders. With each intermediary that stands between you and your hard-earned retirement dollars, you compound agency risk. Introduce an investment advisory—agency risk. Buy mutual funds—agency risk. Have your investment advisor place your money into a funds-of-funds—agency risk upon agency risk.
It was not that long ago that most of us lived with a prevailing sense of cosmic responsibility. Agency risk was not a common topic of conversation. Those were the days when most fiduciaries believed they should do the right thing even when no one is looking.
But today, the Wall Street ethos has sadly crept further and further toward the "get rich at others' expense" mentality. From the macabre and guiltless grin of Bernie Madoff to the quiet SEC payoff this month by Goldman Sachs to the brazen collateralized debt obligations hoisted upon the public's shoulders in the wake of the credit crisis, investors have become wise to the fact that Wall Street can no longer be implicitly trusted to work in their best interests.
As much as I want to like the fat, gray haired, old guy in the Smith Barney commercial who espouses, with a British accent to boot, that they make money the old-fashioned way, I'm wise to shirk the rhetoric in favor of the facts. The "old-fashioned way" is long gone for many money managers. I, alone, must keep a keen eye on my retirement dollars. There are few I can trust to do it for me and do it well.
[See When Investor Fail, This Is A Reason Why ...]
Removing agency risk eliminates a very real threat to preserving your hard-earned retirement wealth and delivers peace-of-mind. By managing a diversified portfolio of low-cost exchange traded funds, you can sleep peacefully at night knowing that a Madoff is not is not lurking somewhere in your portfolio.
Meanwhile, the mutual fund crowd is saddled with the troubling burden of wondering if their burned notice may be coming in the mail.
Steve Beck is Co-Founder of MarketRiders, the internet's leading retirement portfolio manager. Prior to MarketRiders, Beck was a serial entrepreneur having started several successful companies over a storied Silicon Valley career. As a General Partner of Integrity Partners, he was a founding investor and board member of Baidu (Nasdaq: BIDU, the "Google of China"). Prior to this, he was on the founding team of C2B Technologies sold to Inktomi (Naskdaq: INKT), as well as the co-founder of CCS Mail Order sold to Alloy Inc. (Nasdaq: ALOY).