Poised to outperform.
We always act in your best interest.
However, many wealth managers operate under what's called the "suitability standard." This means they have no legal obligation to put your interests first. They don't need to recommend the best or cheapest products; they merely need to recommend something "suitable." They are allowed to consider their own interests, not just their clients' interests, when making investment decisions.
In a practice known as "dual hatting," an advisor who is a fiduciary when giving certain advice may be subject to only a suitability standard when giving other advice. Unfortunately, this means "consumers may not know which legal or conduct regime applies to the advice they are receiving at any moment."1
Bireme is always a fiduciary. We always act in your best interest. Don't settle for advice that is merely "suitable."
Best execution is our only goal.
You would think that all advisors would want to get best execution for their clients. Unfortunately, that isn't the case.
Some advisors are paid on commissions. If an advisor is paid on commissions, he is incentivized to generate high transaction costs instead of high returns, causing a conflict of interest. Furthermore, there's no way to know the size of the fee in advance, so there's no way to know if you will get a good deal.
Mutual funds who use "soft dollars" pay a commission much higher than one might expect in return for receiving benefits from their brokers. In return for paying a premium, "mutual funds get access to research, analysts, management teams and even financial terminals and software."2 Because the fund's investors pay commissions, not the fund's managers, soft dollars serve as a hidden fee increase. Bireme does not use soft dollars. Our clients' historical commissions average .28 cents per share.3 Compare that to Greenwich Associates estimate of 3.5 cents per share for firms in the US and Canada who use soft dollars.4 That's over 12 times higher.
"Payment for order flow" is a controversial practice pioneered by disgraced financier Bernie Madoff. Instead of executing directly in the open market, advisors and brokers send their customers' orders to an unrelated third party in exchange for payment. This creates a revenue source for advisors at the expense of their clients. Former NYSE Chairman Richard Grasso called the practice "bribery" and said it was "inconsistent with serving the interests of investors’ orders."5 Many advisors accept payment for order flow, including leading roboadvisors like Betterment and Wealthfront.6
Transparent fees. No hidden fees or kickbacks.
Investment advice is conflicted when advisors receive kickbacks based on the advice they give. The Executive Office's Council of Economic Advisers (CEA) released a report in 2015 about the effects of conflicted investment advice.7 The CEA found that savers receiving conflicted advice underform by roughly 1% per year, an aggregate annual cost of about $17 billion.
Advisors may get kickbacks for investing their clients in certain funds and products. The CEA notes that these investments tend to be inferior, often high-fee and low-performing. A 2015 report from the office of Senator Elizabeth Warren called "Villas, Castles, and Vacations"8 found a "widespread practice of offering agents kickbacks" that are "effectively concealed from customers." These kickbacks "benefit the agent and the company, but they do so at the expense of their customers."
It's not always easy to find out how your advisor is compensated. Senator Warren's report found that "current disclosure rules are inadequate to ensure that customers are informed about the incentives agents receive for selling them specific financial products." 60 Minutes ran an exposé on the 401(k) industry, finding that providers "deducted more than a dozen undisclosed fees from its clients' 401(k) accounts."9 The CEA says "studies find that households are mostly unaware of their advisers’ conflicts and compensation arrangements."
And even if your advisor does disclose these conflicts, it could actually backfire, leading to worse results. The CEA notes that "research in behavioral economics and psychology demonstrates that when advisers disclose their conflicts, they may be more willing to pursue their own interest over those of their clients and thus give worse advice. Advisees may interpret the disclosure as a sign of honesty and become more likely to follow their advisers’ biased advice."
Contrast this with our completely transparent fees. We have no source of compensation other than our clearly-stated advisory fees. We don't make money on commissions. We take no soft dollars to defray our costs. We don't sell your flow. We take no kickbacks.
Because our fees are clearly stated, we're at a disadvantage versus our competitors who hide their fees. The CEA understands this: "It may be difficult for new entrants providing quality, unconflicted, low-cost advice to compete on price when other advice erroneously appears to be free. Therefore the prevalence of hidden fees and conflicted payments may make it more difficult for low-cost, high-quality alternatives to compete on a level playing field."
We think honesty, transparency, and unconflicted investment advice is worth the risk.
We do better when you succeed.
Advisors who get paid on commissions aren't similarly incentivized. They make more money when there are higher transactions costs, not higher returns.
Other advisors, and almost all mutual funds, charge only a management fee. They are incentivized to increase their asset base, not to maximize the return for the clients they have. Unfortunately, fund returns are negatively correlated with fund size.11 If your manager charges only management fees, not only are they incentivized to spend time gathering assets rather than maximizing your returns, but those additional assets will further decrease your expected returns.
In-house strategies.
Delivering outperformance via dynamic asset allocation isn't easy. It requires that an advisor have no conflicts regarding how he invests his clients' assets, and that he has knowledge about which investments will perform best over the coming years.
All our strategies are run in-house. As we charge the same low fee no matter how much you have invested in each of our strategies, our only incentive is to put you in the strategies that we think have the most attractive risk and return prospects. Other advisors may get fees and kickbacks from choosing specific funds and products, costing their clients billions of dollars. Even if another advisor uses all in-house strategies, a conflict still exists if some of their strategies charge higher fees than others.
Because we created and operate all of our own strategies, we have a much better idea how our strategies will perform than other wealth managers who purport to know what a third-party fund is likely to return in the future. We have the information, the ability, and the absence of conflicts of interest that enable us to tell our clients, "Strategy A has had a great run the past few years, but market conditions say we should switch some of your assets to Strategy B."
On the other hand, fund managers likely won't tell you whether they expect their funds' returns to be higher or lower in the future than they were in the past. There's an inherent conflict of interest between you and the manager. The manager wants you to invest no matter what; you only want to invest if future returns are likely to be as attractive as they were in the past. This shows up in the data: mutual funds increase advertising and fees during times when arbitrary holding periods coincidentally enhance their returns.12 Performance-chasing investors are fooled by these illusory returns. Unfortunately, they end up investing based on trailing returns rather than future returns. This performance-chasing cost mutual fund investors -1.94% annually from 1991 to 2013.13
At Bireme, we think our unique combination of in-house, proprietary strategies and dynamic asset allocation, without the conflicts of interest that mar other advisors' products, puts our clients in the best possible position to outperform.