Why a mutual fund agent can promise you profit while a fund manager could not?

Have you had bad experience losing money investing in mutual funds? The funds which lose money over time. It is not the issues with any mutual funds, but rather the agents who can promise you the sky but end up under delivering. When they recommend a fund, they would tell you as if they can predict how the market is going. If you are uninformed, agents would have overloaded you with all the jargons of using technical tools to so-called determine buy-sell decisions. Or can tell you that this or that fund can perform 10-20 percent over the next year.

Frankly, no one can promise you “x % return” or say it is “picking up”. Not even myself with CFP or a fund manager with CFA.  We can only say – average return from track record. No one will ever know how market going to perform that’s why we diversify to reduce “concentration risk”. Plus, do asset allocation.

Compare that with humble statements from a fund manager, below – excerpt from CIO of Philip Capital Management (PCM), Ang Kok Heng – latest memo in April 2014

“There are many types of profit available to be made in the stock market. Many investors like to make short-term speculative profit which could provide quick gain when the market surged. Meanwhile, conservative investors would  prefer  to  buy  high  dividend  yielding stocks which are generally safer. The return from speculative stock is exciting for punters. Investors  who  try  to  make  this  type  of  profit  must  know  the  rules  of  the  game and  the potential risk.”

 ang kok heng profit to make

“The potential quick gain  is very tempting  and hence,  some investors may throw away their traditional investment strategy to try their luck on penny stocks. The  stock  market  is  an  exciting  place  to  make money and there are different types of profit that can  be  made  in  this  marketplace.  Bigger  fund houses would prefer  to make capital gains from blue  chips,  while  some  smaller  fund  managers would  go  for  growth  stock.   Nonetheless, investing basing on fundamentals of companies remains the  most common strategy among  fund managers. However,  retail  investors  have  more  avenues. Technical  traders  would  just  rely  on  chart  to provide  for  buy  or  sell  signal.  As  such,  trend followers  will  just jump  into  the  bandwagon  by riding on  the trend of  mid-  and small-cap stocks which have  been performing  very well recently.”

“The substantial gain made  from  the  price appreciation among penny stocks has emerged as the most profitable strategy of late.  Overall,  there  is  nothing  wrong  for  any individual  to  adopt  this  kind  of  speculative strategy  to  make  quick  gain  from  the  stock market.  However, an investor must bear in mind that  investing in fundamental stocks is different from  trying  to  make  quick  gain  based  on speculative  newsflow.  The  risk  of  trading  on these  kinds  of  stocks is different and  hence  the strategies are also distinct.  Trading  profit can be from  penny  stocks, turnaround  stocks,  under-valued  asset  rich stocks,  syndicated  counters,  stocks  under  hot theme play, “insider” recommendation etc.  Just  a  reminder,  trading  stocks  are  only  meant for  trading  and  punters  who  dabble  in speculative  stocks  must  prepare  to  cut  their losses  when  the  market  turns  downward unexpectedly.  The most common mistake made by  punters  is  that  they  like  to  try  their  luck  on speculative stocks but when losses set in,  they will  refuse  to  sell  and  instead  of  being  short term  traders  they  will  end  up  becoming  long term investors.”

At the time of this writing, you can see that probably a lot of speculators are being hit if they dabble in penny stocks – Shocks continue as Malaysian penny stocks sold down

Lastly, this shows a BCI (business condition index) rebound in Q1 2014. This means we would not have recession anytime soon, yet!

BOOSTING START

  • Business Conditions Index rose 103.1 points against 92.0 points in the previous quarter
  • Manufacturing sales picking up
  • Moderate domestic demand and export orders
  • More job openings in the manufacturing sector
  • Business activity likely to accelerate in the next quarter

 bci1q2014

This Post Has 4 Comments

  1. This is a problem when we have investors whose sole aim is to make fast money. They are not interested in understanding and knowing what the difference is between investing in unit trusts and the stock market. As long as they make a profit, they will be happy.

    As a unit trust agent, if I am told that the investor is going to invest $100k through me and expects a 10% gain within a year, I will be very tempted to promise him it is possible given that my commission on his $100k is quite substantial. And it gets even more tempting when the investor says if he gets the 10% gain this year, he will invest another $100k next year as well as introduce me to his friends who will also invest the same amount. Imagine if I can get 10 or more investors asking the same.

    What the investor fails to understand is that after deducting the initial sales charge of approximately 6%, his investment must earn a return of more than 17% to get his 10% target. Therefore the unit trust agent will take a gamble and put the money into the most aggressive fund with the aim to achieve that 17+% return.

    And given that most unit trust agencies (which is not the unit trust management company) have the objective of getting their agents to achieve maximum sales, such occurences will continue. I was once told of an agency where the agency manager will indicate which fund to buy and which fund to switch to periodically with the aim of achieving maximum returns. And all the agents are expected to follow so that they can achieve addittional sales and good returns for the investors.

    Investor education is almost non-existent except where the unit trust agency is really into proper financial planning for their investors. Such will be rare as many investors are not really keen as such ideas cover a medium to long term time frame.

    And like you mention, CF, they do not want to affect the agent’s rice bowl. These investors will just accept the loss situation and plan to move his investments elsewhere.

    1. Wise words KS! Sales quota and greed – one is the system, the other is human nature – has to do with it too. And yes, like you said, investors, esp the layman, are partly to be blamed as well because long term concept is unattractive. I think most will realize proper financial planning is really tedious because consumer awareness is low, although that is the proper way. So it’s back to paradox – in the end of the day, agents are just giving what consumers want (or want to hear). And the cycle continues 🙂

  2. Some good mutual fund agents will still explain the risk rather than promise anything. 🙂 But, most agents do make the promise. We can’t blame them, this is because most people want to hear the word “promise”.

    So now the agents have 2 choice:
    (1) Educate them – but this takes time and most often when one is already educated, they may not want to buy from you anymore because agent is really just a medium. The ROI is low.
    (2) Promise them – this is a short cut. When they make money, they will buy more from you. You don’t need explain further. When they lost, you only start to educate them. If you fail to educate them, it also means if you choose option 1, it won’t work too but at least you can trick them to buy for the first time! 🙂 So ROI is higher for this option.

    See the reason why promising is better strategy? Just an opinion.

    1. Oh yes, ChampDog. We need these “few good men” in business, definitely!
      A better sales strategy for option (2), like you say – faster closing sales. But I think consumers are not becoming dumber nowadays – just a matter of time before they realize if their agent/adviser is not trustworthy anymore. Trust takes time to earn but to lose it, just a blink of an eye. Certainly not good for long term business.
      I have a client who told me he suspect that his agent wasn’t forthcoming with him on his UT investments which has been losing money over the years. Yet because he didn’t know how to calculate annualized return or IRR, he can’t prove it because agent told him it’s “hard to compute that due to switching/ reinvestment etc”. But once he engaged me, I showed him crystal clear on everything. For most people, that would be the last straw but he is such a gentleman that he didn’t go to prove his agent wrong. He just plan to move his investments out, and remarked that it is “understandable” for an agent to do so because it is his agent rice bowl. Kisah benar

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