By SJS Senior Client Portfolio Manager Tom Kelly, CFA.
Last year, I wrote a piece entitled What is the Value of Your Advisor?, which highlighted some of the aspects of your relationship with your SJS advisor, such as designing portfolios to support your goals, reviewing your current investment approach, and recommending revisions that might make sense for you. Our approach is centered around sitting on the same side of the table as you, acting as a fiduciary, being bound ethically to act in your best interests.
Unfortunately, some in the investment business haven’t always shared this approach. With potential misaligned incentives, some firms focused on selling complex high-fee products that have led investors to sacrifice net-returns to costs and commissions, losing a lot of money unnecessarily in the process.
One example was recently highlighted in The Wall Street Journal article, “Bankrupt in Just Two Weeks – Individual Investors Get Burned by Collapse of Complex Securities.” Investors seeking high returns poured their portfolios into leveraged exchange-traded notes, which are unsecured debt instruments that follow an underlying index of securities. Exchange-traded notes are often pitched as offering steady payouts and high upside compared to typical investments such as bonds or indexed mutual funds. But the devil is in the details, and the notes can come with high fees and complexities such as being redeemed at a moment’s notice when it favors the issuer, not the investor. The Securities and Exchange Commission (SEC) even issued an Investor Bulletin in 2015 to inform investors of the significant investment risks and complexities of these instruments.[1] The swift market collapse in March left several notes virtually worthless when they were redeemed by the issuing banks, leaving investors with significant realized losses.[2]
As the economic adage says, “There’s no such thing as a free lunch.”[3] Unfortunately for some, the cost of that “free lunch” was their entire life’s savings. In the investing world, we know all too well that there is no such thing as a long-term investment that is both safe and highly profitable. That’s why we design portfolios specific to you to help you achieve your financial goals, carefully balancing your risk tolerance and ability with your return needs.
So the next time you hear about a hot tech stock or a “can’t miss” investment product, pause and remember this cautionary tale. We’ll be here with our disciplined, time-tested approach to investing. We invite you to give SJS a call! We are happy to buy you lunch, but if makes you feel better, we will split the check too!
Important Disclosure Information and Sources:
[1] “Investor Bulletin: Structured Notes”. SEC Office of Investor Education and Advocacy, 12-Jan-2015, sec.gov.
[2] “‘Bankrupt in Just Two Weeks’—Individual Investors Get Burned by Collapse of Complex Securities.“ Akane Otani & Sebastian Pellejero, 01-Jun-2020, wsj.com.
[3] There’s No Such Thing As a Free Lunch. Milton Friedman, 1975, Open Court Publishing Company.
Advisory services are provided by SJS Investment Services, Inc., a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
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