The Bee Cave Bee

 

We all know that marketing materials for investment products typically have a section at the very end (usually printed in small type) that contains important disclosures. In the investment world, what you don’t know can hurt you and much of what you need to know is contained in the small print making up the disclosure statement. Here are five good reasons for you to grab the magnifying glass and read these disclosures when considering any investment:

 

1.            Actual vs. Hypothetical Performance – The disclosures will tell you if the returns found in the material are actual or hypothetical, also known as “back-tested” results. Certain types of investments can use pro-forma or hypothetical data to estimate past results even though there is no actual performance history. 

 

            Unfortunately, there are many limitations regarding the value of hypothetical data, not the least of which is that it is compiled with the benefit of 20/20 hindsight. Therefore, be sure to read the disclosures to see if you’re looking at actual returns or the investment equivalent of a fairy tale.

 

2.             Benchmark Comparisons – Investments are often compared to specific “benchmarks,” which are typically major market indexes. However, read the disclosures to determine the makeup of these benchmarks. What good is it to invest in a program because it beats a stock market index if that benchmark has no relevance to your investment needs? As a practical matter, the best benchmark for many investors is the annual return needed to meet your financial goals.

 

3.            Total Returns vs. Annualized Returns: As you review an investment, it’s very important to know whether you are looking at “total returns” or “annualized returns.” There is a big difference between the two. Total return simply means the difference between the amount originally invested and a subsequent accumulated value, without regard to the time period. 

 

Annualized returns, on the other hand, are compounded returns averaged over a period of years. An annualized return of 30% over five years would be quite impressive but a total return of 30% over five years amounts to a compound return of only about 5.4% per year. 

 

            Unfortunately, investors are so used to seeing annualized returns in mutual fund advertising that some investment sponsors capitalize on that assumption by using total returns to mislead potential investors. However, a quick review of the disclosure statement should tell you what you’re dealing with.

 

4.             Potential Conflicts of Interest: A conflict of interest exists when factors such as compensation, employment affiliations, etc. have the potential to affect the unbiased nature of investment recommendations. The mere possibility of a conflict of interest doesn’t necessarily mean you will receive biased advice, but you need to check the disclosures to see what, if any, such conflicts exist.

 

5.             Where to go for More Information: The disclosure information tells you where to go to get more information about the investment and its sponsor. It may refer to a mutual fund prospectus or a Form ADV, Part II or other similar document. While most of these publications are sure cures for insomnia, it’s important to review them anyway – and ask questions about anything you don’t fully understand.

 

Just as important is to notice when investment disclosures are not present. Virtually all regulated investment sponsors are required to disclose certain material. Be wary of any investment sponsor who claims that there are no disclosures required.

Halbert Wealth Management, Inc. (HWM) is a Registered Investment Advisor based in Bee Cave, Texas. As a “Manager of Managers,” HWM matches investor needs to a nationwide group of third-party professional money managers. HWM seeks out strategies that can reduce the risk of investment losses while providing reasonable returns.

 

Telephone: 512-263-3800.

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