Top stocks to invest in – Nutrition Labels for Investment Portfolios?

Top stocks to invest in

Before the Nutrition Label and Education Act of 1990 mandated the ubiquitous nutrition fact label, consumers did not always know what was in the food they ate.

US Secretary of Health and Humans Services Louis W. Sullivan described the confusion:

“The grocery store has become a Tower of Babel and consumers need to be linguists, scientists, and mind readers to understand the many labels they see.”

Through the standardization of nutrition labeling, however, consumers now know what’s in their food — which no amount of colorful packaging can obscure.

Could investors today use a similar solution when it comes to what’s in their portfolios? With the implementation of the DOL Fiduciary Rule and the US Securities and Exchange Commission soliciting comment on conduct standards for advisers and brokers, the question is worth considering.


Financial intermediaries today are like pre-1990 food manufacturers: Many investors are confused by the investment data they receive. They don’t understand where it comes from and they don’t always know what’s in their portfolios. Take investment reports, for example. Insiders know these are calculated and compiled not by the intermediary but by broker-dealers or technology providers. Yet investors receive “white-labeled” performance reports that appear to be the intermediary’s handiwork. To investors, these investment reports look like they’re created in-house by the adviser.

Does this influence investors’ trust in investment reporting? Does knowing the source of the investment reporting affect whether an investor believes it? We explored these questions in a recent study, “The State of Investor Trust and Transparency.”

We asked investors how confident they were that an unbiased third party would get the same performance results as those calculated by their intermediary. We asked this question about a variety of metrics that are important to investors. The results gave us a better understanding of how the apparent source of performance information affects investor perceptions of the data’s accuracy.


How confident are you an unbiased third party would get the same results as your intermediary when calculating . . . ?

top-stocks-to-invest-in


Some of the metrics we inquired about have precise calculations. Others may vary from practitioner to practitioner. For example, investment return is clearly defined. With the exact return definition — internal rate of return (IRR) or compound annual growth rate (CAGR), etc. — and a series of transactions, two professionals will arrive at the same answer. Benchmark construction, however, has an element of art to it. Two professionals might construct different target benchmarks for the same underlying portfolio.

All else being equal, we expected investors to be more confident about the fees, rate of return, and risk when it came to the information source. But respondents were most distrustful about the accuracy of fee and return calculations.

Does this mean clients were unhappy with their financial advisers? Would the data change if we only surveyed clients of a fiduciary? To find out, we asked investors two more questions:

  • “On a scale of zero to 10, how likely are you to recommend your financial adviser?”
  • “Whose interests do you think your adviser prioritizes most highly?”

We then segmented the investors into two groups: One cohort that was very likely to recommend their financial adviser, as indicated by a response of nine or 10, and a second that believed the adviser prioritized the investor interests over those of the adviser and their firm.

The following chart shows the proportion of investors who were highly confident and not highly confident that an unbiased third party would get the same result as their adviser.


Confidence in Rate of Return Calculation by Investor Segment

top-stocks-to-invest-in


This next table provides the sample size for each of the respondents and the p-value of the Fisher test that the imbalance of investor confidence, relative to the population of all investors, is statistically significant at the 99.9% confidence interval.


top-stocks-to-invest-in


Finally, we computed the Fisher score for the those who were very inclined to recommend their advisers and those who believe that investor interests are prioritized and get a p-value of 0.728, indicating that the difference between the two samples is not statistically significant and is likely due to chance.

How these findings affect the dynamic between the adviser and client is clear: Stronger relationships and putting the interests of investors first help to address — but do not eliminate — investor skepticism about the source of investment reporting.

While the DOL Fiduciary Rule requires professionals to prioritize client interests above all others and is a step in the right direction, our research demonstrates that something more is required to instill investor trust.

Clients must have a clear grasp of what they are investing in, and that means deconstructing the Tower of Babel that has sprung up around investment reporting.

Whether through further regulatory initiatives or industry leadership, investors need accurate nutrition labels on their portfolios.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.


Benjamin Gross

Benjamin Gross has spent 15 years in the investment management industry focusing on the intersection of quantitative analysis, wealth management, and financial technology (fintech) entrepreneurship. He is the founder and CEO of Visualize Wealth and holds a Master of Science in Computational Finance from Carnegie Mellon University.

Top stocks to invest in

FIND THE BEST STOCKS TO BUY NOW




Source link